The Volvo Group concluded an intense 2007 with a fourth quarter in which sales and operating income reached record levels.

In the fourth quarter, sales increased by 25 per cent to 84.6 billion kronor (£ 6.71bn) and operating income rose 12 per cent to 5.8 billion kronor (£460.3m). The underlying profitability remained at a favourable level, which is a reflection on the positive development in most of the Group’s markets.

The operating margin of 6.8 per cent was negatively affected by the development in North America, integration expenses which initially yield lower profitability in acquired companies and a provision for engine-related warranty expenses in North America amounting to 370 million kronor (£ 29.4m).

The split market conditions are most apparent in the truck operations, in which nearly all markets continued to show favourable development, with the exception of North America and Japan. There is a good stability and high profitability in Europe and the Group is expanding production capacity, particularly against the background of very high demand in Eastern Europe. Following the acquisition of Nissan Diesel, Asia has grown to become the second largest truck market and truck deliveries tripled in the fourth quarter in Asia.

During the fourth quarter, Volvo CE had a very strong growth but profitability was impacted by increased production costs and costs related to the integration of acquired companies. Volvo Buses have the new Euro 4-engines based on the new engine platforms in place and are far ahead in the environment area, including hybrid buses in the commercial phase. Buses are now being integrated closer to the truck companies and Volvo 3P, with a focus on joint solutions, reduced costs and increased profitability. Volvo Penta continues to capture market shares in the marine segment and Volvo Aero ended the year strongly. Volvo Financial Services has stable profitability and delivered a return on equity of 15.9 per cent.

On December 31, 2007, the Volvo Group had 101,698 employees.

CEO’S COMMENTS – STRONG GROWTH AND FAVOURABLE PROFITABILITY (extract)
The Volvo Group concluded an intense 2007 with a fourth quarter in which sales and operating income reached record levels. During the year we carried out several major acquisitions, established a strong presence in Asia, advanced our positions in important product segments, launched many new products and managed widely shifting demand trends in our main markets – continued growth in Europe and Asia and a sharp decline in North America. Following the acquisitions of Nissan Diesel, Lingong and Ingersoll Rand’s road development division, we now have a significant industrial structure in Asia, with a presence in Japan, China and, when the expected cooperation with Eicher Motors is in operation, also in India. These are rapidly growing markets and we want to be part of that growth.

Favourable level of underlying profitability
In the fourth quarter, sales increased by 25% to SEK 84.6 billion and operating income rose 12% to SEK 5.8 billion. The operating margin of 6.8% was negatively affected by the development in North America, integration expenses, which initially yield lower profitability in acquired companies and a provision for engine-related warranty expenses in North America amounting to SEK 370 M. The underlying profitability remained at a favourable level, which is a reflection on the positive development in most of our markets. During the fourth quarter, our industrial operations also had a very strong operating cash flow of SEK 12.4 billion. For the full year, the Group’s sales increased by 10% to slightly more than SEK 285 billion, while operating income was up 9% to more than SEK 22 billion. The split market conditions are most apparent in our truck operations, in which nearly all markets continued to show favourable development, with the exception of North America and Japan. We have good stability and high profitability in Europe, where we increased deliveries during the autumn, despite already strained production. We are expanding production capacity, particularly against the background of very high demand in Eastern Europe.

Following the acquisition of Nissan Diesel, Asia has grown to become our second largest truck market and we have continued high expectations about development there. In Asia, truck deliveries tripled in the fourth quarter.

In North America, we introduced a new generation of engines during the year that comply with the world’s most stringent emission legislation, and simultaneously implemented adaptations in the industrial system. Combined with weak demand, these measures affected profitability. We have adapted the operations to suit market conditions and have a high level of preparedness for handling changes in demand.

On February 1st the members of the UAW union at the New River Valley plant decided to go on strike, and production at the plant has been halted. In the Group’s other engine and truck plants in North America there is a temporary agreement since the old agreement expired.

We estimate that the truck market in Europe will grow by 5-10% compared with 2007, with the industry’s delivery capacity as the limiting factor.
The North American truck market is difficult to assess, but we estimate that it will be on about the same level as in 2007.

Profitability generates shareholder value
In 2007, Volvo transferred slightly more than SEK 20 billion to shareholders through dividends and share redemptions. For 2007, the Board of Directors proposes an ordinary dividend of SEK 5.50 (43.5p) per share, corresponding to 74% of the year’s profit. If the Annual General Meeting approves the dividend proposal, it would mean that the ordinary dividend has continuously increased by an average of 21% annually for the last 15 years.

Profitability for the Volvo Group during 2007 will also benefit employees. They work hard for the continued successful development of the Group and will receive a distribution of SEK 450 M in the profit-sharing system.

We have entered 2008 with strong order books, a very strong product program and with an overall good demand in our main markets outside North America. The focus is now on ensuring our delivery capacity with a competitive cost base and on increasing productivity.

Leif Johansson
President and CEO

Overview of Truck Operations (extract)

Continued strong underlying profitability
• Continued growth with good profitability in Europe
• Weak sales and profit levels in North America
• Significant increase in warranty reserves for North America

Diverging market development
Demand is on very high levels on most of the world’s larger truck markets, with the exception of North America and Japan.

During 2007, the European market continued to develop strongly, and the total number of registrations in the EU, Norway and Switzerland increased by 9% to 328,557 heavy trucks (301,570). The development was especially strong in Eastern Europe where the rapid economic growth and an increased transport need drive demand for heavy trucks.

During 2007, the total market for heavy trucks (Class 8) in North America declined by 40% to 207,847 trucks, compared with 348,866 trucks in 2006. The decrease is a consequence of large pre-buy volumes during 2006, the softer US economy with lower freight volumes during 2007 and a drop-off in housing construction.

In Brazil the market grew by 45% to 57,817 heavy trucks (39,873).

In Asia the positive development continued in China whereas the market in Japan declined. According to preliminary figures, the Chinese market for trucks over 14 tons grew by 58% to approximately 490,000 trucks (310,000). In India the market continued on a high level and amounted to 193,105 trucks (196,519). The Japanese market for heavy trucks amounted to 42,717 vehicles (49,295), which was a 13% decrease.

Demand for trucks is very strong in the Middle East. As of September, the import of heavy trucks to the region increased by 38% to 29,000 trucks (21,000) with Saudi Arabia and Turkey recording growth of 38% and 63% respectively.

The total European market (EU29) is currently limited by the production capacity of the industry, where order backlogs are substantial and delivery times are long. The strained production in Europe affects the supply of trucks also on markets in Asia, the Middle East and South America. Order backlogs for 2008 indicate a continued growth in the European heavy truck market by some 5-10% compared with 2007.

As expected, demand in North America remains low, reflecting the weakening economy. This has resulted in lower profitability in the transport industry along with a relatively high level of inventories of new trucks at the dealers.

Forecasting the market is difficult, but current expectations are a demand for trucks in 2008 on the same level as in 2007.

During the fourth quarter, the truck operation’s order bookings increased by 23% to 76,417 trucks (61,999). Excluding Nissan Diesel, order bookings increased by 3%. Order bookings in Europe declined by 8%, in comparison with the exceptionally strong fourth quarter of 2006, which was affected by pre-buys prior to price increases announced by Renault Trucks. The levelling-off comes after a long period of continually increasing orders, which has led to long delivery times.

Even though order bookings in North America rose in comparison to 2006, they continued to be on a low level with construction trucks being affected the most. Nissan Diesel’s order bookings declined by 32% as a consequence of fewer orders of light trucks from Nissan Motors. Excluding the Nissan Motors business, order bookings declined by 5%.

The delivery pace of the truck operations increased substantially during the fourth quarter on all markets, but North America. Capacity utilization in the European plants was in general very high.
During the second half of 2007 efforts have been made to increase capacity in the European production system even further. In total, 76,525 trucks were delivered during the quarter, compared with 58,789 trucks in the same period of the preceding year.

The large increases in Asia and Other markets is mainly an effect of Nissan Diesel being included in the deliveries. Excluding Nissan Diesel, deliveries in Asia were down by 2% and by 4% in other markets. During the fourth quarter, Nissan Diesel’s total deliveries declined to 14,585 trucks compared with 17,780 trucks the same period in the preceding year. The lower deliveries are a consequence of significantly lower sales of light trucks to Nissan Motors, which was partly offset by increased deliveries of heavy-duty trucks.

North American deliveries decreased as a consequence of lower demand. Even though dealer inventories of trucks equipped with engines compliant with the old emission legislation (US04) decreased during the quarter, they remain at higher levels than expected. The Group’s North American truck operations continues to focus on converting existing dealer inventory into retail sales and giving customers experience with trucks equipped with the new generation of engines (US07) to spur orders.

Good profitability in Europe
During the fourth quarter, the truck operation’s net sales amounted to SEK 57,012 M, which was an increase of 27% compared with SEK 45,023 during the same quarter in 2006. Nissan Diesel contributed with SEK 7,849 M to net sales. Adjusted for changes in exchange rates and Nissan Diesel, net sales increased by 11%. Operating income rose by 16% to SEK 4,144 M (3,575). Operating margin amounted to 7.3% (7.9).

The good demand and competitive products contributed to favourable price realization in Europe, South America and large parts of Asia.

An advantageous product and market mix with increased deliveries in Europe also contributed to the higher earnings as did the increased profitability in the dealer network and the aftermarket business. On the other hand, operating income was negatively affected by increased research and development expenses, which is a consequence of higher amortization of previously capitalized R&D expenses and lower capitalization of current R&D expenses.

The production increase in Europe resulted in higher production costs through overtime, extra shifts and increased outsourcing activities. In North America the operating income was affected by continued low deliveries of trucks and an increase in warranty reserves for phased-out legacy engines and quality issues on truck engines produced for the North American market during 2007.

Nissan Diesel’s operations contributed SEK 300 M to operating income during the seasonally weak fourth quarter, excluding negative effects from purchase price allocation adjustments (PPA) amounting to a total of SEK 94 M attributable to amortization of intangible and tangible assets. A change in the consolidation method of Nissan Diesel’s foreign subsidiaries had a positive impact on operating income amounting to SEK 63 M in the fourth quarter. For further information, Nissan Diesel had an operating margin of 3.8% before PPA adjustments.

Net sales for the full year increased by 10% to SEK 187,892 M (171,265). Operating income amounted to SEK 15,193 M (14,828 excluding adjustment of goodwill in Mack Trucks), while the operating margin was 8.1% (8.7).

New generations of heavy trucks in Europe
In December 2007, Volvo Trucks announced the launch of a new generation of heavy trucks in Europe. Both the Volvo FH, the company’s best-seller in the long-haul segment, and the Volvo FH16 - the flagship model with the market’s highest torque - are being significantly upgraded. Production start is scheduled for autumn 2008, although customers can already start placing orders for the new trucks.

Also in December 2007, Renault Trucks announced the launch of a new Renault Magnum, featuring an upgraded cab. Production will start mid 2008. However customers could place orders for the new trucks already in December.

After a brief rate increase in late 2007 to address orders that weren’t filled due to production disturbances earlier in the year, the production rate at the New River Valley plant as of February was to be returned to a level better adapted to current demand. The decision means that 500 to 600 employees should have been released during February. However, as of February 1, 2008 the production at the plant has been halted after a decision by the American autoworker’s union UAW to go on strike