VOLVO GROUP ANNUAL AND SUSTAINABILITY REPORT 2018 Driving prosperity The Volvo Group 2018 Group Volvo The www.volvogroup.com Driving prosperity through transport solutions The Volvo Group’s mission statement expresses a broad ambition – to drive prosperity. Our customers provide modern logistics as the base for our economic welfare. Transport supports growth, provides access for people and goods and helps combat poverty. Modern transport solutions facilitate the increasing urbanization in a more sustainable way. Transport is not an end in itself, but rather a means allowing people to access what they need, economically and socially. A GLOBAL GROUP 2018 OvervieW Our customers make societies work The Volvo Group’s products and services contribute to much of what Volvo Group’s customers are companies within the transportation we all expect of a well-functioning society. Our trucks, buses, engines, or infrastructure industries. The reliability and productivity of the construction equipment and financial services are involved in many products are important and in many cases cr ucial to our customers’ of the functions that most of us rely on every day. The majority of the success and profitability. ON THE ROAD OFF ROAD IN THE CITY AT SEA Our products help ensure that Engines, machines and vehicles Our products are part of daily Our products and services people have food on the table, from the Volvo Group can be life. They take people to work, are there, regardless of whether can travel to their destination found at construction sites, in collect rubbish and keep lights someone is at work on a ship, and have roads to drive on. mines and in the middle of shining. Our buses and public traveling to work on a ferry, on We calculate that 15% of all forests. They are used to mine transport solutions help people holiday in a pleasure boat or food in Europe is delivered by iron ore, transport lumber or get to work or to school. Our con- need urgent help from the sea a truck from the Volvo Group. haul stone and rock. Our indus- struction equipment is used to rescue services. The Volvo Group Our products also deliver goods trial engines power vital irrigation build housing as well as indus- has marine engines for a broad to keep production plants installations at agricultural sites trial and sports facilities. range of applications. running. all over the world, so that farmers can grow their crops. 1 A GLOBAL GROUP 2018 OvervieW A global group The Volvo Group is one of the world’s leading manufacturers of trucks, buses, construction equipment as well as marine and industrial engines. The Group also provides complete solutions for financing and service. With its headquarters in Gothenburg, Sweden, the Group employs 105,000 people, has production facilities in 18 countries and sells its products in more than 190 markets. Competitive products All of the Volvo Group’s products have been developed to contri bute to efficient transport and infrastructure solutions and to provide our customers with uptime. We drive the develop- ment of electrified vehicles and machines as well as automated solutions for the benefit of customers, society and the environment. Sales of new vehicles, machines and engines as well as used vehicles and machines, superstructures and special vehicles accounted for 77% of the Group’s net sales in 2018. Sales of vehicles and machines build a population of products that drives spare parts sales and service revenue. World-class services In addition to vehicles and machines, the offering includes various types of services such as insurance, rental services, spare parts, preventive maintenance, service agreements and assistance 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 20% of net sales in 2018. The Group also offers financing for customers and dealers. Financial Services provided financing for 24% of products sold by the Group in 2018, measured in the markets where financing is offered. Strong positions globally Thanks to competitive product programs, strong dealers with extensive service networks and increasingly more complete offerings, the Volvo Group has established leading positions on a global market. The Group is one of the world’s largest manufacturers of heavy-duty trucks, construction equipment, buses and heavy-duty diesel engines as well as a leading supplier of marine and industrial engines. These positions provide for economies of scale in product development, production, purchasing and financial services. Strong brands The Volvo Group’s brand portfolio consists of Volvo, Volvo Penta, UD Trucks, UD Buses, Terex Trucks, Renault Trucks, Prevost, Nova Bus, Mack and Arquus. 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 both mature markets and growth markets. 2 A GLOBAL GROUP 2018 OvervieW SHARE OF NET SALES BY MARKET NORTH EUROPE AMERICA 41% 28% ASIA 20% SOUTH 6% 5% AMERICA AFRICA AND OCEANIA SHARE OF NET SALES BY SHARE OF NET SALES BUSINESS AREA BY REVENUE TYPE Financial Services, 3% Trucks, 64% Financial Services, 3% Vehicles, 77% Volvo Penta, 4% Services, 20% Buses, 7% Construction Equipment, 22% 3 A GLOBAL GROUP 2018 OvervieW Content A GLOBAL GROUP OVERVIEW This is the Volvo Group . .1 2018 in brief . .5 CEO comments. 6 STRATEGY Balancing trends and challenges . 10 Drive prosperity through transport solutions. 12 Improving performance – the journey continues . 13 Strategic priorities. 14 Financial targets . 17 Electrification. 18 Automation . 22 Connectivity . .26 BUSINESS MODEL OUR ROLE IN SOCIETY . 30 VALUE CHAIN . 40 Customers. 42 Product development . .48 Purchasing. 58 Production & Logistics. 60 Retail & Service . 66 Reuse. 68 EMPLOYEES. 70 GROUP PERFORMANCE BOARD OF DIRECTORS’ REPORT 2018 Global strength. 78 Significant events . .80 Financial performance. 82 Financial position. 85 Cash flow statement. 88 Trucks . .90 Construction Equipment . .94 Buses . 97 Volvo Penta. 99 Financial Services . 101 Financial management . 103 Changes in consolidated shareholders’ equity. 104 The share . 105 Risks and uncertainties. .108 Sustainability Reporting. 116 NOTES Notes to the financial statements . .121 Parent Company AB Volvo . 182 CORPORATE GOVERNANCE Corporate Governance Report 2018 . 192 Board of Directors . 200 Group Executive Board . 206 OTHER INFORMATION Proposed remuneration policy. 210 Proposed disposition of unappropriated earnings . 211 Audit report for AB Volvo (publ) . 212 Key Ratios. 215 Eleven-year summary . 218 Reporting scope and boundaries. 226 Annual General Meeting. 228 Preliminary publication dates. .228 AUGMENTED REALITY Download the app Volvo Group AR Stories. The Volvo Group’s formal financial reports are presented on Use your mobile device to view the images pages 78–191, 210–211 and 215–217 and have been audited by the company’s auditors. marked with the AR symbol. Read more on page 229. For information on which pages constitute the Volvo Group’s Sustainability Report, please see the Sustainability Reporting Index on page 116. 4 A GLOBAL GROUP 2018 OvervieW 2018 IN BRIEF Strong growth in both sales and profitability • Good demand in many markets contributed to net sales increasing by 17% to SEK 391 billion (333). Currency-adjusted net sales grew by 14%. • Vehicle sales increased by 20% and service sales by 10%. • Adjusted operating income improved to SEK 40,660 M (29,278), corresponding to an adjusted operating margin of 10.4% (8.8). • Operating cash flow of SEK 26.6 billion (28.4) in the Industrial Operations. • Strong financial position with net financial assets of SEK 43.9 billion, corresponding to 38.8% of equity in the Industrial Operations, excluding provisions for post-emplyment benefits. • The Board of Directors proposes an ordinary dividend of SEK 5.00 per share (4.25) and an extra dividend of SEK 5.00 per share. • During the year there was a strong push in electrified vehicles and machines as well automated solutions. Electric trucks will be launched commercially in 2019. Net sales, Adjusted operating Operating income, SEK bn Operating cash flow, Industrial SEK bn income1, SEK bn Operating margin, % Operations, SEK bn Adjusted operating margin, % 391 40.7 34.5 26.6 11.6 20.2 21.1 29.3 6.4 18.3 3.5 28.4 283 313 302 333 5.8 23.3 20.8 29.7 14 15 16 17 18 14 15 16 17 18 14 15 16 17 18 14 15 16 17 18 4.1 6.5 7.0 8.8 10.4 2.1 7.5 6.9 8.9 8.8 KEY RATIOS 2018 2017 KEY RATIOS 2018 2017 Net sales, SEK M 390,834 332,738 Return on shareholders’ equity, % 21.3 20.5 Adjusted operating income¹, SEK M 40,660 29,278 Total number of employees 105,175 99,488 Adjusted operating margin, % 10.4 8.8 Share of women, % 19 19 Share of women, presidents and Operating income, SEK M 34,478 29,678 other senior executives, % 25 25 Operating margin, % 8.8 8.9 Energy consumption, MWh/SEK M 5.8 6.4 Income after financial items, SEK M 32,148 27,605 Total CO2 emissions, tons/SEK M Income for the period, SEK M 25,363 20,786 (GHG scope 1 & 2) 1.1 1.2 Diluted earnings per share, SEK 12.24 10.07 Share of direct material purchasing 2 spend from suppliers having made a Dividend per share, SEK 10.00 4.25 CSR self- assessment, % 91 95 Operating cash flow, Industrial Operations, SEK bn 26.6 28.4 The comparative financial information has been restated due to the implementation of IFRS 15 Revenue from Contracts with Customers.