VW Group remains in profit during YTD despite loss on "special items" during Q3

The Volkswagen (VW) Group has released financial results showing that it has remained in profit during the first nine months of 2015 despite a significant loss during the third quarter related to its decision to set aside EUR6.7 billion (USD7.4 billion) related to rectifying the diesel emissions situation.

For the three months ending 30 September 2015, VW recorded sales revenues of EUR51,487 million, a gain of 5.3% year on year (y/y). This was despite a 3.4% y/y fall in deliveries to customers to 2.392 million units. However, as a result of "special items" costs amounting to EUR6,685 million - predominantly made up of cash set aside to rectify and compensate for the EA189 diesel engine emissions use of a defeat device - its operating income has gone from a profit of EUR3,230 million to a loss of EUR3,479 million. This has resulted in its income before tax falling from a profit of EUR3,713 million during the third quarter of 2014 to a loss of EUR2,522 million, while its income after tax has dropped from a profit of EUR2,971 million to a loss of EUR1,673 million.

The contribution this quarter has fed into its financial results for the year to date (YTD). For this nine-month period, sales revenues have grown by 8.5% y/y to EUR160,263 million. This is despite a 1.5% y/y decline in customer deliveries to 7.431 million units. Operating profits have fallen by 64.5% y/y to EUR3,342 million as a result of the "special items" mentioned. However, when this is excluded, profit would have risen 8.3% y/y to EUR10,197 million. Nevertheless, profit before tax has fallen by 55.2% y/y to EUR5,142 million while profit after tax now stands at EUR3,990 million, a decline of 54.1% y/y.

On a unit-by-unit basis for the first nine months of the year, excluding the impact of special items, the VW passenger car brand has recorded a marginal improvement in operating margin from 2.3% to 2.8% in 2015, despite an increase in sales revenues of 9.0% y/y to EUR79,972 million. The company said that its performance has been helped by its efficiency programme and optimising its costs, as well as the positive impact of exchange rates, which more than offset the negative impact of the market situation in South America and Russia.

Its premium Audi brand's operating margins fell slightly from 9.7% recorded last year, but still ended the nine months at 9.2% on sales revenues of EUR43,695 million. It said that while its earnings were hit by investments in new products and technologies as well as capital expenditure in widening its global production network, this was offset by its positive product mix and exchange rate benefits.

The Skoda brand's margins have risen from 7.4% to 7.9% on an increase in sales revenues of 5.6% y/y to EUR9,280 million, thanks to its product mix, material costs and exchange rates. The effort put in by its SEAT brand is also starting to pay off now with its operating income turning from a loss of EUR82 million to a profit of 12 million. This has been helped by an increase in sales volumes, underlined by the gain in its sales revenues of 13.6% y/y to EUR6,388 million, as well as exchange rate benefits and optimised costs.

Luxury brand Porsche's margins remain at an exceptionally high level at 15.5% on sales revenues of EUR16,471 million, although it noted that changes to mix, structural costs and development costs had a negative impact. On the other hand, Bentley's margins fell to 4.2% from 9.9% a year ago, on sales revenues which have grown by 8.3% y/y to EUR1,354 million. This has been due to lower vehicle sales and upfront expenditure, likely partly related to the launch of the forthcoming Bentayga sport utility vehicle (SUV).

Of its commercial vehicle businesses, the VW Commercial Vehicles brand's margins slid from 5.4% to 4.2% as it renews its product range, although sales revenues have increased by 8.0% y/y to EUR7,537 million. Scania's margins remain strong though (see Sweden: 28 October 2015: Scania records improvement in profits during Q3), while MAN is seeing South America continuing to weigh on its earnings (see Germany: 28 October 2015: MAN continues to struggle during Q3).

Operating profit at VW Financial Services amounted to EUR1.381 million, up 13.7% y/y on the back of positive volume and exchange rate effects.

Outlook and implications

It will come as no surprise to anyone that the VW Group has announced such a significant loss for the quarter given the announcement made soon after the defeat device revelations that it had allocated EUR6.5 billion towards rectifying the situation (see World: 22 September 2015: VW emissions irregularities could affect 11 mil. vehicles worldwide as fall-out spreads outside US). However, the automaker's management has been keen to underline the underlying strength of the business despite this situation. New chief financial officer (CFO) Frank Witter said in a statement, "The Volkswagen Group has very solid and robust liquidity resources. This will help us manage the challenging situation caused by the financial impact of the diesel issue." Indeed, as of 30 September 2015, the Automotive Division has seen its net liquidity reach EUR27,755 million, an increase of 65.4% compared with the same point a year ago. It is likely to have been partly helped in this by the sale of shares in Suzuki (see Japan - India: 17 September 2015: Suzuki buys back VW stake for USD3.8 bil., outlines plans for India).

In addition, it notes that its operating profit and sales revenues exclude the activities of its Chinese joint ventures (JVs), which are accounted for in the financial result using the equity method. The share of operating profit attributable to these as of the end of September stand at EUR3.8 billion.

Nevertheless, despite this the ongoing investigation internally and externally will continue to overhang much of what the company does in the short-to-medium term, whether from the financial aspect (which is still a long way from being fully accounted for) or from a business reputational standpoint in relation to customer. The newly appointed chairman of the board of management for the VW Group, Matthias Mueller has noted, "The figures show the core strength of the Volkswagen Group on the one hand, while on the other the initial impact of the current situation is becoming clear. We will do everything in our power to win back the trust we have lost."

In the near term, the VW Group has given an indication as to the expectations of the company in the full year. Despite challenging conditions in some of its regional markets, it anticipates that its customer deliveries will remain flat in the full year. It also believes that its sales revenues will increase by 4% y/y, although this will depend on economic conditions, particularly in South America and Eastern Europe. However, because of charges related to the situation with the EA189 diesel engine, it now expects operating profit for both the group and its passenger car business to be down significantly. However, before special items, it believes that the operating margin will stand at between 5.5% and 6.0%, and reaching between 6.0% and 7.0% among its passenger car brands. Even so, the VW brand will be the focus on further cost cuts that should help its standalone operating margin (see Germany: 14 October 2015: VW brand plans EUR1 bil. of cuts and reshaping of diesel strategy, Phaeton to be EV).