Volvo 2007 Annual Report Download - page 20
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Please find page 20 of the 2007 Volvo annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.Financial strategy
A competitive offering of products and services and a good geographical
balance provide the Volvo Group with a structurally higher profi tability,
stronger cash fl ow and lower risk. The three fi nancial targets of the
Volvo Group are: Growth, Operating Margin and Capital Structure.
16 Board of Directors´ Report 2007
Focus on commercial transport solutions
The streamlining of the Volvo Group, which
commenced with the sale of passenger car
operations in 1999 and continued in the form
of a number of successful acquisitions, has
created a strong group with a renewed focus
on commercial vehicles and equipment. The
Volvo Group’s new composition has led to
structurally higher margins and stronger cash-
fl ow. The higher earnings have been invested
in product development, acquisitions and
efforts for geographic expansion into new
markets. In turn, this has resulted in geo-
graphic and product diversifi cation that has
also reduced risk in the company. Moreover,
the Volvo Group’s stronger focus on aftermar-
ket operations, which are less sensitive to
economic trends, has contributed to reducing
risk. Profi tability, and also the return to Volvo’s
shareholders in the form of dividend, have
increased sharply in recent years.
The organization features business units
with Group-wide responsibility for engines
and product development, purchasing and
product planning. This has fuelled in-house
effi ciency programs and ensured the realiza-
tion of considerable potential synergies.
These targeted efforts have created business
areas that individually have strong positions in
their particular markets, while simultaneously
capitalizing fully on the potential offered for
coordination and cooperation deriving from
the dramatically higher volumes of engines
and other products.
Financial strategy
The purpose of Volvo’s long-term fi nancial strat-
egy is to ensure the best use of Group funds
in providing shareholders with a favorable
return and offering creditors reliable security.
However, a prerequisite for the long-term
competitive development of the company is
the availability of suffi cient fi nancial resources
to secure investments and active participation
in industry consolidation worldwide, thereby
maintaining a strategically competitive pos-
ition in all business areas. The Volvo Group’s
fi nancial resources will be used for value-
enhancing investments in organic growth and
acquisitions, and a competitive return to the
shareholders in the form of a stable dividend
with a long-term development.
Financial targets
• Growth in net sales should increase by at
least 10% annually.
• Operating margin should exceed 7% for the
Group’s industrial operations over the busi-
ness cycle.
• Net debt in the industrial operations should
be a maximum of 40% of shareholders’ equity.
The growth target of 10% annually will be
achieved through organic growth and through
acquisitions at approximately equal proportions.
The Volvo Group’s profi tability target is that
operating margin is to exceed a 7% annual
average over a business cycle. The target cov-
ers all Group operations, except Financial
Services, which over time is, expected to con-
tribute approximately one additional percent-
age point.
The Volvo Group’s capital is intended pri-
marily for organic growth and for the fi nancing
of acquisitions, and secondly for maintaining a
high level of fi nancial fl exibility. Any surplus
capital will then be transferred to Volvo’s
shareholders. The limiting level of net debt to
a maximum of 40% should mainly be regarded
as a reserve that can be used in the event of a
major acquisition.
Financial Services
The target for Financial Services is a return on
shareholders’ equity of 12–15% and an equity
ratio of 8-10%. At the end of 2007 total
assets in Financial Services amounted to
approximately SEK 95 billion and the equity
ratio was 8.1%.
Long-term credit rating
The purpose of Volvo’s capital structure is to
balance expectations from the shareholders
and other fi nancial stakeholders. Each year,
Volvo meets with credit rating institutes to dis-
cuss the lender’s view of the company and to
assess the Group’s future ability to repay
loans. The Group’s goal is to maintain good
credit ratings as a base for favorable fi nancing
through loans.
Volvo has received an A3 credit rating from
Moody’s Investor Services. The long-term A3
credit rating provides access to additional
sources of fi nancing and improved access to
the fi nancial market. A3 is among the highest
credit ratings in the transport and automotive
industry and one of the highest among Nordic
industrial companies.