Volvo Car GROUP Interim report THIRD quarter and first nine
VOLVO CAR AB GROUP (PUBL.) (556810 8988) INTERIM REPORT THIRD QUARTER AND FIRST NINE MONTHS, GOTHENBURG OCTOBER 26 TH THIRD QUARTER Retail sales increased by 10.6 per cent to 135,831 (122,766) units Net revenue increased by 18.4 per cent to MSEK 48,880 (41,273) Operating income (EBIT) increased by 77.5 per cent to MSEK 3,669 (2,067) Net income increased by 89.4 per cent to MSEK 2,513 (1,327) Cash flow from operating and investing activities at MSEK -4,357 (921) Electrification strategy announced Further investments in US operations announced Launch of the new XC40 and of Care by Volvo FIRST NINE MONTHS Retail sales increased by 9.0 per cent to 413,472 (379,329) units Net revenue increased by 18.9 per cent to MSEK 149,250 (125,519) Operating income (EBIT) increased by 36.4 per cent to MSEK 10,445 (7,659) Net income increased by 42.1 per cent to MSEK 7,262 (5,111) Cash flow from operating and investing activities at MSEK -7,503 (-2,254) Full SUV line up launched Upgraded credit rating Volvo Cars recognised on the list of the World s Most Ethical Company by the Ethisphere Institute 2 OF 22
INTERIM REPORT THIRD QUARTER AND FIRST NINE MONTHS Key figures Net revenue, MSEK 48,880 41,273 149,250 125,519 180,902 Research and development expenses, MSEK -2,612-2,767-8,214 7,892 10,174 Operating income (EBIT), MSEK 3,669 2,067 10,445 7,659 11,014 Net income, MSEK 2,513 1,327 7,262 5,111 7,460 EBITDA, MSEK 6,588 4,767 19,312 15,506 21,541 Cash flow from operating and investing activities, MSEK -4,357 921-7,503 2,254 6,515 Gross margin, % 24.4 21.9 23.2 22.6 21.4 EBIT margin, % 7.5 5.0 7.0 6.1 6.1 EBITDA margin, % 13.5 11.5 12.9 12.4 11.9 Net Cash (Net debt if positive) -8,253-5,722-8,253-5,722-18,873 Retail sales (units) Europe 64,027 60,832 219,840 207,058 290,925 China 30,427 22,699 82,341 63,387 90,930 US 22,861 21,878 56,963 58,532 82,726 Other 18,516 17,357 54,328 50,352 69,751 Retail sales total 135,831 122,766 413,472 379,329 534,332 Wholesales 1) 128,841 118,797 416,915 376,843 536,211 Production 134,540 114,766 441,625 381,968 533,156 1) Wholesales refers to new car sales to dealers and other customers including own units and rentals. All amounts are in MSEK unless otherwise stated. Amounts in brackets refer to the same period for the preceding year, unless otherwise stated. All performance measures are further described on page 20. This report contains statements concerning, among other things, Volvo Car Group s financial condition and results of operations that are forward-looking in nature. Such statements are not historical facts but, rather, represent Volvo Car Group s future expectations. Volvo Car Group believes that the expectations reflected in these forward-looking statements are based on reasonable assumptions, however, forward-looking statements involve inherent risks and uncertainties, and a number of important factors could cause actual results or outcomes to differ materially from those expressed in any forward-looking statement. Such important factors include, but may not be limited to: Volvo Car Group s market position, growth in the automotive industry, and the effects of competition and other economic, business, competitive and/or regulatory factors affecting the business of Volvo Car Group, its associated companies and joint ventures, and the automotive industry in general. Forward-looking statements speak only as of the date they were made and, other than as required by applicable law, Volvo Car Group undertakes no obligation to update any of them in light of new information or future events. 3 OF 22
INTERIM REPORT THIRD QUARTER AND FIRST NINE MONTHS ceo COMMENT Volvo Cars has delivered another quarter of sales growth and increased net revenue, building on the good progress in the first half of the year. The growth in net revenue was driven by the positive sales development in all markets and an improved sales mix as a result of increased sales of the new S and V90 as well as the XC60. As a result, the operating profit and the EBIT margin also improved, demonstrating progress in line with our goals of maintaining sustainable profit levels and being a truly global company with an attractive model line-up in all regions. We see strong demand for our products even in regions where markets are softening. In China, we have seen a strong growth in sales and our local manufacturing footprint supports our local expansion. The US has been showing signs of recovery since the beginning of the year, when our sales was impacted by delivery constraints. European sales showed good growth with the XC60 continuing to be our best-selling model. The start of production and roll out of the new XC60 has been successful and from December we will stop producing the XC60 Classic. Our global manufacturing structure gives us the flexibility to gradually shift production from one location to another depending on demand. Consistent with this we have decided to increase our investment in the Charleston manufacturing plant that is now under construction in the US. The plant will produce the new S60 as well as the next generation XC90. It will serve both the US and the international markets in a similar way as has been successfully implemented in Daqing, China, for the S90. In September we entered into a new segment on the SUV market by launching our new small XC40 SUV. It will be produced in Gent, Belgium, and in Luqiao, China. With the XC40 alongside the XC60 and XC90 we are, for the first time, covering the whole SUV segment making Volvo one of the most SUV focused companies in the industry. The SUV market remains one of the fastest growing in the industry. With the launch of the XC40 we also introduced a new model of car ownership with the Care by Volvo subscription service. Care by Volvo redefines the traditional model of car ownership and introduces a transparent monthly subscription which will include digital concierge services and e-commerce ordering. I am also very proud that we have been recognised by the United Nations for our ground-breaking electrification strategy, unveiled in July, stating that all models launched from 2019 will have hybrid or fully electric propulsion. We think this is the right future for Volvo Cars and this recognition confirms that we are leading the way on this important journey. Our recent announcement about our new brand in Polestar, with a state-of-the-art manufacturing facility in Chengdu, China, reinforces that we are committed to deliver on this strategy. For the full year, I anticipate continuous growth in line with the previous nine along with more exciting news about our cars and service products. The results so far demonstrate that we are heading in the right direction. Håkan Samuelsson CEO 4 OF 22
INTERIM REPORT THIRD QUARTER AND FIRST NINE MONTHS The Volvo Car Group Volvo Car AB (publ.), with its registered office in Gothenburg, is majority owned (99 per cent) by Geely Sweden Holdings AB, owned by Shanghai Geely Zhaoyuan International Investment Co., Ltd., registered in Shanghai, China, owned by Zhejiang Geely Holding Group Ltd., registered in Hangzhou, China. Volvo Car AB (publ.) holds shares in its subsidiary Volvo Car Corporation and provides the Group with certain financing solutions. Volvo Car AB (publ.) indirectly, through Volvo Car Corporation and its subsidiaries, operates in the automotive industry with business relating to the design, development, manufacturing, marketing and sales of cars and thereto related services. Volvo Car Group and its global operations are referred to as Volvo Cars. Sales development Volvo Cars global retail sales increased by 9.0 per cent to 413,472 (379,329) units and wholesale increased by 10.6 per cent to 416,915 (376,843) units during the first nine of. The XC60 Classic together with the new XC60 were the best-selling models, followed by the V40/V40 Cross Country. Strong demand for the 90 series contributed to Volvo Cars sales growth. Volvo Cars third quarter retail sales increased by 10.6 per cent to 135,831 (122,766) units. The sales growth was supported by strong momentum in China. Wholesale increased by 8.5 per cent to 128,841 (118,797) units. Continued strong demand for the 90 series and the launch of the new XC60 were driving factors in the company s sales growth. Europe Total sales of passenger cars (EU+EFTA) increased by 3.6 per cent in the first nine. The improvement was reflected in Volvo Cars major European markets, with a sales increase in the overall market in Sweden of 3.1 per cent, Germany 2.2 per cent, and Italy 9.0 per cent. The exception was the United Kingdom, which recorded a decline in sales of 3.9 per cent year-on-year. Volvo Cars reported a retail sales increase of 6.2 per cent to 219,840 (207,058) units in the first nine of. Sales was supported by stronger demand for the 90 series, as well as the XC60. In the third quarter, Volvo Cars increased its retail sales by 5.3 per cent to 64,027 (60,832) units. With a 19 per cent increase, Sweden (15,381 units) was the fastest growing market in Europe, followed by Germany, with 7.5 per cent sales increase (9,124 units). By overall sales the UK was second strongest despite declining with the overall UK market. China The Chinese passenger car market grew by 2.4 per cent in the first nine. Sales in the SUV segment increased by 16.1 Retail sales (units) Change % Change % Europe 64,027 60,832 5.3 219,840 207,058 6.2 China 30,427 22,699 34.0 82,341 63,387 29.9 US 22,861 21,878 4.5 56,963 58,532-2.7 Other 18,516 17,357 6.7 54,328 50,352 7.9 Retail sales total 135,831 122,766 10.6 413,472 379,329 9.0 Wholesales 128,841 118,797 8.5 416,915 376,843 10.6 Production 134,540 114,766 17.2 441,625 381,968 15.6 5 OF 22
INTERIM REPORT THIRD QUARTER AND FIRST NINE MONTHS per cent in the same period. The market saw a rebound in demand in June. This positive development continued in the third quarter, with a gradual monthly improvement. Volvo Cars sales increased by 29.9 per cent for the nine month period, to 82,341 (63,387) units. This growth was driven by the the S90 and growing demand for the XC90 and XC60, which remains the most popular model in the region. During the third quarter, our sales in China increased by 34.0 per cent to 30,427 (22,699) units. RETAIL SALES BY MARKET FIRST NINE MONTHS RETAIL SALES BY CARLINE FIRST NINE MONTHS US During the first nine, sales in the overall US market for light vehicles declined by 1.7 per cent. August sales figures in particular were negatively affected by hurricanes. However, September sales figures helped to mitigate this decline due to replacement demand in the hardest affected areas. The underlying demand for crossovers and SUVs remained strong and continued to grow. Volvo Cars retail sales declined by 2.7 per cent in the first nine. However, sales in the US is recovering since the beginning of the year, when it was impacted by delivery constraints. In the third quarter, retail sales in the US increased by 4.5 per cent to 22,861 (21,878) units. The XC90 continued to be the best-selling model, followed by the XC60. Europe 53% China 20% US 14% Other 13% S 17% V 35% XC 48% Other Volvo Cars retail sales increased by 7.9 per cent to 54,328 (50,352) in the first nine of, supported by demand for the S90 and V90, as well as stronger demand for the XC60. In the third quarter, retail sales increased by 6.7 per cent. In Japan, Volvo Cars registered a retail sales increase of 11.3 per cent during the first nine. In Russia and Korea sales improved by 20.3 and 32.6 per cent, respectively. In Russia, the sales growth was supported by a stronger overall demand in the market and increased sales of the 90 series. In Korea, a stronger overall demand, the introduction of the 90 series and a strengthened dealer network contributed to the growth. Canada increased by 4.3 per cent. In the third quarter, Volvo Cars recorded a retail sales increase of 12.9 percent in Japan, 7.1 and per cent in Russia. Sales in Korea improved by 20.0 per cent which was driven by the same factors as for the first nine. Retail sales in Canada improved by 7.6 per cent. 6 OF 22
INTERIM REPORT THIRD QUARTER AND FIRST NINE MONTHS Top 10 Retail sales by market (units) China 30,427 22,699 82,341 63,387 US 22,861 21,878 56,963 58,532 Sweden 15,381 12,926 54,105 49,381 UK 12,035 12,311 36,516 34,881 Germany 9,124 8,489 28,821 27,610 Japan 4,040 3,578 11,734 10,545 Italy 3,774 3,550 13,040 13,016 Belgium 3,771 3,957 13,918 14,542 France 2,982 2,818 11,483 10,894 Spain 2,969 2,912 10,361 9,710 Retail sales by model (units) XC60/XC60 Classic 49,491 38,120 139,441 111,937 V40/V40 Cross Country 20,562 23,120 69,116 71,790 XC90 20,410 22,436 60,596 66,347 S60/S60L/S60 Cross Country 13,157 15,927 39,328 43,748 S90/S90L 11,587 2,407 28,933 2,594 V90/V90 Cross Country 11,139 1,278 37,789 1,278 V60/V60 Cross Country 9,455 12,692 37,940 41,785 Other (discontinued models) 30 6,786 329 39,850 Total 135,831 122,766 413,472 379,329 7 OF 22
INTERIM REPORT THIRD QUARTER AND FIRST NINE MONTHS Significant events THIRD QUARTER Electrification strategy announced Volvo Cars announced that every Volvo launched from 2019 will have an electric motor. The portfolio will include electrified cars across the model range; fully electric, plug in hybrids and mild hybrid cars. Volvo Cars and Geely agree on the formation of LYNK & CO A separate LYNK & CO company, fully responsible for the LYNK & CO car line, will be formed. Volvo Cars will hold 30 per cent of the shares, while Geely Auto will hold 50 per cent and Geely Holding 20 per cent of the shares in the new company. Other events Products & Technology Launch of the new XC40 By launching the new XC40, the SUV line up is complete. Production starts in the Ghent plant in Belgium in November and the XC40 is the first model on the new modular vehicle architecture (CMA). Further investments in the US operations The next generation XC90 large premium SUVs will be built in the new manufacturing plant in Charleston, South Carolina from 2021. This takes Volvo Cars total investment in its US manufacturing operations to over USD 1.1 billion and will raise the total of new jobs created at the Charleston site to nearly 4,000. Volvo Cars and Geely form technology sharing JV Volvo Cars and Geely Holding has completed the formation of a new joint venture to coordinate procurement and commonality for shared existing and future technology. The new joint venture, GV Automobile Technology (Ningbo) Co. Ltd, will be 50/50 owned by Volvo Cars and Geely Holding. Acquisition of Amtek Components Sweden AB Volvo Cars acquired 100 per cent of the shares in Amtek Components Sweden AB, renamed to Automotive Components Floby AB. The acquired company consists of the Floby plant that supplies vehicle components to Volvo Cars as well as other external customers. Consumer Experiences Care by Volvo Alongside the launch of the new Volvo XC40, a new model of car access was introduced. Care by Volvo is a subscription based service; a national, ready-negotiated monthly fee, combined with a new car delivered every 24. Investments in new digital technology The acquisition of the technology platform Luxe and transfer of key members of its staff, is aiming at accelerate Volvo Cars ability to offer digital customer experiences; pick-up and drop-off services will add a new level of convenience for Volvo owners. Summary first six Launch and start of production of the new XC60 New shared mobility business announced to be set up Polestar became separate global high performance car brand First fully electric car to be built in China Zenuity, the joint venture with Autoliv with the purpose to develop next generation self-driving car technologies, became operational Upgraded credit rating to BB+ with a stable outlook New appointments to the Executive Management Team; - Martina Buchhauser Senior Vice President Procurement - David Ibison Senior Vice President Corporate Communications - Xiaolin Yuan Senior Vice President Asia Pacific 8 OF 22
INTERIM REPORT THIRD QUARTER AND FIRST NINE MONTHS Financial summary THIRD QUARTER INCOME AND RESULT The comparative figures refer to the consolidated income statement of the third quarter if not otherwise stated. During the third quarter, Volvo Cars generated net revenue of MSEK 48,880 (41,273) 1) 2), an increase of 18.4 per cent. The increase was a result of a positive sales volume development, where wholesale increased by 8.5 per cent to 128,841 (118,797) units, along with an improved sales mix, generated by XC60, S90 and V90 sales. The increase was also an effect of sold licenses, partly offset by a negative currency effect. Cost of sales increased by MSEK 4,722 to MSEK 36,963 ( 32,241) 1) 3). The increase was attributable to the higher sales volume and the improved sales mix as well as continuous production ramp-up. Gross income increased to MSEK 11,917 (9,032). Gross margin increased to 24.4 (21.9) per cent. Volvo Cars is continuously investing in new technologies and new car models while meeting the increase in demand by ramping up production. The growth translates into increased research and development, selling and administrative expenses to MSEK -8,086 (-7,353) 3). The increase also reflects a larger workforce, higher marketing and event expenses along with increased IT expenses. For details regarding research and development expenses, see table below. Other operating income and expense, net, decreased to MSEK -199 (306) 1) 2), mainly related to negative translation exchange effects on operating assets and liabilities. Operating income (EBIT) increased to MSEK 3,669 (2,067). The improvement was largely a result of the positive gross income development related to increased volumes, positive sales mix and sold licenses. The improvement was partly offset by increased research and development, selling and administrative expenses together with a negative foreign exchange effect of MSEK 930, resulting in an EBIT margin of 7.5 (5.0) per cent. Net financial items amounted to MSEK 44 (-297), mainly related to decreased interest expenses and other financial expenses as well as increased interest income on cash and short term investments. The income tax increase is related to increased profit and withholding tax. Net income amounted to MSEK 2,513 (1,327). Income Statement (MSEK) Net revenue 48,880 41,273 Gross income 11,917 9,032 Operating income 3,669 2,067 Income before tax 3,625 1,770 Net income 2,513 1,327 Research and development (MSEK) Research and development spending -2,998-3,109 Capitalised development costs 1,391 1,404 Amortisation and depreciation of Research and development 4-1,004-1,062 Research and development expenses -2,612-2,767 1) Prior year net revenue and cost of sales have been restated to hedged currency rates. Total effect amounts to MSEK 201 (178) for net revenue and MSEK -35 (101) for cost of sales. 2) Sold licenses have been reclassified from Other Operating Income to Net Revenue. The comparative period has been restated. Total effect amounts to MSEK 2,660 (11). 3) During costs have been reclassified from cost of sales to research and development. The comparative period has been restated. Total effect amounts to MSEK 197 (188). 4) Includes amortisation of capitalised development cost and a portion of depreciation of other intangible assets. 9 OF 22
INTERIM REPORT THIRD QUARTER AND FIRST NINE MONTHS FIRST NINE MONTHS INCOME AND RESULT The comparative figures refer to the consolidated income statement of the first nine if not otherwise stated. Drivers behind the income and result for the first nine are similar to those in the third quarter. Volvo Cars generated net revenue of MSEK 149,250 (125,519) 1) 2), an increase of 18.9 per cent. The increase was a result of a positive sales volume development, where wholesale increased by 10.6 per cent to 416,915 (376,843) units, along with an improved sales mix, generated by XC60, S90 and V90 sales. The increase was also an effect of sold licenses, acquired business (First Rent A Car Group) and positive currency effects. Cost of sales increased by MSEK 17,532 to MSEK 114,678 ( 97,146) 1) 3). The increase was attributable to the higher sales volume and the improved sales mix as well as move of production of the S90 series to Daqing and general production ramp-up. Gross income increased to MSEK 34,572 (28,373). Gross margin increased to 23.2 (22.6) per cent. Volvo Cars is continuously investing in new technologies and new car models while meeting the increase in demand by ramping up production. The growth translates into increased research and development, selling and administrative expenses to MSEK -24,421 (-21,316) 3). The increase also reflects a larger workforce, higher marketing and event expenses along with increased IT expenses. For details regarding research and development expenses, see table below. Other operating income and expense, net, decreased to MSEK 193 (344) 1) 2), mainly related to negative translation exchange effects on operating assets and liabilities. Operating income (EBIT) increased to MSEK 10,445 (7,659). The improvement was largely a result of the positive gross income development related to increased volumes, positive sales mix and sold licenses. The improvement was partly offset by increased research and development, selling and administrative expenses together with a negative foreign exchange effect of MSEK 1,480, resulting in an EBIT margin of 7.0 (6.1) per cent. Net financial items amounted to MSEK 617 ( 973), mainly related to decreased interest expenses and other financial expenses as well as increased interest income on cash and short term investments. The income tax increase is related to increased profit and withholding tax. Net income amounted to MSEK 7,262 (5,111). Income Statement (MSEK) Net revenue 149,250 125,519 Gross income 34,572 28,373 Operating income 10,445 7,659 Income before tax 9,828 6,686 Net income 7,262 5,111 Research and development (MSEK) Research and development spending -10,526-9,127 Capitalised development costs 5,472 4,237 Amortisation and depreciation of Research and development 4-3,160-3,002 Research and development expenses -8,214-7,892 1) Prior year net revenue and cost of sales have been restated to hedged currency rates. Total effect amounts to MSEK 493 (732) for net revenue and MSEK 173 (148) for cost of sales. 2) Sold licenses have been reclassified from Other Operating Income to Net Revenue. The comparative period has been restated. Total effect amounts to MSEK 3,971 (55). 3) During costs have been reclassified from cost of sales to research and development. The comparative period has been restated. Total effect amounts to MSEK 623 (556). 4) Includes amortisation of capitalised development cost and a portion of depreciation of other intangible assets. 10 OF 22
INTERIM REPORT THIRD QUARTER AND FIRST NINE MONTHS NET FINANCIAL POSITION AND LIQUIDITY The presented figures refer to the consolidated figures for the first nine if not otherwise stated. The comparative figures for the cash flow items refer to the consolidated cash flow statement for the first nine if not otherwise stated. The comparative figures for the balance sheet items refer to the consolidated balance sheets of December 31, if not otherwise stated. CASH FLOW Cash flow from operating and investing activities amounted to MSEK 7,503 ( 2,254). Cash flow from operating activities amounted to MSEK 9,960 (11,535). Operating income stood at MSEK 10,445 (7,659), adjusting for depreciation and amortisation, an additional MSEK 8,867 (7,847) was contributed, although this was partly offset by a change in working capital of MSEK 6,659 ( 1,762). The change in working capital is due to production related seasonality, product mix and ramp-up of production in Daqing, affecting both inventories and accounts payable. The change in accounts receivables is explained by increasing sales and sold licenses. Cash flow from investing activities amounted to MSEK 17,463 ( 13,789). Investments in tangible assets amounted to MSEK 11,888 ( 7,802), following the ongoing construction of the US plant and special tool investments related to new car models, such as the new XC60 and XC40. Investments in intangible assets amounted to MSEK 5,680 ( 4,347) as a result of continuous investments in new and upcoming car models and new technology. Cash flow from financing activities amounted to MSEK -2,026 (-397). This is primarily attributable to dividends paid of MSEK 2,188 ( ), repayment of liabilities to credit institutions of MSEK 2,241 ( 4,195) partly offset by matured marketable securities of net MSEK 1,356 ( 1,446) and withdrawal of credit facilities MSEK 1,179 (479). Cash and cash equivalents including marketable securities decreased to MSEK 31,231 (43,373). Net cash decreased to MSEK -8,253 (-18,873). Including the undrawn revolving credit facility of MEUR 1,300, liquidity is at MSEK 43,749 (49,678). EQUITY Total equity increased by MSEK 7,618 to MSEK 50,928 (43,310), resulting in an equity ratio of 29.0 (26.8) per cent. The change is attributable to the positive net income of MSEK 7,262 and positive effects in other comprehensive income. The latter is related to change in cash flow hedge reserve of MSEK 3,776, offset by a negative translation foreign exchange effect, including hedges of MSEK -869 and remeasurement of post-employment benefits of MSEK -344. Dividend of MSEK -2,188 has been paid to the shareholders, whereof MSEK 65 was distributed to the holders of preference shares. Cash flow Statement (MSEK) Cash flow from operating activities 9,960 11,535 Cash flow from investing activities -17,463 13,789 Cash flow from operating and investing activities -7,503 2,254 Cash flow from financing activities -2,026 397 Cash flow for the period -9,529 2,651 11 OF 22
INTERIM REPORT THIRD QUARTER AND FIRST NINE MONTHS SIGNIFICANT EVENTS AFTER THE REPORTING PERIOD Volvo Cars and Geely invest in Polestar Volvo Cars and Geely Holding announced they will make a joint investment of RMB 5 billion (SEK 6.1 billion) to establish a Polestar manufacturing facility in Chengdu, China. The investment will support the initial phase of Polestar s electrified product, brand and industrial development. RISKS AND UNCERTAINTY FACTORS Risks are a natural element in all business activities. In order to achieve Volvo Cars short and long-term objectives, enterprise risk management is part of the daily activities at Volvo Cars. For a more in-depth analysis of risks, see the Volvo Car Group Annual Report page 76. PRODUCTION Volvo Cars produced 134,540 (114,766) units in the third quarter of, an increase of 17.2 per cent. In the first nine, production amounted to 441,625 (381,968) units, an increase of 15.6 per cent. EMPLOYEES During the third quarter of, Volvo Car Group employed on average approx. 36,000 (30,000) full-time employees. Furthermore, the Group employed on average approx. 4,000 (3,700) consultants. The increased number of employees and consultants mainly relates to higher production volumes, the ramp up in China, the construction of the Charleston manufacturing plant in the US, as well as the continuous development of future car models. OUTLOOK Revenue growth Globally, we expect the premium segment to continue to develop positively. While continuing the industrial transformation and renewal of our product portfolio, Volvo Cars expects further growth of revenue supported by sales growth in. Operating income We expect to maintain strong profit levels based on a richer model mix, following the introduction of the 90 and 60 series, partly offset by increased expenses for sales and R&D. Investments In, we will continue to invest in our global manufacturing footprint, the renewal of our product portfolio and new technologies. Capital expenditure is therefore predicted to increase slightly. PARENT COMPANY The parent company conducts no operations and has no employees. The income statements and balance sheets for the parent company are presented on page 18. 12 OF 22
INTERIM REPORT THIRD QUARTER AND FIRST NINE MONTHS CONSOLIDATED INCOME STATEMENTS MSEK Net revenue 48,880 41,273 149,250 125,519 180,902 Cost of sales -36,963 32,241-114,678 97,146 142,220 Gross income 11,917 9,032 34,572 28,373 38,682 Research and development expenses -2,612 2,767-8,214 7,892 10,174 Selling expenses -3,583 3,046-10,511 8,761 11,992 Administrative expenses -1,891 1,540-5,696 4,663 6,471 Other operating income 648 630 2,107 1,363 2,412 Other operating expenses -847 324-1,914-1,019 1,861 Share of income in joint ventures and associates 37 82 101 258 418 Operating income 3,669 2,067 10,445 7,659 11,014 Financial income 74 29 273 153 218 Financial expenses -118 326-890 1,126 1,711 Income before tax 3,625 1,770 9,828 6,686 9,521 Income tax -1,112 443-2,566 1,575 2,061 Net income 2,513 1,327 7,262 5,111 7,460 Net income attributable to Owners of the parent company 1,836 1,021 5,645 4,124 5,944 Non-controlling interests 677 306 1,617 987 1,516 2,513 1,327 7,262 5,111 7,460 13 OF 22
INTERIM REPORT THIRD QUARTER AND FIRST NINE MONTHS CONSOLIDATED COMPREHENSIVE INCOME MSEK Net income for the period 2,513 1,327 7,262 5,111 7,460 Other comprehensive income, net of income tax Items that will not be reclassified subsequently to income statement: Remeasurements of provisions for post-employment benefits -58 1,319-344 2,148 1,157 Items that may be reclassified subsequently to income statement: Translation difference on foreign operations -257 279-844 539 514 Translation difference of hedge instruments of net investments in foreign operations 3 66-25 149 124 Change in cash flow hedge 884 794 3,776 1,255 3,074 Other comprehensive income, net of income tax 572 1,900 2,563 3,013 3,841 Total comprehensive income for the period 3,085 573 9,825 2,098 3,619 Total comprehensive income attributable to Owners of the parent company 2,464 916 8,461 1,109 2,070 Non-controlling interests 621 343 1,364 989 1,549 3,085 573 9,825 2,098 3,619 14 OF 22
INTERIM REPORT THIRD QUARTER AND FIRST NINE MONTHS CONSOLIDATED BALANCE SHEETS MSEK Sept 30, Dec 31, ASSETS Non-current assets Intangible assets 28,129 25,368 Property, plant and equipment 51,099 45,468 Assets held under operating leases 2,512 2,483 Receivables on parent company 54 54 Investments in joint ventures and associates 2,509 2,498 Other long-term securities holdings 79 79 Deferred tax assets 4,525 4,112 Other non-current assets 3,516 2,013 Total non-current assets 92,423 82,075 Current assets Inventories 31,302 21,198 Accounts receivable 12,897 8,717 Current tax assets 703 293 Other current assets 6,782 5,757 Marketable securities 3,341 4,738 Cash and cash equivalents 27,890 38,635 Total current assets 82,915 79,338 TOTAL ASSETS 175,338 161,413 EQUITY & LIABILITIES Equity Equity attributable to owners of the parent company 46,414 39,536 Non-controlling interests 4,514 3,774 Total equity 50,928 43,310 Non-current liabilities Provisions for post-employment benefits 6,401 6,348 Deferred tax liabilities 2,670 1,209 Other non-current provisions 6,994 6,995 Liabilities to credit institutions 12,108 13,910 Bonds 7,736 7,699 Other non-current liabilities 3,190 5,818 Total non-current liabilities 39,099 41,979 Current liabilities Current provisions 17,574 15,371 Liabilities to credit institutions 3,044 2,813 Advance payments from customers 542 652 Accounts payable 34,755 30,508 Current tax liabilities 1,436 626 Other current liabilities 27,960 26,154 Total current liabilities 85,311 76,124 TOTAL EQUITY & LIABILITIES 175,338 161,413 15 OF 22
INTERIM REPORT THIRD QUARTER AND FIRST NINE MONTHS CONDENSED CHANGES IN CONSOLIDATED EQUITY MSEK Sept 30, Dec 31, Opening balance 43,310 34,635 Net income for the period 7,262 7,460 Other comprehensive income, net of income tax 2,563 3,841 Total comprehensive income 9,825 3,619 Aqusition of non-controlling interests 140 Issue of preference shares -19 4,916 Dividend to shareholders -2,188 Transactions with owners -2,207 5,056 Closing balance 50,928 43,310 Attributable to Owners of the parent company 46,414 39,536 Non-controlling interests 4,514 3,774 Closing balance 50,928 43,310 16 OF 22
INTERIM REPORT THIRD QUARTER AND FIRST NINE MONTHS CONSOLIDATED STATEMENTS OF CASH FLOWS MSEK OPERATING ACTIVITIES Operating income 3,669 2,067 10,445 7,659 11,014 Depreciation and amortisation of non-current assets 2,919 2,700 8,867 7,847 10,527 Interest and similar items received 72 30 223 154 218 Interest and similar items paid -49 22-545 511 953 Other financial items -6 11-252 110 418 Income tax paid -978 519-2,453 1,403 1,705 Adjustments for other items not affecting cash flow 121 173 334 339 522 5,748 4,094 16,619 13,297 19,205 Movements in working capital Change in inventories -2,679 513-10,029 2,337 231 Change in accounts receivable -1,642 2,634-3,778 888 730 Change in accounts payable -1,667 896 4,734 281 4,023 Change in items relating to repurchase commitments -119 8 463 108 342 Change in provisions 742 831 1,954 1,500 3,497 Change in other working capital assets/liabilities -288 246-3 1,986 21 Cash flow from movements in working capital -5,653 2,828-6,659 1,762 7,656 Cash flow from operating activities 95 6,922 9,960 11,535 26,861 INVESTING ACTIVITIES Investments in shares and participations, net -68 1,819 68 1,640 1,462 Dividend received from joint ventures and associates 37 37 5 187 Investments in intangible assets -1,529-1,409-5,680-4,347 6,394 Investments in property, plant and equipment -2,892-2,772-11,888-7,802 12,669 Other 1 5 8 Cash flow from investing activities -4,452 6,001-17,463 13,789 20,346 Cash flow from operating and investing activities -4,357 921-7,503 2,254 6,515 FINANCING ACTIVITIES Proceeds from credit institutions 419 163 1,179 479 1,696 Proceeds from bond issuance 22 4,597 7,579 Proceeds from issuance of preference shares, net -32 4,979 Repayment of liabilities to credit institutions -386 210-2,241 4,195 7,634 Dividend paid to shareholders -2,188 Investments in marketable securities, net -883 661 1,356 1,446 1,189 Other -253 111-100 168 361 Cash flow from financing activities -1,103 619-2,026 397 5,792 Cash flow for the period -5,460 302-9,529 2,651 12,307 Cash and cash equivalents at beginning of period 33,816 22,900 38,635 25,623 25,623 Exchange difference on cash and cash equivalents -466 396-1,216 626 705 Cash and cash equivalents at end of period 27,890 23,598 27,890 23,598 38,635 17 OF 22
INTERIM REPORT THIRD QUARTER AND FIRST NINE MONTHS CONDENSED PARENT COMPANY INCOME STATEMENTS MSEK Administrative expenses -4 7-14 9 10 Income from participation in subsidiary 1) 1,565 Operating income -4 7 1,551 9 10 Financial income 56 41 173 60 107 Financial expenses -95 41-285 74 414 Income before tax -43 7 1,439 23 317 Income tax 9 2 30 2 71 Net income -34 5 1,469 21 246 1) Received dividend from subisidary of MSEK 1,565, passed through to the shareholders. Other comprehensive income and net income are consistent since there are no items in other comprehensive income. CONDENSED PARENT COMPANY BALANCE SHEETS MSEK Sept 30, Dec 31, ASSETS Non-current assets 20,176 20,100 Current assets 4,995 5,021 TOTAL ASSETS 25,171 25,121 EQUITY & LIABILITIES Equity Restricted equity 51 51 Non-restricted equity 7,499 7,614 Total equity 7,550 7,665 Non-current liabilities 17,478 17,338 Current liabilities 143 118 TOTAL EQUITY & LIABILITIES 25,171 25,121 18 OF 22
INTERIM REPORT THIRD QUARTER AND FIRST NINE MONTHS GENERAL DEFINITIONS Volvo Car Group and Volvo Cars Volvo Car AB (publ.), Volvo Car Corporation and all its subsidiaries. Europe Europe is defined as EU28+EFTA. Joint venture companies Joint ventures refer to companies in which Volvo Car Group, through contractual cooperation together with one or more parties, has a joint control over the operational and financial management. DEFINITIONS OF PERFORMANCE MEASURES Performance measures disclosed in the interim report are those that are deemed to give a relevant view of Volvo Car Group s financial performance for a reader of the interim report. For a reconciliation of performance measures, refer to page 23. Gross margin Gross margin is Gross income as a percentage of net revenue and represents the percent of total net revenue that Volvo Cars retains after incurring the direct costs associated with producing the goods and services sold. EBIT EBIT represents earnings before interest and taxes. EBIT is synonymous with operating income which measures the profit Volvo Car Group generates from its operations. EBIT margin EBIT margin is EBIT as a percentage of net revenue and measures Volvo Car Group s operating efficiency. EBITDA EBITDA represents earnings before interest, taxes, depreciations and amortisation, and is another measurement of the operating performance. It measures the profit Volvo Car Group generate from its operations without effect from previous periods capitalisation levels. EBITDA margin EBITDA margin is EBITDA in percentage of net revenue. Equity ratio Total equity divided by total assets, is a measurement of Volvo Car Group s long-term solvency and financial leverage. Net cash/net debt Net cash/net debt is an indicator of Volvo Car Group s ability to meet its financial obligations. It is represented by liabilities to credit institutions, bonds and other interest-bearing non- current liabilities, less cash and cash equivalents and marketable securities. If negative, the performance measure is referred to as net cash and if positive the performance measure is referred to as net debt. Liquidity Liquidity consist of cash and cash equivalents, undrawn credit facilities and marketable securities. 19 OF 22
INTERIM REPORT THIRD QUARTER AND FIRST NINE MONTHS RECONCILIATION TABLES OF PERFORMANCE MEASURES Gross Margin Gross income in % of net revenue 24.4 21.9 23.2 22.6 21.4 EBIT Margin Operating income (EBIT) in % of net revenue 7.5 5.0 7.0 6.1 6.1 EBITDA/EBITDA Margin Operating income 3,669 2,067 10,445 7,659 11,014 Depreciation and amortisation of non-current assets 2,919 2,700 8,867 7,847 10,527 EBITDA 6,588 4,767 19,312 15,506 21,541 EBITDA in % of net revenue 13.5 11.5 12.9 12.4 11.9 EQUITY RATIO Sept 30, Total equity 50,928 43,310 Total assets 175,338 161,413 Equity in % total assets 29.0 26.8 NET DEBT/NET CASH (MSEK) Sept 30, Liabilities to credit institutions (non-current) 12,108 13,910 Bonds 1 7,742 7,693 Other interest-bearing non-current liabilities 2 84 84 Liabilities to credit institutions (current) 3,044 2,813 Marketable securities -3,341 4,738 Cash and cash equivalents -27,890 38,635 Net cash (Net debt if positive) -8,253 18,873 1) The bond loans are presented above at amortised cost. The MEUR 500 bond is recognised in the balance sheet with a fair value adjustment and the fair value component amounted to MSEK 6 (6). 2) Included in Other non-current liabilities in the Balance sheet. LIQUIDITY Sept 30, Cash and cash equivalents 27,890 38,635 Marketable securities 3,341 4,738 Undrawn credit facilities 12,518 6,305 Liquidity 43,749 49,678 20 OF 22
INTERIM REPORT THIRD QUARTER AND FIRST NINE MONTHS The President and Chief Executive Officer certifies that the interim report gives a fair view of the performance of the business, position and income statements of Volvo Car AB (publ.) and Volvo Car Group, and describes the principal risks and uncertainties to which the Volvo Car Group is exposed. Gothenburg, October 26, Håkan Samuelsson President and Chief Executive Officer This report has not been subject to review by Volvo Car AB s auditors. The Volvo Car Group interim report on the fourth quarter will be published on February 8th, 2018. CONTACT Nils Mösko Vice President, Head of Investor Relations +46-(0)31 59 21 09 investors@volvocars.com Volvo Car Group Headquarters 405 31 Gothenburg www.volvocars.com 21 OF 22