VW's full consolidated results show company in robust health, record R&D spend of over EUR10 bil.

The Volkswagen (VW) Group has posted a robust set of financials after posting its full consolidated results for 2013. According to a company press release the firm posted a net profit figure of EUR9.145 billion (USD12.72 billion) which happened to be 58.2% down on last year's figure of EUR21.881 purely as a result of one-off effects of the integration of Porsche SE in 2012. If the influence of the Porsche integration was stripped out the result was consistent with the previous year. This figure was generated from a 2.2% y/y rise in revenue to EUR197.007 billion, while operating profit also rose marginally to EUR11.671 billion from EUR11.498 billion in 2012. Profit before tax also fell as a result of the Porsche integration in 2012, coming in at EUR12.428 billion, 51.2% down from the EUR25.487 billion the year before.

The headline figures were generated from vehicle sales which rose by 4.9% y/y to 9.7 million units, including 3 million unit sales by the firm's Chinese joint ventures (JVs), but also as ever Group sales revenue and operating profit do not include the contributions by Shanghai-VW and FAW-VW. The contributions of these business units has always been accounted for through the equity method. The proportionate share of their operating profit rose to approximately EUR4.3 billion up from EUR3.7 billion in 2013. If this figure were included, the Group's profit per vehicle delivered would have been significantly higher. As a result of the ongoing success of VW in 2013 the firm's supervisory board will propose a dividend at 13 May's Annual General Meeting (AGM) to increase the dividend to EUR4 per ordinary share, up from EUR3.50, and EUR4.06, up from EUR3.56 per preferred share. The return on investment for the Automotive Division was 14.5%, well above the company's self-imposed minimum required rate of return of 9%. The net liquidity of the Automotive Division remained at an extremely comfortable level of EUR16.9 billion as of the end of December 2013, in comparison to EUR10.6 billion at the end of 2012.The ratio of investments in property, plant and equipment (capex) to sales revenue rose slightly by 0.4 percentage points to 6.3%. The company also understandably emphasised its overall R&D commitment of more than EUR10 billion, more than any other OEM, as it invests in key new models and powertrain technologies to support its Strategy 2018 ambitions. Commenting on the figures at last week's results presentation in Berlin, VW CEO Martin Winterkorn said, "2013 was an extremely challenging year for European automakers in particular. We weren't helped either by our home market or by exchange rates. Nevertheless, the Volkswagen Group put up a strong showing despite the difficult conditions."

Brand by brand

• The VW Passenger Cars brand generated sales revenue of EUR99.4 billion as decline of 4.4% due to exchange rate and volume-related factors. Lower outright sales and investment costs affected operating profit, with the unit posting EUR2.9 billion for the year as opposed to EUR3.6 billion the year before.
• Audi's sales revenue of EUR49.9 billion exceeded last year's figure of EUR48.8 billion by 2.3% y/y, while operating profit was down from EUR5.4 billion in 2012 to EUR5.0 billion. This decline was down to increasing R&D costs and investment in new production capacity. The brand still enjoyed a positive return on sales of 10.1%.
• Skoda recorded sales revenue of EUR10.3 billion in 2013. A decline in volume, a weaker model mix and exchange rate effects saw operating profit fall to EUR522 million, down from EUR712 million.
• The SEAT brand failed to move back into the black despite the massively important launch if the new SEAT Leon which had its first full year on sale in 2013. Instead the unit's operating loss improved marginally to EUR152 million, as opposed the loss of EUR156 million generated in 2012.
• Bentley generated sales revenue of EUR1.7 billion in comparison to EUR1.5 billion in 2012. Bentley's operating profit rose by 66.9% to EUR168 million thanks to the new Continental GT and Flying Spur and positive exchange factors.
• Porsche recorded sales revenue of EUR14.3 billion in 2013. Its operating profit amounted to EUR2.6 billion, while the operating return on sales was 18.0%.
• Sales revenue generated by VW Commercial Vehicles reached the prior-year level in 2013 at EUR9.4 billion. Operating profit rose by 6.4% to EUR448 million as the unit focused on improving overall operating efficiency.
• Scania recorded sales revenue of EUR10.4 billion. Its operating profit increased from EUR930 million to EUR974 million. MAN generated sales revenue of EUR15.9 billion and recorded an operating profit of EUR319 million, which was helped by the company's power engineering business.

Outlook and implications

The full consolidated financial results paint a picture of a company in robust financial health and which remains on target to achieve its long-term "Strategy 2018" objective of becoming the world's undisputed biggest vehicle manufacturer by volume that date. As Winterkorn points out, the firm experienced some challenges in 2013 as a result of currency volatility and the ongoing weakness of the Western European market, where the VW Group remains the market leader. However, the company is in a very strong position to continue generate sales growth while defending margins as a result of a number of key strategic elements. Firstly the company's position as the earliest mover in the Chinese market and its two highly successful JVs in the country is a cash generator and allows the company to access the ongoing growth potential to the world's largest vehicle market. Although the corollary of that is that VW is more vulnerable to any macroeconomic shock to hit China than its rivals. In addition the company's enviable mix of premium and mainstream brands gives the company access to unparalleled economies of scale in terms of purchasing and R&D synergies. The acquisition of Porsche also means that VW can now book the profits of the world's most profitable carmaker as it looks to post sales of more than 200,000 units for the first time in 2014.

VW will continue with its programme of key model introductions and the gradual electrification of its range in hybrid and pure electric vehicles (EVs) over the next two years. Among key new model launches over the next few years will be the VW Passat, the Audi A4 and Q7, the Porsche Macan, as well as the new Skoda Superb and Fabia, and the new SEAT Ibiza. If the global macro picture remains relatively stable VW itself is targeting a marginal increase in overall deliveries, which tallies with IHS Automotive's forecast, and an operating return on sales of between 5.5% and 6.5% in 2014 in light of ongoing challenges in the global business environment.