Volvo- nine months ended September 30, 1999

Volvo - Nine months ended September 30, 1999 Excluding Cars First nine months 1999 1998 1998 Net sales, SEK M 89 806 150 320 80 331 Operating income, excluding items affecting 4 462 6 318 3 763 comparability, SEK M 1 Items affecting comparability, SEK M 26 695 (1 150) (1 150) Operating income, SEK M 31 157 5 168 2 613 Income after financial items, SEK M 32 180 7 787 Net income, SEK M 30 565 5 558 Income per share, excluding items affecting comparability and gains on sales of shares during 12.80 12.60 most recent 12-months period, SEK Return on shareholders' equity, excluding items affecting comparability and gains on sales of 8.4 9.4 shares, % 1 Items affecting comparability for 1999 concerns gain on sale of Volvo Cars and for 1998 allocations for restructuring costs in Buses and Construction Equipment of SEK 240 M and SEK 910 M respectively. @ Volvo Group sales also increased in the third quarter, compared with year- earlier sales. Net sales for the first three quarters of 1999 amounted to SEK 89,806 M, an increase of 12%, excluding Volvo Cars. Adjusted for units acquired and divested, the increase was 10%. @ Operating income, excluding Volvo Cars and items affecting comparability, increased by SEK 699 M, to SEK 4,462 M, in the first three quarters of 1999, compared with income in the first three quarters of 1998. Operating income in the third quarter was higher than in the comparable period of the preceding year in all business areas except Buses and Aero. @ Strategically important steps for Volvo: -Agreement with Investor to acquire that company's holding of Scania shares and the offer to the other Scania shareholders outside the United States and certain other countries to acquire their holdings. -Closer cooperation with Mitsubishi Motors. Comments by the Chief Executive Officer The single most important event during the third quarter was the agreement with Investor covering the acquisition of Scania. The acquisition is a logical consequence of Volvo's concentration on commercial vehicles after the sale of Volvo Cars to Ford Motor Company in the first quarter of the year. These two major transactions have created the conditions for the Group to establish stronger positions in the commercial-vehicle field. The new Group will be Europe's largest manufacturer of heavy trucks and the world's second- largest producer of heavy trucks and buses. The two brand names, Volvo and Scania, are among the absolute strongest in the industry. The prospects for improved profitability increase significantly, notably through gains from coordination in the areas of purchasing and product development. Currently, a review is under way of Volvo's application to the EU Commission regarding the acquisition of Scania. Within the next few days, information is expected whether the EU Commission elects to make a decision now or at a later date. Our efforts to develop a new and more competitive business structure for Volvo are continuing. An agreement was reached in October covering closer cooperation with Mitsubishi Motors which means that Volvo will eventually become a major owner of the separate truck and bus company that Mitsubishi plans to form. The closer cooperation means that Volvo is being strengthened both geographically and in terms of products, partly through an increased presence in Asia and partly through Mitsubishi Motors' strong position in the field of medium-heavy and light trucks and buses. Economic conditions in Western Europe continue to be stable. The expected softening of the North American economy is being confirmed by a certain decline in order bookings, but this is occurring from a very high level. Demand in Volvo's growth markets in Eastern Europe, South America and Asia is still weak, although there are signs of recovery in Asia. The favorable economic conditions in Western Europe and North America have contributed to a rate of growth for the Volvo Group that is above our target of 10%. Sales have increased 12% compared with the year-earlier period. During the third quarter, which as a rule is seasonally the weakest quarter of the year, Volvo's sales rose 9% and operating income was up 26% compared with the preceding year. To date this year, Volvo Trucks' sales have increased by 34% in North America and by 8% in Western Europe. The markets in South America continue to be very unstable and sales declined in the third quarter. One favorable aspect of operations there is that Volvo Trucks has been able to utilize the flexibility in its production system by shipping diesel engines from Brazil to Europe. Volvo Buses posted favorable order bookings in the third quarter and the new products that were introduced during the year have been well received. Volvo Buses is now focusing on consolidating operations following the rapid expansion in recent years. In this connection, the plant in Poland, which is as yet not fully developed, will be of great importance. Despite a weak world market for its products, Volvo Construction Equipment (Volvo CE) reported one of its best-ever third quarters. Part of the improvement in income was due to the fact that the restructuring of Volvo CE's excavator business has now begun to yield results. Sales in the important and profitable North American market are declining, but from a relatively high level. The Marine and Industrial Engines business area reported a very strong third quarter and is on the right track in terms of both sales and profitability. Volvo Penta reported a strong upturn in marine engines in North America and its sales of industrial engines are increasing, particularly in Asia. The business area is continuing its efforts in strengthening profitability in the marine sector and increasing the rate of growth in industrial engines. Volvo Aero has developed favorably during the year, due in part to increased air traffic throughout the world. Income for the first three quarters of the year was higher, notably within the Commercial Engines segment, where Volvo Aero Norge contributed positively. The agreement that was concluded with Boeing during the first half of the year is expected to begin to have an impact in the fourth quarter. The first nine months of 1999 have been very eventful. We have established a solid base for further developing our position as a global and leading player in the truck and bus sectors. Integration of the acquisitions that have been made, and those that are announced, which will strengthen all of Volvo's business areas, is a task that we are looking forward to implementing with full force. In this stimulating work, I view the multiplicity that has arisen as a result of the acquisition strategy within Volvo in recent years, as a valuable asset. Leif Johansson Volvo Group - First nine months of 1999 Significant events and structural transactions during the third quarter Volvo acquires Scania On August 6, 1999, AB Volvo reached an agreement with Investor AB regarding the acquisition of all of Investor's shares in Scania AB, whereby Volvo's ownership in Scania following the acquisition, including its existing holdings of Scania shares, will correspond to 70.9% of the share capital and 77.8% of the voting rights in Scania. Investor will receive a cash payment of SEK 315 per share for 60% of its Scania shares. For the remaining 40% Investor will receive, at its discretion, either a cash payment of SEK 315 per share or newly issued Volvo shares in a proportion of six Volvo shares for every five Scania shares. If Investor chooses the cash alternative alone, Investor has declared that it intends to acquire Volvo shares in the market for an amount corresponding to 40% of the cash proceeds received. Volvo's acquisition of Investor's shares in Scania is conditional upon the receipt of approval from the relevant authorities. In connection with Volvo's agreement with Investor, Volvo's Board of Directors 1 decided to make a public offer to other Scania shareholders to tender their shares to Volvo. Pursuant to this offer, Scania shareholders may choose between a cash payment of SEK 315 per share or newly issued Volvo shares in a proportion of six Volvo shares for every five Scania shares. The public offer is conditional upon Volvo receiving the necessary approvals from the regulatory authorities for acquisition of shares in Scania pursuant to conditions acceptable to Volvo. The alternative allowing Investor and other shareholders in Scania to choose payment in the form of newly issued Volvo shares required approval from a General Meeting of Volvo shareholders. At an Extraordinary General Meeting held on September 29, 1999, the Board of Directors' proposal regarding the issance of the requisite number of shares was approved. The new shares may only be subscribed for by shareholders of Scania subject to the right and obligation of those shareholders to make payment through a transfer to Volvo of their shares in Scania. The Extraordinary General Meeting also voted that the number of Board members be increased by one, following which Marcus Wallenberg, CEO of Investor, was elected to the Board. A condition for this decision and for Marcus Wallenberg's Board membership becoming effective is that the conditions for Volvo's acquisition of Scania shares from Investor are fulfilled. During the third quarter, Volvo increased its ownership in Scania to 28.5% of the votes and 43.1% of the share capital. Taking into account Volvo's previous acquisitions of Scania shares, the average price, based on the assumption that the shares outstanding are purchased for SEK 315 each, will be SEK 303 per share, which corresponds to a total value of approximately SEK 60.6 billion for an acquisition by Volvo of 100% of the shares in Scania. As of June, Scania is reported as an associated company. 1) Volvo's offer is not being made, directly or indirectly, in or to the United States of America, Australia, Japan or Canada and it may not be accepted in or from these countries. Accordingly, no offer is being made for Scania's American Depositary Receipts. The Volvo shares that may be exchanged for Scania shares in the offer have not been, and will not be, registered under the United States Securities Act of 1933, as amended (the "U.S. Securities Act"), nor under the laws of any state of the United States of America and may not be offered, sold, resold or delivered, directly or indirectly, in or into the United States of America except pursuant to an exemption from the registration requirements of the U.S. Securities Act. Agreement between Volvo and Mitsubishi Motors At the beginning of October, Volvo and Mitsubishi Motors of Japan signed a Letter of Intent regarding the formation of a strategic alliance for trucks and buses and an agreement regarding ownership cooperation. The letter of intent between Volvo and Mitsubishi Motors implies that the two companies will form a strategic alliance covering market, product and industrial cooperation in the truck and bus sectors. This agreement will strengthen the companies' existing cooperation in the truck sector and expand it to include buses. It is estimated that it will be possible to conclude an alliance agreement covering these cooperation matters later this year. Pursuant to the ownership cooperation, Volvo intends to acquire 5% of the shares in Mitsubishi Motors prior to the end of 1999 through a non-cash issue of shares in an amount corresponding to SEK 2.3 billion. In addition, Mitsubishi Motors has announced its intention to gradually in the market acquire up to 5% of the shares in Volvo. In accordance with the Letter of Intent, Mitsubishi Motors will form a separate new division for all of its truck and bus operations by April 1, 2000, at the latest. This division will be converted into an independent corporate entity during 2001 and become a subsidiary of Mitsubishi. In conjunction with this incorporation process, Volvo intends to acquire 19.9% of the shares in the resulting truck and bus company, in additional to its holding in Mitsubishi Motors. Volvo decided to participate in the financing of Henlys' acquisition of Bluebird, an American company. In August, Henlys, the British bus manufacturer that is partly owned by Volvo, signed an agreement covering the acquisition of Bluebird, an American producer of school buses. The acquisition amounts to the equivalent of approximately SEK 3.5 billion. In connection with the acquisition, Henlys is issuing new shares in a total amount equivalent to approximately SEK 1.3 billion. Volvo will subscribe for new shares in Henlys amounting to SEK 130 M, which corresponds to Volvo's ownership interest in Henlys of approximately 10%. In addition, Volvo is subscribing for a 10-year convertible debenture loan issued by Henlys in the amount of USD 240 M, with the possibility for Volvo to increase its ownership during this period and become involved in Henlys' development. With the acquisition, Henlys is becoming the leading manufacturer of school buses in the North American market. Henlys' acquisition of Bluebird, and Volvo's financing, are subject to approval by the fair trade authorities involved as well as by Henlys' shareholders. Other acquisitions and divestments earlier in the year The sale of Volvo Cars to Ford Motor Company became effective on March 31, 1999. In March, Volvo Construction Equipment (Volvo CE) divested SuperPac, a Canadian company, and 65% of Volvo CE's holding in Mecalac, in France. As part of Volvo CE's strategy to mainly organize sales through independent dealers instead of its own units, the marketing company in Spain and parts of the operations in France were divested during the second quarter. In April, Volvo Aero concluded an agreement with Boeing, the aircraft manufacturer, covering the sale of surplus spare parts; as a consequence of this agreement, Volvo Aero also acquired the operations of Jet Support Corporation, an American company. During the first half of the year Volvo Aero increased its holding in The AGES Group from 57% to 86% and also acquired 78% of the shares of Norsk Jetmotor AS, whose name was changed to Volvo Aero Norge AS in connection with the acquisition. Income and financial position Net sales of the Volvo Group in the first three quarters of 1999 amounted to SEK 89,806 M, an increase of 12%, adjusted for the sale of Volvo Cars, compared with sales in the year-earlier period. Excluding acquired and other divested companies, as well as the effects of movements in foreign exchange rates, the increase was 9%. The rates of increase in Volvo Buses and Volvo Construction Equipment weakened slightly while the other business areas continued to show increases exceeding 10%. During the first nine months of the year Volvo delivered 61,100 medium-heavy and heavy trucks, an increase of 3%, and 6,600 buses and bus chassis, a decrease of 2%. The higher net sales were attributable to North America (up 26%) and Western Europe (up 14%), which together accounted for 88% of the Group's total net sales. Demand in South America and Eastern Europe continued to weaken, with sales in those markets declining by 46% and 23%, respectively, but from relatively low levels. Demand for Volvo's products in Asia rose gradually and sales were 5% higher than in the preceding year. Volvo CE's acquisition in South Korea contributed to this increase. Group operating income during the first three quarters amounted to SEK 31,157 M (5,168). Excluding effects of the sale of Volvo Cars and items affecting comparability, operating income amounted to SEK 4,462 M (3,763), an earnings increase of SEK 699 M. The increase was due to larger volumes of business, higher margins in Volvo Trucks in North America, increased profitability resulting from acquired and divested operations, and to a capital gain on the sale of Volvo Construction Equipment's Spanish marketing company. These factors compensated for the decline in volume in established operations in Volvo Buses and the higher costs of product development, sales and administration. The operating margin, excluding Volvo Cars and items affecting comparability, amounted to 5.0% (4.7). All business areas except Volvo Buses and Volvo Aero reported operating margins that were higher than in the preceding year. Operating income in the third quarter amounted to SEK 1,143 M, an increase of SEK 237 M compared with income in the year-earlier period, excluding Volvo Cars. Income from investments in associated companies, primarily Scania, Bilia and Volvofinans, amounted to SEK 478 M (340). After amortization of goodwill, income from the investment in Scania amounted to SEK 370 M. Income from other shares and participations amounting to SEK 198 M (2,162) pertained mainly to a dividend received from Scania. Income in the 1998 period included a gain of SEK 2,090 M on the sale of shares of Pharmacia & Upjohn. Net interest income amounted to SEK 309 M (247), of which SEK 223 M was booked in the third quarter. Interest-bearing assets that were higher than in the preceding year had a favorable impact on net interest income. This was offset in part by higher costs of borrowing in Brazil and local financing of the expansion in South Korea at a high rate of interest, and by lower interest rates in Europe. Tax expense amounted to SEK 1,555 M (2,224) and consisted mainly of current taxes. Based on a decision of the Council for Advanced Tax Rulings, the sale of Volvo Cars did not result in a taxable capital gain. This decision has been appealed by the National Tax Board. Net income amounted to SEK 30,565 M (5,558) and the return on shareholders' equity, excluding items affecting comparability and a gain on the sale of shares, was 8.4% (9.4%). Net sales by market area First nine Change months 1 SEK billion % of total 1999 1998 in % Western Europe 52.3 47.0 41.2 14 Eastern Europe 2.2 2.0 2.6 (23) North America 35.3 31.7 25.2 26 South America 3.1 2.8 5.2 (46) Asia 4.6 4.1 3.9 5 Other countries 2.5 2.2 2.2 0 Total 100 89.8 80.3 12 1 Excluding Cars First nine months Consolidated income statements, Excluding SEK M Cars 1999 1998 1998 Net sales 89 806 150 320 80 331 Cost of sales (70 830) (115 160) (62 145) Gross income 18 976 35 160 18 186 Research and development expenses (3 383) (7 312) (3 099) Selling expenses (6 481) (13 324) (6 299) Administrative expenses (4 438) (5 738) (4 013) Other operating income and (212) (2 468) (1 012) expenses 1 Items affecting comparability 26 695 (1 150) (1 150) Operating income 31 157 5 168 2 613 Income from investments in 478 340 2 associated companies Income from other investments 198 2 162 Interest income and similar 1 578 1 149 credits Interest expenses and similar (1 269) (902) charges Other financial income and 38 (130) expenses Income after financial items 32 180 7 787 Taxes (1 555) (2 224) Minority interests in net (60) (5) (income) loss Net income 30 565 5 558 1 Items affecting comparability for 1999 concerns gain on sale of Volvo Cars and for1998 allocations for restructuring costs in Buses and Construction Equipment. 2 In applying an amortization period of 20 years on the brand and goodwill attributable to the holding in Scania, earnings from participations in associated companies in 1999 would be reduced by SEK 102 M. See page 15 for more details. Condensed income statement - Sales finance Excluding Cars SEK M 1999 1998 1998 Net sales 5 667 6 982 4 199 Operating income 319 318 162 Income from associated companies 51 85 71 Income after financial items 370 403 233 Taxes (171) (163) (112) Minority interests 14 (4) 4 Net income 213 236 125 Gross and operating margin, Volvo Group Excluding Cars % 1999 1998 1998 Gross margin 21.1 23.4 22.6 Research and development expenses in % of net 3.8 4.9 3.9 sales Selling expenses in % of net sales 7.2 8.9 7.8 Administrative expenses in % of net sales 4.9 3.8 5.0 Operating margin, excluding items affecting comparability 5.0 4.2 4.7 Operating margin 34.7 3.4 3.3 Consolidated balance Volvo Group excl Volvo Group sheets 1 sales financing Sales financing total SEK M 990930 981231 990930 981231 990930 981231 Assets Intangible assets 6 203 5 678 103 100 6 306 5 778 Property, plant and 18 579 36 045 91 162 18 670 36 207 equipment Assets under operating 1 506 1 817 9 586 20 468 11 092 22 285 leases Shares and participations 30 097 9 707 685 715 26 499 3 393 Long-term sales finance 39 171 15 566 24 375 15 605 24 546 receivables Long-term interest- 14 822 3 293 41 20 14 863 3 313 bearing receivables Other long-term 2 338 3 666 47 192 2 385 3 858 receivables Inventories 19 928 31 876 298 252 20 226 32 128 Short-term sales finance 9 81 15 819 22 171 15 828 22 252 receivables Short-term interest 970 1 422 - - 970 1 422 bearing receivables Other short-term 19 567 26 880 963 2 140 20 530 29 020 receivables Marketable securities 19 303 6 850 332 318 19 635 7 168 Cash and bank 5 966 11 969 425 1 087 6 391 13 056 Total assets 139 327 139 455 43 956 72 000 179 000 204 426 Shareholders' equity and liabilities Shareholders' equity 95 275 68 056 4 283 7 029 95 275 68 056 Minority interests 506 804 0 56 506 860 Provision for post- 2 287 2 906 4 30 2 291 2 936 employment benefits Other provisions 12 518 21 886 1 826 3 301 14 344 25 187 Loans 3 795 5 909 35 524 58 321 39 319 64 230 Other liabilities 24 946 39 894 2 319 3 263 27 265 43 157 Shareholders' equity and 139 327 139 455 43 956 72 000 179 000 204 426 liabilities 1 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 September 30, 1999 were SEK 25.4 billion lower than at December 31, 1998. Excluding the sale of Volvo Cars and other changes in the composition of the Group, total assets increased by SEK 5.7 billion. The increase is attributable mainly to continued expansion of the Group's sales-financing operations which increased total assets by SEK 6.7 billion. Changes in foreign exchange rates resulted in a decrease of SEK 3.3 billion in total assets. Shareholders' equity amounted to SEK 95.3 billion, an increase of SEK 27.2 billion. Net income increased shareholders' equity by SEK 30.6 billion, and a change in method of accounting for deferred tax increased it by SEK 1.3 billion. Shareholders' equity was reduced by SEK 2.6 billion by the dividend paid to AB Volvo's shareholders, and by SEK 2.0 billion pertaining to conversion differences. Key ratios Jan - Sept Jan - Dec 12 month figures unless 1998 1998 otherwise stated Income per share, SEK 76.20 19.60 Income per share, excluding items affecting comparability and gain on sales of shares, SEK 12.80 14.40 Return on shareholders' 39.8 13.7 equity, % Return on shareholders' equity excluding items affecting comparability and gain on sales of 8.4 10.3 shares, % Net financial assets at end of 35.0 14.8 period, SEK billion Net financial assets at end of period as percentage of shareholders' equity and 36.5 21.5 minority interests Shareholder' equity and minority interests as 53.5 33.7 percentage of total assets Shareholders' equity and minority interests excluding sales financing, as percentage of 68.7 49.4 total assets First nine months 1 Cash flow analysis Volvo Group Volvo Group excl sales Sales total financing financing SEK billions 1999 1998 1999 1998 1999 1998 Operating income 4.2 4.9 0.3 0.3 4.5 5.2 excluding gain from sale of Volvo Cars Depreciation and 2.3 4.3 1.6 2.2 3.9 6.5 amortization Changes in working 0.1 0.8 (2.3) (0.4) (2.2) 0.4 capital, etc Cash flow pertaining to (1.6) (2.0) 0.1 0.0 (1.5) (2.0) financial items and income taxes Cash flow from operations 5.0 8.0 (0.3) 2.1 4.7 10.1 Capital expenditures (3.5) (7.2) 0.0 (0.1) (3.5) (7.3) Investments in leasing (0.4) (0.6) (3.5) (7.9) (3.9) (8.5) assets Disposals of tangible 0.7 0.9 0.5 0.4 1.2 1.3 assets Investments in shares, (23.1) 2.8 - - (23.1) 2.8 net Long-term receivables, (0.8) 0.1 (2.0) (6.7) (2.8) (6.6) net Acquisitions and sales of 31.3 (5.2) - (0.6) 31.3 (5.8) companies Remaining after net 9.2 (1.2) (5.3)(12.8) 3.9 (14.0) investments Changes in loans 4.8 14.3 Dividends paid to AB (2.6) (2.2) Volvo's shareholders Changes in liquid funds, excluding, 6.1 (1.9) translation differences Translation differences (0.3) 0.2 in liquid funds Changes in liquid funds 5.8 (1.7) 1 In the cash flow analysis, the effects of major acquisitions and divestments of subsidiaries are excluded from "Other receivables" in the balance sheet. The effects of foreign exchange movements in connection with the translation of the accounts of foreign subsidiaries to Swedish kronor have also been excluded since they do not affect cash flow. The Volvo Group's cash flow after net investments amounted to SEK 3.9 billion. During the first nine months of the year, the Group's operating cash flow, excluding the sales-financing operations, amounted to SEK 1.8 billion, including SEK 0.5 billion in the third quarter. The operating cash flow during the nine-month period ended September 30 was charged with SEK 0.5 billion related to implementation of restructuring measures 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 22.8 billion. Capital expenditures for property, plant and equipment amounted to SEK 3.5 billion, which was equal to level of investments in commercial products in the year-earlier period. Change of Net financial assets, SEK billion 981231 14.8 Cash flow from 5.0 operations Capital expenditures (3.5) Investments in leasing (0.4) assets Disposals of tangible 0.7 assets Long term operational 0.0 receivables, net Operating cash flow, excluding 1.8 Sales Financing Dividend received and 33.9 purchase price Receivables from Ford 12.1 Sale of Volvo Cars 46.0 Acquisition of shares in (22.8) Scania Other acquisitions of companies (1.3) 1 and shares Dividends paid to AB (2.6) Volvo's shareholders Other (0.9) 990930 35.0 1 Including purchase price and net debt in aqcuired companies Financial review by business area Net sales First nine months Change Oct 1998 - Jan-Dec SEK M 1999 1998 in % Sept 1999 1998 Trucks 49 755 45 041 +10 68 551 63 837 Buses 10 645 9 724 +9 15 207 14 286 Construction Equipment 14 388 13 733 +5 20 124 19 469 Marine and industrial 4 170 3 659 +14 5 442 4 931 engines Aero 7 111 6 270 +13 9 425 8 584 Other 9 363 8 002 +17 13 133 11 772 Eliminations (5 626) (6 098) - (7 553) (8 025) Volvo Group, excl 89 806 80 331 +12 124 329 114 854 1 Cars Cars - 73 936 - - 103 798 Eliminations - (3 947) - - (5 716) Volvo Group 89 806 150 320 - - 212 936 1 Excluding divested and acquired units the total change was +10%. Operating income First nine months Oct 1998 - Jan-Dec SEK M 1999 1998 Sept 1999 1998 Trucks 2 486 1 939 3 608 3 061 Buses 72 345 112 385 Construction Equipment 1 371 1 133 1 787 1 549 Marine and industrial 265 153 207 95 engines Aero 394 349 572 527 Other (126) (156) (385) (415) Operating income excl 4 462 3 763 5 901 5 202 1 Cars 2 Cars - 2 555 1 253 3 808 1 Operating income 4 462 6 318 7 154 9 010 Items affecting 26 695 (1 150) 25 514 (2 331) comparability Operating income 31 157 5 168 32 668 6 679 1 Excluding items affecting comparability 2 Cars' value during October 1998 - September 1999 includes three months Operating margin First nine months % 1999 1998 Trucks 5,0 4,3 Buses 0,7 3,5 Construction Equipment 9,5 8,3 Marine and industrial 6,4 4,2 engines Aero 5,6 5,6 Operating margin excl 5,0 4,7 1 Cars Cars - 3,5 1 Operating margin 5,0 4,2 Items affecting 29,7 (0,8) comparability Operating margin 34,7 3,4 1 Excluding items affecting comparability Trucks Net sales by market First nine Change area months SEK M 1999 1998 in % Europe 27 759 25 760 +8 North America 17 893 13 350 +34 South America 1 826 3 310 (45) Asia 1 118 1 496 (25) Other countries 1 159 1 125 +3 Total 49 755 45 041 +10 Demand for heavy trucks in Volvo's most important market areas, Europe and North America, continued to be very favorable during the first nine months of the year. Activity in the markets for trucks in Asia, Eastern Europe and South America was still sluggish. Volvo Trucks delivered 61,100 medium-heavy and heavy trucks during the first three quarters of 1999, 3% more than in the comparable 1998 period. Deliveries in Western Europe rose by 8%, to 27,960 units, and by 21% in North America, to 25,640 units. Volvo Trucks' deliveries declined to 2,670 trucks in South America and to 1,650 trucks in Asia. A gradual improvement in demand is currently being noted in Volvo's operations in Southeast Asia. Volvo's market-share in the heavy-truck class in Western Europe amounted to 15.3% (15.5) in July. Its market-share in the comparable class (Class 8) in the United States declined slightly, to 11.1% (12.1) in August, due mainly to shortage of production capacity. Its market-share in Brazil declined to 19.7% (22.6), primarily as a result of retooling in preparation for a change of models. The order backlog at September 30, 1999 were 18% lower than on the same date a year earlier. The high level last year was due to very substantial order bookings, as well as to difficulties in producing at a rate parallel with demand. Currently, the order backlog is at a satisfactory level. During the third quarter, in connection with increasing sales in Europe, the flexibility in Volvo Trucks' global production system was utilized. Deliveries of engines from the factory in Skövde to the assembly plants in Göteborg and Ghent (Belgium) were supplemented with engines manufactured in Curitiba, Brazil. Volvo Trucks' net sales in the first nine months of the year amounted to SEK 49,755 M, an increase of 10%, compared with the year-earlier period. Operating income amounted to SEK 2,486 M (1,939). Income was affected favorably by a larger volume of sales, strengthened margins in North America and lower production costs, and negatively by a lower level of activity in South America and establishment costs in China. The operating margin was 5.0% (4.3). Net sales in third quarter were 9% higher than in the comparable period of the preceding year; the increase was largely attributable to operations in North America. Operating income in the third quarter amounted to SEK 602 M, an increase of SEK 101 M compared to the third quarter 1998. The improvement in earnings is also attributable to North America, as a result of an increase in volume and strengthened margins. The decline in earnings in the third quarter of 1999 compared with the second quarter of 1999 is due mainly to seasonal variations. Buses Net sales by market First nine Change area months SEK M 1999 1998 in % Europe 4 303 4 190 +3 North America 4 882 3 428 +42 South America 372 748 (50) Asia 769 1 093 (30) Other countries 319 265 +20 Total 10 645 9 724 +9 To date, the world market for buses with a total weight exceeding 16 tons has declined compared with the market in 1998. The total market in Europe and North America was largely unchanged but the Asian and South American markets continued to be weak. Volvo estimates that the total market for the full year 1999 will decline by 10% to approximately 60,000 buses primarily due to reduced demand in South America. Volvo's deliveries of buses and bus chassis during the first nine months this year were virtually unchanged compared with the first three quarters of 1998. The number of vehicles delivered was 6,600 (6,720). However, adjusted for the acquisitions of MASA and Nova BUS, the number of buses and bus chassis delivered declined by 17%. The decrease was attributable to lower demand in Brazil and China. The consequence of the very weak demand in Brazil was severe price competition, which Volvo attempted to avoid. The delayed introduction of the "low-floor" version of Volvo's doubledecker bus in Great Britain also affected deliveries negatively. Deliveries in Continental Europe were higher. The number of orders received increased by 13% and the order backlog was 22% higher than in the first three quarters of 1998. Volvo achieved a breakthrough in the Mexican bus market in the third quarter this year with an order for 900 intercity buses. Net sales increased to SEK 10,645 M (9,724). Excluding acquired units, net sales declined by 3% compared with year-earlier sales. Complete buses' percentage of sales continues to increase and this is the primary reason why net sales was relatively unaffected by the lower volumes. Adjusted for the acquisition of MASA, net sales decreased by 4% in the third quarter of 1999, compared with the third quarter of 1998. This was due primarily to the weak demand in South America. Operating income in the first nine months of 1999 continued to be unsatisfactory, amounting to SEK 72 M (1998: SEK 345 M before items affecting comparability). A decline in volume and continuing high product-development costs had a negative impact on income. The operating margin was 0.7% (3.5). Operating income in the seasonally weak third quarter was SEK 16 M, compared with SEK 45 M in the year-earlier period. Construction Equipment Net sales by market First nine Change area months SEK M 1999 1998 in % Europe 7 469 6 785 +10 North America 4 644 4 823 (4) Other countries 2 275 2 125 +7 Total 14 388 13 733 +5 The total world market for construction equipment weakened during the first three quarters by about 5%. Total demand in Western Europe rose about 10%, mainly in the compact equipment segment. The market declined about 10% in North America, but from a relatively high level. The economic recovery in Asia is becoming increasingly apparent, while the South American market remains weak and unstable. Net sales for Volvo Construction Equipment amounted to SEK 14,388 M (13,733). Adjusted for divestments and acquisitions, net sales rose by 5% compared with the first three quarters of 1998. Order bookings for the first three quarters were at a level comparable to the year-earlier period. Operating income rose by 21% to SEK 1,371 M (1998: 1,133 before items affecting comparability). The increase is attributable to the restructuring of the excavator business beginning to have an effect and improved profitability within compact and service equipment, among other areas. Moreover, reduced costs and a capital gain in the second quarter had a positive impact. This has offset increased selling and administrative expenses and a weaker market in North America. Operating margin for the first nine months of the year amounted to 9.5% (8.3). Operating income in the third quarter was SEK 397 M (273), which is historically a very high level. The operations acquired in South Korea developed favorably and made a positive earnings contribution during the third quarter. The rebuilding of Volvo CE's new plant in Asheville, North Carolina, in the U.S., where wheel loaders and articulated haulers are manufactured, was completed in September. The investment was made for increased mechanization, greater flexibility and for environmental improvement measures. Concurrently, production capacity rose from 2,000 to 3,000 units annually. During the third quarter, the first articulated haulers manufactured in the facilities in South Korea were delivered. This is the first step in utilizing the industrial structure in South Korea as Volvo CE's industrial platform for the Asian markets. In addition, production of the new generation of Volvo excavators began in South Korea and the first deliveries are currently under way. Marine and industrial engines Net sales by market First nine Change area months SEK M 1999 1998 in % Europe 2 175 2 081 +5 North America 1 288 1 042 +24 South America 89 105 (15) Asia 489 332 +47 Other countries 129 99 +30 Total 4 170 3 659 +14 The world market for marine and industrial engines continued to be stable during the first three quarters of 1999. Volvo Penta's net sales increased by 14%, to SEK 4,170 M, compared with sales in the first nine months of 1998, due mainly to higher sales of marine engines in Europe, North America and Asia. Sales of industrial engines continued to develop favorably, notably in Asia. A positive trend of sales and continuing lower overhead costs helped increase operating income to SEK 265 M (153). The operating margin was 6.4% (4.2). During the third quarter Volvo Penta introduced two new drive systems (engines and drives) for leisure boats. The engines, which are rated at 500 hp and 600 hp, respectively, are assembled in Volvo Penta's plant in Lexington, Tennessee, in the U.S. Aero Net sales by market First nine Change area months SEK M 1999 1998 in % Europe 3 219 3 297 (2) North America 3 252 2 494 +30 South America 151 233 (35) Asia 383 190 +102 Other countries 106 56 +89 Total 7 111 6 270 +13 During the first seven months of 1999 air traffic throughout the world increased by 5.9%, compared with the 2.3% increase in traffic in 1998. The greatest growth, 9.3% and 7.8%, respectively, was recorded in Asia and Europe. Volvo Aero's net sales increased by 13%, to SEK 7,111 M, primarily as a result of increased sales in Commercial Engines and Aviation Support Services. With increased profitability in Commercial Engines, where the new subsidiary, Volvo Aero Norge, also contributed positively, operating income rose to SEK 394 M (349). The operating margin was 5.6%, unchanged from the 1998 period. In September the South African Government announced its intention to purchase 28 JAS 39 Gripen military aircraft, with an option of only taking delivery of nine aircraft. The initial deliveries are scheduled to be made in 2006. The transaction represents a breakthrough in the export market for the Gripen aircraft, whose RM12 engine is manufactured by Volvo Aero. The agreement between Boeing and Volvo began to be implemented in a practical manner during the third quarter. Under terms of the agreement, Volvo Aero's American company, The AGES Group, has obtained exclusive rights to market and sell surplus new spare parts to the fleet of Boeing and McDonnell Douglas commercial aircraft in the world market. Sales-financing Assets in the Group's sales financing operations amounted to SEK 44.0 billion, an increase of SEK 6.7 billion compared with assets at December 31, 1998, excluding Volvo Cars and the effect of changes in foreign exchange rates. The increase is attributable primarily to strong growth in the North American market. Net income from sales-financing operations in the first nine months of 1999 amounted to 213 M, compared with SEK 125 M in the year-earlier period, excluding Volvo Cars. New millennium Volvo's Y2K compliance work has been conducted in four phases: inventory, analyses/prioritization, remedial action and verification. Most work on the first three phases has been completed. However, a few steps still remain in the verification phase. During the last quarter of 1999, certain applications will be introduced as planned in the marketing organization. The company will also continue to monitor Y2K preparations by Volvo suppliers. Contingency planning in conjunction with the millennium shift has been intensified, and efforts during the fourth quarter will focus on greater detail and refinement. Detailed planning for the actual transition to year 2000 will be completed during the fourth quarter. An information center will also be established to monitor the transition in various Volvo companies and society in general. To reduce the risk of disruptions in conjunction with the new millennium, no changes unrelated to Y2K compliance will be made in applications, computer environments or embedded systems during the period from November 1, 1999 through January 31, 2000. Previous estimates of expenses to secure Y2K compliance remain unchanged. Number of employees As of September 30, 1999, the Volvo Group had 52,900 employees. This is a decrease of 26,900 since year-end 1998, and is primarily a consequence of the sale of Volvo Cars. The report on operations for the full year 1998 will be issued on February 14, 2000. Göteborg, October 20, 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 3/1998 4/1998 1/1999 2/1999 3/1999 specified Net sales 48 614 62 616 27 072 33 905 28 829 Cost of sales (37 306) (48 838) (21 063) (26 714) (23 053) Gross income 11 308 13 778 6 009 7 191 5 776 Research and development (2 468) (2 792) (1 085) (1 194) (1 104) expenses Selling expenses (4 533) (5 596) (2 120) (2 232) (2 129) Administrative expenses (1 993) (2 353) (1 474) (1 547) (1 417) Other operating income and (693) (345) (115) (114) 17 expenses Items affecting 0 (1 181) 26 695 0 0 comparability Operating income 1 621 1 511 27 910 2 104 1 143 Income from investments in associated companies 105 104 19 88 371 Income from other (15) 2 364 1 189 8 investments Interest income and 170 353 667 457 454 similar credits Interest expenses and (216) (473) (725) (313) (231) similar charges Other financial income and 13 (27) 127 13 (102) expenses Income after financial 1 678 3 832 27 999 2 538 1 643 items Taxes (594) (715) (435) (550) (570) Minority interests (1) (37) (7) (48) (5) Net income 1 083 3 080 27 557 1 940 1 068 Depreciation and 2 286 3 143 1 188 1 381 1 325 amortization included above Income per share, SEK 2.50 7.00 62.40 4.40 2.40 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 3/1998 4/1998 1/1999 2/1999 3/1999 Net sales 26 530 34 523 27 072 33 905 28 829 Cost of sales (20 677) (27 160) (21 063) (26 714) (23 053) Gross income 5 853 7 363 6 009 7 191 5 776 Research and development (1 057) (1 166) (1 085) (1 194) (1 104) expenses Selling expenses (2 188) (2 630) (2 120) (2 232) (2 129) Administrative expenses (1 436) (1 639) (1 474) (1 547) (1 417) Other operating income and (266) (489) (115) (114) 17 expenses Items affecting 0 (500) 26 695 0 0 comparability Operating income 906 939 27 910 2 104 1 143 Gross and operating margin excluding Cars % 3/1998 4/1998 1/1999 2/1999 3/1999 Gross margin 22.1 21.3 22.2 21.2 20.0 Research and development expenses in % of net sales 4.0 3.4 4.0 3.5 3.8 Selling expenses in % of 8.2 7.6 7.8 6.6 7.4 net sales Administravie expenses in 5.4 4.7 5.4 4.6 4.9 % of net sales Operating margin, excluding items affecting 3.4 4.2 4.5 6.2 4.0 comparability Operating margin 3.4 2.7 103.1 6.2 4.0 Net sales SEK M 3/1998 4/1998 1/1999 2/1999 3/1999 Trucks 14 634 18 796 15 767 17 972 16 016 Buses 3 259 4 562 2 791 4 388 3 466 Construction Equipment 4 656 5 736 4 115 6 050 4 223 Marine and industrial 1 139 1 272 1 230 1 540 1 400 engines Aero 2 044 2 314 2 167 2 532 2 412 Other 2 706 3 770 3 023 3 301 3 039 Eliminations (1 908) (1 927)(2 021)(1 878) (1 727) Net sales 26 530 34 523 27 072 33 905 28 829 Operating income excluding items affecting comparability SEK M 3/1998 4/1998 1/1999 2/1999 3/1999 Trucks 500 1 123 917 967 602 Buses 45 40 (67) 123 16 Construction Equipment 273 415 183 791 397 Marine and industrial 32 (58) 45 128 92 engines Aero 114 178 139 175 80 Other (58) (259) (2) (80) (44) Operating income 906 1 439 1 215 2 104 1 143 Operating margin excluding items affecting comparability % 3/1998 4/1998 1/1999 2/1999 3/1999 Trucks 3.4 6.0 5.8 5.4 3.8 Buses 1.4 0.9 (2.4) 2.8 0.5 Construction Equipment 5.9 7.2 4.4 13.1 9.4 Marine and industrial 2.8 (4.6) 3.7 8.3 6.6 engines Aero 5.6 7.7 6.4 6.9 3.3 Other (2.1) (6.9) (0.1) (2.4) (1.4) Operating margin 3.4 4.2 4.5 6.2 4.0 Accounting principles 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. Reporting of intangible assets in connection with the acquisition of Scania A goodwill amortization period of 40 years is being applied to the brand and goodwill values attributable to the holding in Scania. Among other factors, the reason for this amortization period is the strength of the Scania brand on markets in Western Europe and South America, which was established more than 40 years ago. The above application is considered by Volvo to comply with the recommendations issued by the International Accounting Standards Committee, IAS 22 (Business Combinations, revised 1998) and IAS 39 (Intangible Assets). Volvo intends to annually review the brand and goodwill values to determine whether they should be written down in accordance with rules in IAS 22 and IAS 36 (Impairment of Assets). The current recommendation of the Swedish Financial Accounting Standards Council for consolidated accounting (RR 1:96) gives a maximum amortization period for goodwill of 20 years. For this reason, separate information is being disclosed on the effect on the earnings of the Volvo Group for the first three quarters of 1999 in applying the amortization period of 20 years. (See note 2 , page 6) The Swedish Financial Accounting Standards Council is expected to propose a revision to RR 1:96 during the latter part of 1999 so that it corresponds to IASC's rules. Trucks, units First First Change invoiced nine nine in % months months 1999 1998 Europe 29 871 28 951 +3 Western 27 962 25 943 +8 Europe Eastern 1 909 3 008 (36) Europe North America 25 640 21 207 +21 South America 2 674 5 059 (48) Asia 1 651 2 932 (45) Other markets 1 270 1 417 (9) Total, trucks 61 106 59 566 +3 of which > 16 58 246 56 152 +4 tons of which < 16 2 860 3 414 (16) tons Mitsubishi 2 133 1 179 +81 Canter Volvo buses/bus First First Change chassis, units nine nine in % invoiced months months 1999 1998 Europe 2 450 2 730 (10) 1) North America 2 560 1 450 77 South America 460 1 230 (63) Asia 770 1 040 (26) Other markets 360 270 +33 Total, buses/bus 6 600 6 720 (2) chassis 1) Figures for the nine six months of 1999 include 890 units sold through the acquired MASA. ------------------------------------------------------------ Please visit http://www.bit.se for further information The following files are available for download: http://www.bit.se/bitonline/1999/10/20/19991020BIT00120/bit0001.doc The full report http://www.bit.se/bitonline/1999/10/20/19991020BIT00120/bit0002.pdf The full report