THE VOLVO GROUP ANNUAL AND SUSTAINABILITY REPORT DRIVING PROSPERITY THROUGH TRANSPORT SOLUTIONS CONTENT A GLOBAL GROUP OVERVIEW This is Volvo Group . 2 CEO comments . 4 OUR MISSION IS TO DRIVE PROSPERITY STRATEGY The Volvo Group journey continues . 8 THROUGH TRANSPORT Mission . .10 SOLUTIONS. Vision . 12 Aspirations . 14 Values . 15 Global context and overall trends . 16 Strategy . 19 Financial targets . 23 Materiality issues . .26 OUR VISION IS TO BE BUSINESS MODEL THE MOST DESIRED AND Value chain . 30 SUCCESSFUL Customers . 32 TRANSPORT SOLUTION Product development . 38 PROVIDER IN THE Purchasing . 48 WORLD. Production & Logistics . 50 Retail & Services . .54 Reuse . 56 Our people behind it . .58 Our role in society . 64 GROUP PERFORMANCE BOARD OF DIRECTORS’ REPORT 2016 OUR ASPIRATIONS Global strength . 76 ARE THE GUIDE ON Significant events published in quarterly reports . 78 Financial performance . .80 OUR JOURNEY. Financial position . 83 Cash flow statement . 86 Trucks . .88 Construction Equipment . 92 Buses. 95 Volvo Penta . 97 Financial Services . 99 BUILDING A PERFOR- Financial management . .101 MANCE CULTURE. Changes in consolidated shareholders’ equity . 102 OUR COMPANY CULTURE The share. 103 IS HOW WE INTERACT Risks and uncertainties . 106 WITH EACH OTHER, WITH OUR CUSTOMERS NOTES Notes to financial statements . .112 AND WITH SOCIETY Parent Company AB Volvo . 160 AS A WHOLE. CORPORATE GOVERNANCE Corporate Governance Report 2016 . 170 Board of Directors . 178 Group Executive Board . 184 OTHER INFORMATION Proposed Remuneration Policy . 188 Proposed Disposition of Unappropriated Earnings . 189 Audit report for AB Volvo (publ) . 190 Eleven-year Summary . 193 Explanation to adjusted operating income . 202 Definitions . 204 Annual General Meeting . 205 Preliminary publication dates . 205 The Volvo Group’s formal financial reports are presented on pages 76–169, 188–189 and 202–203 in the printed version and have been audited by the company’s auditors. A GLOBAL GROUP OVERVIEW 2016 IN BRIEF Improved underlying performance on lower volumes JLower net sales in the Americas partly offset by JImplementation of brand-based organization with growth in Europe and Asia. In total net sales declined clearer commercial accountability for the Group’s truck by 3% to SEK 302 billion. brands. JCost reductions and productivity gains combined with JNew Mission – Driving prosperity through transport a favorable product and market mix offset the impact solutions. New Vision – the Volvo Group is to be the from lower volumes. The adjusted operating margin most desired and successful transport solution rose to 7.0% (6.5). provider in the world. JOperating cash flow in the Industrial Operations of JNew Aspirations: SEK 3.5 billion despite being negatively impacted by 1. Have leading customer satisfaction for all brands in SEK 6.5 billion from EU antitrust investigation and a their segments. negative market mix. 2. Be the most admired employer in our industry. 3. Have industry-leading profitability. JStrong financial position with a net financial debt to equity in the Industrial Operations of 1.3%, excluding provisions for post-employment benefits. 302 21.1 20.8 3.5 NET SALES, SEK bn ADJUSTED OPERATING OPERATING OPERATING CASH INCOME1, SEK bn INCOME, SEK bn FLOW, INDUSTRIAL OPERATIONS, SEK bn 13 14 15 16 12 13 14 15 16 1,5 6,4 18,3 3,5 12 13 14 15 16 12 13 14 15 16 12 19.4 9.2 11.6 20.2 21.1 300 273 283 313 302 17.6 7.1 5.8 23.3 20.8 −4,9 KEY RATIOS 2016 2015 KEY RATIOS 2016 2015 Net sales, SEK M 301,914 312,515 Return on shareholders’ equity, % 14.9 18.4 Adjusted operating income1, SEK M 21,094 20,235 Total number of employees 94,914 99,501 Adjusted operating margin, % 7.0 6.5 Share of women, % 17 18 Operating income, SEK M 20,826 23,318 Share of women, presidents and other senior executives, % 24 22 Operating margin, % 6.9 7.5 Employee Engagement Index, % 72 71 Income after financial items, SEK M 19,230 20,418 Energy consumption, MWh/SEK M 7.1 6.8 Income for the period, SEK M 13,223 15,099 Total CO emissions, tons/SEK M (scope 1&2) 1.4 1.4 Diluted earnings per share, SEK 6.47 7.41 2 Water consumption, m3/SEK M 15.2 16.2 Dividend per share, SEK 3.25 3.00 Share of direct material purchasing Operating cash flow, spend from suppliers having made a Industrial Operations, SEK bn 3.5 18.3 CSR self- assessment, % 88 87 1 For more information on adjusted operating income, please see page 202. 1 A GLOBL GROUP OVERVIEW OVERVIEW Our customers make societies function 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 functions that most of us rely on every day. The majority of the Volvo Group’s customers are companies within the transportation or infrastructure industries. The reliability and productivity of the products are important and in many cases crucial to our customers’ success and profitability. Strong positions globally Thanks to competitive product programs, strong market. Based on sales volumes the Group is number dealers and increasingly more complete offerings 2 in heavy-duty trucks, number 3 in construction including services such as financing, insurance, equipment, number 2 in buses for target segments leasing, various service contracts, accessories and and markets, number 2 in heavy-duty diesel engines spare parts that support the core products, the Volvo and number 1 in diesel engines for leisure boats. Group has established leading positions on a global #2 #3 in heavy- in construction #2 duty equipment trucks in heavy-duty diesel engines #2 #1 in buses for in diesel engines target segments for leisure boats and markets SHARE OF NET SALES BY MARKET 2016 SHARE OF NET SALES BY BUSINESS AREA 2016 Trucks, 66% Europe Construction Equipment, 17% 44% North Buses, 8% America Volvo Penta, 3% 27% Asia Financial Services, 4% 18% Other, 2% 5% 6% South America Africa and OceaniaOceania 2 A GLOBL GROUP OVERVIEW Strong brands The Volvo Group’s brand portfolio consists of Volvo, Volvo Penta, UD, Terex Trucks, Renault Trucks, Prevost, Nova Bus and Mack. We partner in alliances and joint ventures with the SDLG, Eicher and Dongfeng brands. By offering products and services under different brands, the Group addresses many different customer and market segments in mature as well as growth markets. 4% 74% SHARE OF NET SALES % 2 2 VEHICLES SERVICES Competitive products FINANCIAL SERVICES All of the Volvo Group’s products have been developed to contribute to efficient trans- port and infrastructure solutions. Sales of new vehicles, machines and engines as well as used vehicles and machines, trailers, superstructures and special vehicles accounted for 74% of the Group’s net sales in 2016. Sales of vehicles and machines build a population of products that drives spare parts sales and service revenue. First class services In addition to vehicles and machines, the Volvo Group’s offering includes various types of services such as insurance, rental services, spare parts, preventive maintenance, service agreements, assistance services and IT services. The range and flexibility of the offering means that the solutions can be customized for each customer. The service business contributes to balancing the fluctuations in the sales of new products and is an area of priority. Sales of services accounted for 22% of Group net sales in 2016. The Volvo Group also offers financing for customers and dealers. In 2016 Financial Services revenue accounted for 4% of Group net sales. 3 A GLOBAL GROUP CEO COMMENTS CEO COMMENTS A year of traveling In my first full year at the Volvo Group, I spent a lot of time traveling, meeting with customers, dealers and business partners as well as Group colleagues in all corners of the world. These trips confirmed that we have many skilled and knowledgeable employees in all our businesses as well as committed and engaged dealers looking after our customers. A passion for supporting customers The trips also reinforced my understanding that the Group is has responsibility for its own commercial development and profit- well-invested with new and competitive products as well as ability. Moving more responsibility into the regions is something attractive service offerings. We are truly at the forefront of new we will continue to drive within our ten business areas – the goal technology that brings benefits to both our customers and society is to have as much of the daily decision-making as close to the as a whole. customer as possible. With the substantial restructuring activities now being Decentralization and focus on continuous improvement completed and after major product renewals in recent years, we For some time now we have focused on continuous improve- are currently intensifying efforts to increase productivity and ments, but I think we can develop this further. We have identified product quality through continuous improvements and continuous improvement areas such as speeding up decision-making and introductions of new features into our products. strengthening our agility to adapt to market volatility. Our tools for We have also reinforced our focus on growing the service busi- achieving this include decentralizing decisions and accountability. ness, which can reduce the impact on our earnings from cyclical One step in this direction was the implementation of a brand- drops in vehicle sales volumes. And more importantly, growing based organization for our truck business. Each of the brands now and continuously developing our services help keeping the vehi- cles and machines running and earning money for our customers. New strategic direction – Mission, Vision, Values, Aspirations and Strategic Priorities Our mission is to drive prosperity through transport solutions.