VW Exceeds Own Expectations As H1 Net Profit More Than Triples to 1.8 Bil. Euro

The Volkswagen (VW) Group outperformed the expectations of the market and its own management in the first half of the year to record a net profit figure more than three-and-a-half times that recorded during the first half of 2009, at 1.82 billion euro (US$2.38 billion), in comparison to 494 million euro. According to a company press release, the company's other financial indicators for the first half of the calendar year were also extremely strong, with operating profit more than doubling to 2.8 billion euro (from 1.2 billion euro) and profit before tax more than tripling to 2.6 billion euro (from 0.8 billion euro). However, the company's first-half operating profit did not include the 804 million euro attributed to the company's Chinese unit, which VW has just announced will be allowed more management autonomy. These extremely impressive financial figures were supported by similarly robust increases in sales volumes during the period, as reported earlier this week (see World: 26 July 2010: Volkswagen Posts Very Strong H1 Sales Performance with 16% Rise), with the company's group sales rising by 16% y/y to 3.6 million units (from 3.1 million units). This also in turn translated into a marginal increase in the company's combined global market share, which has been the trend over the past two years, to 11.7% (from 11.6%). The company's chief executive officer (CEO), Martin Winkterkorn, hailed the company's first-half performance. He said, "First-half earnings were clearly in excess of our expectations." He added, "We were able to expand our position in the international automotive markets even further. We shall systematically extend our competitive position on the way to becoming the world’s leading automaker by selectively expanding our extensive range of new, environmentally friendly vehicle models."

An important, and from VW's perspective welcome result of the company's extremely strong performance in the first of the year has been a strong increase in cash reserves. The company's liquidity during the reporting period in question increased by 42.2% to 17.5 billion euro. The company had already increased its capital reserves substantially during the first quarter as a result of the capital increase to raise money for the acquisition of 49.9% of the Porsche sports-car company. Despite the company's recent programme of acquisitions, which also includes the purchase of a 19.9% share in the Japanese minivehicle manufacturer Suzuki, the company is also maintaining strict control over capital expenditure, with the ratio of investment in property, plant, and equipment to sales revenues in the Automotive Division actually dropping to 3.5%, from 5.6%.

In terms of brand-by-brand performance, the VW brand recorded a 17.5% year-on-year (y/y) rise in sales to 1.9 million units, up from 1.77 million units. Operating profit for the brand during the period increased fivefold to 1.0 billion euro (from 0.2 billion euro). This growth was driven by the Golf, Polo, Tiguan, and new Touareg, while the Jetta and Passat variants sold in China supported this. The Audi brand enjoyed record sales during the first half of the year, at 660,000 units, up 16.4% y/y from 567,000 units. The brand was the major single contributor to the VW Group's operating profit, with Audi's operating profit rising by 61.6% y/y to 1.3 billion euro, up from 0.8 billion euro in the first half of 2009. This strong result was supported by efficiency and cost improvements, in addition to strong sales of the Audi Q5, Audi Q7, Audi A5 Sportback, and Audi A8, which recorded strong individual results. The Skoda brand also recorded encouraging unit sales growth of 13.7% to 298,000 units (up from 262,000). As a result, operating profit climbed 92 million euro to 227 million euro. In addition to volume increases, the rise was driven by cost reductions and more favourable exchange rates. The recovery in the Spanish automotive market had a positive effect on SEAT's brand sales, which rose by 17.7% in the reporting period to 186,000 units. The operating loss amounted to 157 million euro, which almost exactly matched the figure recorded in the prior-year period of 159 million euro. Volkswagen Commercial Vehicles benefited from increased demand in the commercial vehicles business; sales amounted to 159,000 units, 18.3% more than in the prior-year period. Its operating profit amounted to 118 million euro, although this figure was significantly down on the prior-year figure of 463 million euro. However, the latter figure included proceeds of 0.6 billion euro from the sale of the Brazilian commercial vehicles business. Adjusted for this item, operating profit rose significantly. Unit sales by the Scania brand increased by 37.0% in the reporting period to 28,000 vehicles (from 21,000). At 577 million euro (from 48 million euro), operating profit was up clearly on the figure for the previous year, which was hit by the difficult operating environment.

Outlook and Implications

VW was once again the star performer of all the major global original equipment manufacturers (OEMs) in the first half of the 2010 calendar year, with the company again making an overall gain in terms of its global market share. The company's financial performance during the period exceeded the expectations of the market and the company's management alike. The company's excellent first-half performance was supported by strong sales in all of its key global markets, including Western Europe, China, and North and South America. The one major market where the VW Group posted a significant decline was Germany, where the high base of comparison provided by the scrappage-scheme-fuelled 2009 market saw the group's sales decline by 28.7% y/y. However, as has been the case in other recent reporting periods, China continued to be the growth driver of the company's sales increases in the first half of the year. The VW Group's combined sales in China increased by 45.7% y/y during the first six months of the year, to a staggering 950,300 units, up from last year's figure of 652,200 units, with this result helped by sales of the VW Bora and VW Lavida, while the Skoda brand also fuelled the group's growth in China following its very successful introduction onto the market. The company continues to post strong results in Brazil and the rest of South America, illustrating that a large degree of VW's recent success has been the result of the global sales footprint that it enjoys. The Chinese and Brazilian markets in particular proved particularly resistant to the global economic downturn in 2009 and into the first half of 2010 as a result of strong ongoing consumer confidence and highly successful government market stimulus measures.

The VW Group is expecting to continue to generate strong sales in the second half of 2010 as it continues to roll out new models with its latest range of highly fuel-efficient powertrains. As a result, the company is forecasting "significantly higher" deliveries than it managed in 2009. In addition, the company's broad range of brands, and the shared development and production of vehicle hardware such as powertrains across those brands, continues to be a key competitive advantage. However, even VW itself does not believe that the extremely strong momentum will continue unabated in the second half. Ongoing uncertainty over the macroeconomic situation in Western Europe and the United States means that the strong overall sales trend is likely to slow. In terms of the full year, IHS Automotive forecasts that the VW Group will post sales of 6.6 million units, with the first-half running rate moderating somewhat in the second half of the year. This will still equate to a solid but less spectacular growth rate of 4% as the ongoing effects of the withdrawal of scrappage schemes in Western Europe and continuing uncertainty in the U.S. marketplace take their toll.