THE VOLVO GROUP ANNUAL AND SUSTAINABILITY REPORT 2015 The Volvo Group’s products and services contribute to much of what we all expect of a well-functioning society. Our trucks, buses, engines, construction equipment and financial services are involved in many of the utilities that most of us rely on every day.. THE VOLVO GROUP ANNUAL AND SUSTAINABILITY REPORT CONTENT CEO comment 2 A GLOBAL GROUP SHARE OF NET SALES BY BUSINESS AREA 2015 OVERVIEW Our customers make societies function 4 Strong positions thanks to ... 6 Trucks, 68% ... competitive products ... 8 ... and first-class services. 10 Construction Equipment, 16% Buses, 7% STRATEGY Volvo Penta, 3% Global context 18 Vision, Core values, Code of Conduct and Wanted position 20 Customer Finance, 3% Strategy 22 Other, 3% BUSINESS MODEL Value chain 24 Product development 26 Supply chain 30 Production 32 Distribution & Service 38 Products in use 42 Reuse & Recycling 46 Value creation 50 Sustainability context 52 Sustainability drivers 54 Sustainability ambitions 55 SHARE OF NET SALES BY MARKET 2015 Our material issues 56 Sustainable transport solutions 58 Shared value 64 Responsible business behavior 70 GROUP PERFORMANCE BOARD OF DIRECTORS’ REPORT 2015 North Europe Global strength 76 America 39% Significant events published in quarterly reports 78 33% Financial performance 80 Financial position 83 Asia Cash flow statement 86 17% Trucks 88 Construction equipment 92 Buses 95 Volvo Penta 97 South Volvo Financial Services 99 America Financial targets 101 5% 6% Financial management 102 Changes in consolidated shareholders’ equity 103 The share 104 Rest of the Risks and uncertainties 107 world NOTES Notes to financial statements 111 Parent Company AB Volvo 158 CORPORATE GOVERNANCE Corporate Governance Report 2015 168 Board of Directors 178 Group Management 184 OTHER INFORMATION Proposed policy for remuneration to senior executives 188 Proposed Disposition of Unappropriated Earnings 189 Audit report for AB Volvo (publ) 190 Eleven-year Summary 191 Definitions 200 Annual General Meeting 201 Preliminary publication dates 201 The Volvo Group’s formal financial reports are presented on pages 76–167 and 189 in the printed version and have been audited by the company’s auditors. THE VOLVO GROUP IMPROVED ITS PROFITABILITY IN 2015 uring 2015 the Volvo Group’s volumes were on the China, but gained market shares in its core segments and worked same level as in 2014, but sales increased by 10% hard to adapt its costs to the lower volumes. Buses had a positive D as an effect of changes in currency exchange rates momentum in earnings and have an established position at the and amounted to SEK 312.5 billion. Despite the forefront of the electromobility. Volvo Penta had another strong unchanged volumes, profitability improved thanks to competitive year, with a renewed, expanded and innovative product portfolio. product programs, cost-saving measures, favorable currencies and The customer financing operations developed well with a good divestitures of shares in Eicher Motor Limited. For our truck busi- profit and return on equity. The Volvo Group’s operating income, ness, sales and profitability increased in Europe and North Amer- excluding restructuring charges, improved to SEK 25.7 billion (8.4), ica as an effect of good demand for new trucks as well as spare which corresponds to an operating margin of 8.2% (3.0). Operating parts and services. However, this was partly offset by a less favora- cash flow in the Industrial Operations was strong and increased ble development in South America. The construction equipment to SEK 18.3 billion (6.4) contributing to a significant strengthening business faced tough market conditions in many markets, not least of the financial position. +10% +206% +186% OPERATING INCOME OPERATING CASH EXCL. RESTRUCTURING FLOW, INDUSTRIAL NET SALES, SEK bn CHARGES, SEK bn OPERATIONS, SEK bn –4.9 11 12 13 14 15 11 12 13 14 15 11 12 13 14 15 310 300 273 283 313 26.9 19.6 7.9 8.4 25.7 14.1 1.5 6.4 18.3 KEY RATIOS 2015 2014 KEY RATIOS 2015 2014 Net sales, SEK M 312,515 282,948 Operating cash flow, Operating income excl. Industrial Operations, SEK bn 18.3 6.4 restructuring charges, SEK M 25,652 8,393 Return on shareholders’ equity, % 18.4 2.8 Operating margin excl. Total number of employees 99,501 104,571 restructuring charges, % 8.2 3.0 Share of women, % 18 18 Restructuring charges, SEK M –2,333 –2,569 Share of women, presidents and Operating income, SEK M 23,318 5,824 other senior executives, % 21 21 Operating margin, % 7.5 2.1 Employee Engagement Index, % 71 72 Income after financial items, SEK M 20,418 5,089 Energy consumption, MWh/SEK M 6.9 7.9 Income for the period, SEK M 15,099 2,235 CO2 emissions, tons/SEK M 0.7 0.8 Diluted earnings per share, SEK 7.41 1.03 Water consumption, m3/SEK M 16.2 18.1 Dividend per share, SEK 3.001 3.00 Share of direct material purchasing spend from suppliers having made a 1 According to the Board’s proposal. CSR self- assessment, % 86 80 1 A GLOBAL GROUP CEO COMMENT Improved profitability and cash flow How would you summarize 2015 in terms of market “ We are now gradually moving development? Jan Gurander (JG): If we start in North America, the market was away from major restructuring incredibly strong and we have a very solid business. Around 90% of the Volvo trucks are now delivered with our own engines and for programs to more continuous gearboxes that figure is 85%. Naturally, this development is very improvement work”. positive for our dealer network in terms of share of business with the customer during the entire life cycle. The North American Martin Lundstedt market is slowing down, but in a controlled way, and we believe that 2016 will be a good year as well, albeit not as good as last year. And what about Latin America? Speaking of China: how is Construction Equipment JG: For Brazil, which is by far our biggest market in Latin America, coping with the downturn? it was a different story. Compared to the peak years, the drop in JG: The market for construction equipment in China today is demand has been dramatic. We are keeping our market shares and about one fourth of what it was when the market peaked. Last have adjusted production and our organization to this much lower year we continued to adapt our organization to manage the lower level – which we believe will be with us for the rest of 2016, at least. volumes in China. A lot of work has also been put into managing credit risks linked to dealers and customers in China. On the Turning to Europe, it seems that we are seeing a positive global level we focused more on our bigger machines where the trend when it comes to Renault Trucks? margins are better. We have done quite well in these segments JG: Yes, our new range is very well received by the customers and and increased our market shares. Overall, a tremendous job done has also to some extent opened the door to new segments. Over- by Volvo Construction Equipment. In fact, all our Business Areas all, demand in Europe has been gaining momentum, slowly but performed well in 2015. Volvo Financial Services had a record steadily. Some of the factors behind this development are low year, with a result breaking the SEK 2 billion ceiling, and Volvo interest rates, low fuel prices and a need to invest in new trucks, Penta also had reason to celebrate since their result exceeded as the fleet in Europe is rather old. SEK 1 billion. It is really good to see that our colleagues at Volvo Penta continue to turn innovation into sales and profitability. One And if we look to the East? example is the new Forward Drive propulsion system that pulls the JG: The market in Japan in 2015 was basically flat and rather boat through the water rather than pushing it, which is great if you undramatic. For the rest of Asia, the picture was rather mixed. are into wakeboarding or wakesurfing. India was the only emerging market where we had growth. As for China, the total market was down 25% in 2015. Our strategic And Volvo Buses? partner Dongfeng Commercial Vehicles (DFCV) is making adjust- JG: Buses are looking good. We are seeing a gradual improve- ments to manage this lower volume. ment in profitability, as an effect of a large number of activities carried out over the years. In addition to the financial result, Volvo How is the cooperation between the Volvo Group and Buses also had a milestone year when Gothenburg’s first route for DFCV developing? electric buses was opened in June. The electric bus is now ready JG: Very well. In June we signed a license agreement granting DFCV for serial production. It is quiet, does not have any exhaust emis- the right to develop an 11-liter engine based on the Volvo Group sions, and is about 80% more energy efficient than a conven- engine currently used in the UD Trucks models Quester and KuTeng. tional diesel bus. 2 A GLOBAL GROUP CEO COMMENT Jan Gurander Martin Lundstedt Mr Lundstedt: What is your view on sustainability? or a Volvo ticket. That says something about the strength of the Martin Lundstedt (ML): The 55 electric bus route in Gothenburg brand position Volvo has built up in that market. I have listened to is a great example of what can be achieved when we work people in the US talk about the Mack brand and what it repre- together with other actors in society to develop transport solu- sents to them.