VW Posts 80.6% Y/Y Decline in Net Profit

The Volkswagen (VW) Group has posted an 80.6% year-on-year (y/y) decline in its net profit during the full 2009 calendar year to 911 million euro, down from the figure of 4.688 billion euro the year before, according to a company press release. As would be expected, there was also a corresponding decline in operating profit, which fell by 70.7% y/y to 1.855 billion euro in comparison to the figure of 6.333 billion euro in 2008. Profit before tax declined in line with the decrease of net profit, with a fall of 80.9% y/y to 1,261 billion euro. These results were achieved off the back of a 7.6% y/y decline in sales revenue to 105.187 billion euro in comparison to the figure of 113.808 billion euro which was achieved in 2008 before the very worst effects of the global credit crisis fully took hold. Commenting on the group's headline numbers, CEO Martin Winterkorn said, "The Volkswagen Group successfully mastered the difficult situation in the automotive industry last year. That is convincing proof of the strength of our multibrand group." However, while he emphasised the solid financial foundations of the VW Group following this latest set of results, Winterkorn also warned investors that the company did not expect a rapid marked improvement in business conditions during 2010. "Our success is founded on our attractive, innovative and efficient vehicles. We also have a very solid financial position and our liquidity remains high. Under these circumstances, we will once again be able to systematically expand our position on world markets during the current year. We have good grounds for approaching this year with confidence. Conditions will, however, remain very difficult."

However, the group revenue decline rather belies the 2009 sales data that VW has previously published where it managed to actually post a small 1.3% y/y improvement in sales volume to 6.336 million units, in comparison to 6.257 million units in 2008. This was a hugely impressive sales performance given the prevailing conditions in the global automotive market. However, the lower outright revenue figure suggests increased sales of models in the lower vehicle segments and lower price points, something that would be borne out by the launch of the new VW Polo and strong sales of its close relation the Skoda Fabia throughout the year as a result of various European scrappage schemes. Winterkorn also mentioned the company's strong liquidity levels, stating that VW has 10.6 billion euro in cash reserves, comfortably exceeding the prior-year figure of 8 billion euro. VW also stated that it recorded positive net cash flow during the year despite the acquisition of its 49.9% stake in Porsche.

Outlook and Implications

VW appears to have disappointed some investors, especially with lower-than-expected profitability figures during the fourth quarter. Deducting the financial results for the first nine months of the year indicated that VW made an operating profit in the fourth quarter of 337 million euro and an operating margin of just 1.2%. However, it has also been clever in managing expectations about its financial performance during 2009 and 2010.VW will maintain dividend payments to shareholders this year, but it has opted against providing concrete expectations of financial performance this year, which is a shrewd strategy given the ongoing uncertainty surrounding the global economy. The company is planning a capital increase this year by issuing up to 135 million new preference shares, in order to acquire the Porsche brand of sports cars and the Porsche Holding dealership group which are worth a combined 16 billion euro in equity and debt, something that has improved extremely unpopular with some institutional investors (see Germany: 17 November 2009: VW and Porsche Criticised Again Over Shareholder Transparency; Contract to Be Agreed). As a result, VW is trying to placate these investors by paying dividends while at the same not setting concrete targets of 2010 performance, which can be easily underperformed. In its press release, the VW Group made a relatively open-ended statement regarding 2010 financial performance. It stated "The Group's sales revenue and operating profit for 2010 are expected to exceed the prior-year figures despite a shift in volumes between the markets. Interest and exchange rate volatility will remain a drag on profit." Sales performance has been very strong in 2009, but this has not quite been matched in terms of profitability as a result of currency effects and a lower value sales mix. As a result of the significantly lower profits recorded for 2009, VW has proposed cutting its dividend by 17% to 1.66 euro per preferred share.

VW is looking to continue its strategy of addressing its susceptibility to currency effects by increasing the regionalisation of its production footprint, forging ahead with plans to re-establish a production base in North America. Work on the new factory in Chattanooga is well advanced and production is on schedule to begin early next year. Meanwhile VW's acquisition of a 19.9% stake in Suzuki gives it an entry into geographical areas of the Asian market and access to minivehicle technology that will substantially enhance its global strategy. VW will now look to consolidate its relatively robust 2009 financial results by continuing with its Strategy 2018 plan, which includes a stated goal to overtake Toyota as the world's number one volume carmaker by 2018. VW will no doubt have been encouraged in this regard by the immense amount of negative publicity that has surrounded the Toyota brand recently as a result of the global vehicle recall involving floor mats and sticking accelerator pedals that have led to reports of accidents related to unintended acceleration, particularly in the United States.