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VW's Net Profit Increases Sixfold During January-September to 4 Bil. Euro

Published: 25 October 2010
Volkswagen (VW) surprised once more with an extremely strong set of financial results for the first three quarters of the year although it is increasingly dependent on the Chinese market to maintain sales and profit momentum.

IHS Global Insight Perspective

 

Significance

The Volkswagen (VW) Group has posted a very strong uplift in its financial performance in the first three quarters with the firm's net profits increasing by more than six times to 4.029 billion euro during the period.

Implications

The strong financial result posted by VW in the first nine months of the year was on the back of further growth in global vehicle sales, although the majority of outright volume growth has been provided by the Chinese market. The company also enjoyed significant one-off effects as a result of the consolidation process which will eventually see Porsche become part of the VW Group, although this is still ongoing.

Outlook

The VW Group's financial performance continues to impress despite ongoing global market volatility. However it should be noted that a large component of the Group's strong performance during the first three quarters derives from China and the company but be cautious against becoming too reliant on the world's largest vehicle market to generate volumes and profitability growth.

The Volkswagen (VW) Group has posted a very strong set of financial results for the first three quarters of the calendar year, posting a sixfold rise in net profit for the period at 4.029 billion euro (US$5.622 billion), according to a company press report. Profit before tax increased by 4.4 billion euro to 5.4 billion euro, with one-off effects from "equity-accounted investments and from measurement of put/call rights" relating to Porsche Zwischenholding GmbH also contributing significantly, at a figure of 863 million euro. It also posted a strong uplift in operating profit increasing by more than three times to 4.826 billion euro (1,518 billion euro in 2009). The third-quarter results taken in isolation were also extremely strong, there was a sevenfold increase in third-quarter operating profit, jumping from 278 million euro to 1.985 billion euro between July and September. These financial results exceeded analysts' expectations by a significant amount, with the third-quarter result being the highest absolute profit figure in the company's history, while it also experienced one of the highest quarterly margin figures as well.

VW Q1-Q3 2010 Financial Results (Euro, Bil.)

 

Q1-Q3 2009

Q1-Q3 2010

Revenue

77,158

92,547

Operating Profit

1,158

4,826

Profit Before Tax

1,065

5,444

Profit After Tax

655

4,029

These extremely robust financial figures were the result of accelerated growth in sales volumes and revenues despite ongoing global market volatility, although it should be acknowledged that the vast majority of sales growth is being derived from China, where VW's market leading position and the extraordinary accelerated growth this year has led to unit sales rising 39% y/y in the country to 1.48 million units (see World: 18 October 2010: VW Group Sets New Record with YTD Sales). That has been a massive boon for VW's financial results in 2010. For the first three quarters of the calendar year, sales volume rose by 19.9% y/y to 92.547 billion euro. These figures also illustrated the significant uplift in sales at VW's main volume premium brand Audi, and an improved sales mix generally, as this hike in sales revenue came from a 12.9% y/y rise in global deliveries to customers during the period to 5,409 million units. The uplift in financial performance was also illustrated by the strong cash flow improvements. Cash flow from operating activities increased by 25.7% y/y to 11.506 billion euro, while cash flow from investing activities increased by 56.1% y/y to 6.327 billion euro. This bolstered the company's net liquidity by 46.7% y/y to 19.644 billion euro up from 13.391 billion euro at the end of September 2009.

Outlook and Implications

The VW Group's inexorable rise appears to be continuing unchecked, with an extremely strong set of financial results for the first three quarters of the year. However, it must be wary of becoming too reliant on its massive success in the Chinese market to generate revenue, volumes and profit growth. This is easier said than done given the ongoing volatility in the global vehicle market, especially Western Europe which is one of the firm's traditional core markets. VW experienced a sizeable decline in sales volumes in Germany during the first nine months of the year following the ending of the ultra-successful German scrappage scheme. However, there is little doubt that the company's ongoing success is further bolstering its financial fundamentals, as liquidity levels continue to grow. This may encourage VW to try to pursue an outright takeover of Porsche SE, following its acquisition of a 49.9% stake in the company last year for 3.9 billion euro. Porsche said last week that the proposed merger between itself and VW was likely to be delayed as a result of the ongoing legal cases that had been brought against it in the United States and Europe over alleged share manipulation of VW shares during its failed takeover bid. The German authorities have still to complete a tax assessment on the potential liabilities relating to the merger. However, with VW chairman Ferdinand Piƫch being a major shareholder in Porsche Automobil Holding SE, he is likely to wish to retain control of family's shareholding in the company.

There are plenty of other potential acquisition targets VW could look at with its current cash pile, including turning its 29.9% stake in truck maker MAN into a controlling holding, while it is also said to be keen on increasing its 19.9% stake in Suzuki, although Suzuki's management is less keen. However, even if acquisition targets prove difficult to secure, VW's current growth in both sales and profitability put it in an enviable position, with the Group forecasting a record full-year sales volume. In its press release VW claimed that fourth-quarter growth would again be supported to new model launches, although VW also admitted that a significant portion of outright sales growth would be generated by the Chinese market.

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