THE VOLVO GROUP Annual and Sustainability Report 2017 Driving Performance The Volvo Group 2017 The Volvo and Innovation CONTENT A GLOBAL GROUP STRONG BRANDS OVERVIEW This is the Volvo Group. 2 CEO comments. 4 he Volvo Group’s brand port- folio consists of Volvo, Volvo STRATEGY T Committed to staying ahead . 8 Penta, UD, Terex Trucks, Renault Mission. 10 Trucks, Prevost, Nova Bus and Vision. .10 Mack. We partner in alliances and Values . 10 joint ventures with the SDLG, Aspirations. .11 Code of Conduct . 11 Eicher and Dongfeng brands. By Driving innovation. 12 offering products and services Strategic priorities. 16 under different brands, the Group Financial targets. .21 addresses many different BUSINESS MODEL customer and market segments in VALUE CHAIN. 24 mature as well as growth markets. Customers . 28 Product development . 34 Purchasing. 46 Production & Logistics . 48 Retail & Service . 54 Reuse. 60 EMPLOYEES . 68 OUR ROLE IN SOCIETY. 74 GROUP PERFORMANCE BOARD OF DIRECTORS’ REPORT 2017 Sustainability Reporting Index . 82 Global strength in a changing world. 82 Significant events. 84 Financial performance . 86 Financial position . 89 Cash flow statement . 92 Trucks . 94 Construction Equipment . 98 Buses. 101 Volvo Penta . 103 Financial Services. 105 Financial management . 107 Changes in consolidated shareholders’ equity. 108 The share. 109 Risks and uncertainties. 112 NOTES Notes to the financial statements. 118 Parent Company AB Volvo . 178 CORPORATE GOVERNANCE Corporate Governance Report 2017 . 188 Board of Directors. 196 Group Executive Board. 202 OTHER INFORMATION Proposed remuneration policy. .206 Proposed disposition of unappropriated earnings . 207 Audit report for AB Volvo (publ) . 208 Alternative Performance Measures . 211 Eleven-year summary . 214 Reporting scope and boundaries . 222 Annual General Meeting . 224 Preliminary publication dates. 224 The Volvo Group’s formal financial reports are presented on pages 82–187, 206–207 and 211–213 and have been audited by the company’s auditors. For information on which pages constitute the Volvo Group’s Sustainability Report, please see Sustainability Reporting Index on page 82. A GLOBAL GROUP 2017 OVERVIEW 2017 IN BRIEF Increased sales and continued profit improvement Strong demand for the Volvo Group’s products and services Strong financial position with net financial assets of SEK 26.3 in many of the world’s markets. Net sales increased in billion, corresponding to 26.9% of equity in the Industrial all regions and amounted to SEK 335 billion. Oper ations, excluding provisions for post­employment benefits. Increased sales volumes contributed to an increase in profit­ New financial targets introduced. ability. Adjusted operating income improved to SEK 29.9 M New trucks from Volvo Trucks and Mack Trucks contributed corres ponding to an adjusted operating margin of 8.9% with to the Group’s biggest product renewal in North America in a particularly strong development in Construction Equipment. 20 years. Furthermore, all­new heavy­duty and medium­duty Operating cash flow in the Industrial Operations increased truck ranges were launched under the UD brand. to SEK 28.4 billion. 28.4 29.9 30.3 335 273 283 313 302 9.2 11. 6 20.2 21.1 1.5 6.4 18.3 3.5 7.1 5.8 23.3 20.8 13 14 15 16 17 13 14 15 16 17 13 14 15 16 17 13 14 15 16 17 NET SALES, ADJUSTED OPERATING OPERATING SEK BN OPERATING INCOME, C ASH F LOW, INCOME¹, SEK BN INDUSTRIAL SEK BN OPERATIONS, SEK BN 335 SEK bn 29.9 SEK bn 30.3 SEK bn 28.4 SEK bn KEY RATIOS 2017 2016 KEY RATIOS 2017 2016 Net sales, SEK M 334,748 301,914 Return on shareholders’ equity, % 20.8 14.9 Adjusted operating income¹, SEK M 29,928 21,094 Total number of employees 99,488 94,914 Adjusted operating margin, % 8.9 7.0 Share of women, % 18 17 Share of women, presidents and Operating income, SEK M 30,327 20,826 other senior executives, % 25 24 Operating margin, % 9.1 6.9 Employee Engagement Index, % 75 72 Income after financial items, SEK M 28,254 19,230 Energy consumption, MWh/SEK M 6.4 7.1 Income for the period, SEK M 21,283 13,223 Total CO2 emissions, tons/SEK M Diluted earnings per share, SEK 10.32 6.47 (GHG scope 1 & 2) 1.2 1.4 Dividend per share, SEK 4.252 3.25 Share of direct material purchasing Operating cash flow, spend from suppliers having made a Industrial Operations, SEK bn 28.4 3.5 CSR self-­assessment, % 95 88 1 For more information on adjusted operating income, please see Alternative Performance Measures on page 211. 2 Proposed by the Board of Directors. 1 A GLOBAL GROUP 2017 OVERVIEW OVERVIEW This is the Volvo Group The Volvo Group is one of the world’s leading manufacturers of trucks, buses, construction equipment and marine and industrial engines. The Group also provides complete solutions for financing and service. With its headquarters in Gothenburg, Sweden, the Group employs almost 100,000 people, has production facilities in 18 countries and sells its products in more than 190 markets. WHAT WE DO ON THE ROAD AT THE SITE IN THE CITY AT SEA Our products help ensure that Engines, machines and vehicles Our products are part of daily life. Our products and services are people have food on the table, can from the Volvo Group can be found They take people to work, distribute there, regardless of whether some­ travel to their destination and have at con struction sites, in mines and goods and collect rubbish. one is at work on a ship, on holiday roads to drive on. Our products in the middle of forests. We develop the public transport in a pleasure boat or need urgent deliver goods to keep production solutions of tomorrow, with an help from the sea rescue services. plants running. increased focus on electrification. SHARE OF NET SALES SHARE OF NET SALES BY MARKET % 21 75 % Vehicles, 75% EUROPE Services, 21% 43% Financial Services, 4% NORTH AMERICA 4 % 25% ASIA 20% SOUTH AMERICA 5% 7% AFRICA AND OCEANIA 2 A GLOBAL GROUP 2017 OVERVIEW OUR CUSTOMERS MAKE SOCIETIES FUNCTION TRUCKS The Volvo Group’s products and services contribute to much of what we all expect of a well­functioning 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 dealers with dense service networks and increasingly more complete offerings, including services such as financing, insurance, leasing, various service contracts, accessories and spare parts that support the CONSTRUCTION core products, the Volvo Group has established leading positions EQUIPMENT on a global market. The Volvo Group is the world’s second largest manufacturer of heavy­duty trucks, one of the world’s largest manu­ facturers of construction equipment, buses and heavy­duty 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. COMPETITIVE PRODUCTS All of the Volvo Group’s products have been developed to contri­ bute to efficient transport and infrastructure solutions. Sales of BUSES new vehicles, machines and engines as well as used vehicles and machines, superstructures and special vehicles accounted for 75% of the Group’s net sales in 2017. Sales of vehicles and machines build a population of products that drives spare parts sales and service revenue. FIRST CLASS SERVICES ENGINES AND COMPLETE In addition to vehicles and machines, the Volvo Group’s offering POWER SOLUTIONS FOR MARINE AND INDUSTRIAL includes various types of services such as insurance, rental ser­ APPLICATIONS vices, 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 cus­ tomer. The service business contributes to balancing the fluctua­ tions in the sales of new products and is an area of priority. Sales of services accounted for 21% of Group net sales in 2017. The Volvo Group also offers financing for customers and dealers. During 2017 Financial Services provided financing solutions for 25% of Group products in the markets where financing is offered. 3 A GLOBAL GROUP 2017 CEO COMMENTS CEO COMMENTS Driving performance and innovation 2017 was a record year in terms of sales and profitability for the Volvo Group. We supported our truck customers who worked at high activity levels in many markets and successfully met the global surge in demand for construction equipment. For us, this resulted in increased sales, improved profitability, strong cash flow and a strengthened balance sheet. In fact, we achieved the highest sales and operating income in the Volvo Group’s history. STRATEGIC PRIORITIES To be successful the key is to create value for our customers by impacting their bottom line profitability. By understanding our customers’ priorities and challenges, we are able to provide products and services that grow customers’ revenues and decrease customers’ costs. This is the basis for our strategic direction. Read more on page 16 1 2 3 4 5 6 7 4 A GLOBAL GROUP 2017 CEO COMMENTS n addition we renewed and extended our truck ranges in The Japanese market for heavy­duty trucks continued to be good, North America, Japan and Southeast Asia and demon­ with UD Trucks regaining market share in the heavy­duty truck strated innovations within electromobility, automation and segment.