VW's Q3 Net Profits Fall 86%, Still on Target for Positive Full-Year Result

The Volkswagen (VW) Group posted a decline in net profit in the third quarter of 2009 of 86% year-on-year (y/y) to 161 million euro (US$237.6 million) as the company experienced declining sales across nearly all of its automotive brands. Sales during the period fell by 10.3% to 25.9 billion euro as a result. Operating profits slumped by 81.3% to 278 million euro in comparison to the high base level recorded in the third quarter of 2008 which was the last quarter to be largely unaffected by the result of the global economic downturn. However, despite the marginal slowdown in financial performance in the third quarter, VW is still on the way to posting a robust set of full-year financial figures. It recorded net profit of 655 million euro in comparison to the 3.7 billion euro posted during the same period last year. Operating profit during the first three quarters of the year was 1.5 billion euro in comparison to 4.9 billion euro posted during last year, representing a 69.1% y/y decline. However, this figure does not include over 500 million euro recorded by the company's joint ventures in China, which is now VW's largest sales market. VW's sales revenue fell by 9.7% to 77.2 billion euro, although sales volumes for the first three quarters of the year actually fell by only 0.2% y/y to 4.79 billion euro, which suggests external pressures on profitability such as higher raw materials prices and currency effects. Commenting on the third-quarter results and the combined three-quarter-year results VW Chairman Dr Martin Winterkorn said, "The Volkswagen Group is holding its own extremely well despite the adverse conditions. While the global market is contracting by 12%, we are recording stable delivery levels. This proves that—even in difficult times—we are well positioned with our multi-brand strategy."

VW has moved to counter the worst effects of the financial crisis throughout 2009. While the company's sales deliveries have remained constant it has cut production by around 12% y/y to 4.4 million units. This has ensured that VW has cut its sales inventory. This is despite strong ongoing demand for models like the Mark Six Golf which was launched in the market over a year ago, especially in the German market where the model has sold 212,000 units alone, more than 90,000 units more than the equivalent point last year. Winterkorn reiterated that despite the global downturn the VW Group is maintaining its investment levels and will look to continue its policy of making the introduction of low emission vehicles the group's top priority. The company has actually increased investment in property, plant and equipment at the automotive division by 2% to 3.9 billion euro, with the majority of this figure spent on new production facilities for models launched this year and in 2010.

In terms of brand-by-brand financial and sales performance all the company's major nameplates have suffered from the financial downturn despite strong performances in individual markets. In the first nine months of the year operating profit declined to 335 million euro in comparison to the figure of 1.9 billion euro the brand posted during the same period last year. Overall global brand sales for the period actually rose significantly by 7.5% y/y to 3.02 million units. Audi generated a an operating profit of 1.2 billion euro despite a 12% fall in sales volumes, although this performance was vastly better than declines recorded by its principal rivals BMW and Mercedes-Benz. The Skoda brand witnessed a 19% decline fall in unit sales and continuing unfavourable exchange rate conditions cut operating profit to 162 million euro, down from 455 million euro last year. SEAT recorded a 19% decline in unit sales and an operating loss of 228 million euro (operating loss of 30 million euro) because of the ongoing negative situation on the Spanish passenger car market. At Bentley, the heavy slump in sales volumes in the luxury segment resulted in an operating loss of €148 million, compared to an operating profit of 82 million euro last year.

Outlook and Implications

VW is continuing to perform extremely well despite the ongoing global economic crisis that has seen falling demand in passenger car markets throughout the world. However, the VW has benefited from the relatively robust performance of its principal markets such as China, Germany and Brazil, with these particular markets benefiting substantially from various government incentive programmes. For example the incredibly successful scrapping scheme in Germany has seen VW post an increase of 158,000 units for the first nine months of the year to 622,000 units. However as we have seen above, the scrapping scheme has had an exceptional effect on the German market and this is the exception rather than the rule, although VW's global brand sales have remained extremely robust. VW's multi-brand strategy continues to pay dividends in the downturn and the company's global market spread has certainly helped its sales remain robust, benefiting from strong growth in China for example while not being too adversely affected by the collapse in U.S. passenger car sales.