VW Group's Strong Financial Performance Continues As H1 Net Profit Rises 36% to EUR8.8 Bil.

The Volkswagen (VW) Group has recorded another strong set of financial results for the first half of the year with net profit for the period rising by 35.9% to EUR8.8 billion (USD10.7 billion), according to a company press release. This figure was positively affected by the ongoing strong performance of the company's Chinese joint ventures (JVs) and an improvement in profit by Porsche Zwischenholding GmbH, the controlling company of Porsche AG, and which is now included in VW's financial result using the equity method. Profit before tax calculated by the equity method also rose at an accelerated rate of 22.1% year-on-year (y/y) to EUR10.1 billion (EUR8.2 billion). On a consolidated basis (which does not include the performance of the Chinese JVs) the company posted a revenue rise during the period of EUR95.4 billion, which was an increase of 22.6% y/y over the figure recorded at the equivalent point last year of EUR77.8 billion. Operating profit rose by 6.7% y/y to EUR6.5 billion, with the operating return on sales coming in at 6.8% after six months, which was a mild decline on the figure of 7.8% recorded in the first half of 2011. The consolidated profit figure does not include the EUR1.8-billion share contributed in operating profit by the Chinese JV. Net liquidity was at the level of EUR14.9 billion, down from EUR 17 billion at the end of last year. This figure includes cash outflows of EUR2.1 billion from the increase in 2012 in the stake in MAN SE to 75.03% of the voting rights and 73.57% of the share capital. Commenting on the strong first-half result, VW's chief financial officer (CFO) Hans Dieter Pötsch said: "Against a background of economic uncertainty, our performance so far, our improving cost structures, our flexible production and our technology leadership in many areas mean that we are well equipped to meet the challenges facing us. More than ever before, our sound financial position is paying off."

In terms of global sales, the Group's first-half sales volume rose by 12.4% y/y to 4.6 million units, with its share of the global passenger car market rising to a new record of 12.4%, a 0.1 y/y rise on the figure that was recorded at the same time last year. In terms of the firm's portfolio of brands, the main VW passenger car brand witnessed a 9.5% y/y rise in sales volumes to 2.4 million units, with surprisingly the Fox, Tiguan, Touareg and Shran recoding the highest individual model sales growth rates, with demand for the up!, Beetle and CC models also proving strong. Despite increased R&D spend on introducing the new Modular Transverse (MQB) architecture, the unit's operating profit rose by 3.8% y/y to EUR2.2 billion. Audi's sales rose to 678,000 units, with FAW selling a further 166,000 Audi units in China. High growth rate models included the Audi Q5, Audi A6, Audi A7 and Audi A8. Operating profit amounted to EUR2.9 billion, 13.2% y/y above the prior-year level. Skoda's sales during the first half rose by 12.6% y/y to 408,000 units, with the Roomster, Yeti and Octavia performing well. Volume increases and cost savings saw operating profit rise by 9.0% y/y to EUR449 million.

Outlook and Implications

There is little doubt that this is another set of extremely strong financial results posted by the VW Group during the first half of 2012. However, amongst the data there are perhaps some signs that the company can expect a more difficult environment moving into the second half of the year and beyond. Given the high overall operating and net profit figures the company has recorded in recent years, these high base levels will mean a slowdown in profit growth at some point and it appears that this is starting to occur, with second-quarter operating profit growth slowing by 3.4% to EUR3.28 billion after the 10% rise in operating profit that was posted in the first quarter. Given the high base levels of profit and increasing concerns over the state of the European economy as a result of the inherent weakness of the Southern European economies as a result of austerity measures imposed to counter high public debt, this slowdown in profit growth is not surprising. ,In addition, given some of the alarming economic data to have emerged from Italy and Spain in recent days, with the borrowing costs of the Spanish government at a record high, further turbulence and a significant slowdown in the European market looks an increasing likelihood. Ongoing strong performances in China and the United States can partially make up for weakness in Europe to a degree, but there is evidence that the Chinese market is slowing after the consistent accelerated growth that saw it overtake the US as the world's biggest car market in 2010.

The structural changes and acquisitions that the company has undertaken in the last six months will have some effects going forward in the second half, although they are likely to affect headline revenue figures rather than profit in the short term. The consolidation of MAN SE as of 9 November 2011 will help to increase sales revenue, its contribution to earnings will be limited because of the writedowns that will be required for purchase price allocation. In addition, Porsche's automotive business will become fully consolidated into the group as of 1 August. However, the resulting increase in sales revenue will be relatively slight due to consolidation effects. In addition depreciation and amortisation expense from purchase price allocation is expected to largely offset Porsche's contribution to earnings in operating profit for the current fiscal year. Despite the threat of growing risk and volatility in Europe and the costs and benefits associated with new acquisitions, VW is sticking to its original 2012 forecast that it will match 2011's operating figure, while sales revenue is expected to exceed 2011 levels.