Volkswagen Earnings Preview: Amid Scandal Blues, Expect Margin To Be Hit By Added Expenses
Volkswagen AG (OTCMKTS:VLKAY) is scheduled to announce its Q2 and half-yearly results on July 28. Much hullabaloo has surrounded the German group since late last year when the emissions scandal broke out. The company has gotten preliminary approval for its $14.7 billion settlement with U.S. drivers of the affected diesel-powered vehicles, so it can now start to move on and put the scandal behind it. The scandal and its aftereffects have had a huge impact on Volkswagen’s value, which is down over 20% since September last year.
Volkswagen’s deliveries to customers are up 1.5% year-over-year through the first half of the year, buoyed by growth in Europe and Asia-Pacific. China has been a bright spot where deliveries are up 6.8% year-over-year through June. This comes as good news as Volkswagen has struggled in the country where demand for budget vehicles, especially SUVs and Crossovers, continues to rise. Sales of passenger vehicles rose 9.2% year-over-year in China through June, with SUV sales up by more than 44%. Volkswagen is also continuing to invest heavily in the country, irrespective of its cost-cutting plans. Volkswagen will invest over 4 billion euros ($4.5 billion) in China in 2016, spending on its new SUVs and plug-in models in the country. The group plans to introduce 10 SUV models to be manufactured locally within four years.
However, the group’s performance in North America, in particular the U.S., continues to wane. Volume sales are down over 7% through June in the U.S., where nearly 500,000 customers were affected by Volkswagen’s dieselgate scandal. Lower sales in the U.S. are expected to dent Volkswagen’s results in Q2.
Volkswagen has announced its ‘Strategy 2025,’ which focuses on the automaker’s long-term plans to derive profitable growth and, basically, hopes to shake-off the dieselgate scandal. One of the main highlights of Volkswagen’s strategy is its push for electric vehicles. The company plans to launch 30 purely battery-powered electric vehicles (BEVs) through 2025, and believes that such vehicles will form 25% of the global passenger car market by then. The company is also looking to establish a new mobility solutions business, and acquire companies in areas such as car-sharing, robo-taxis, and ride-hailing. Volkswagen recently invested $300 million in Gett, a ride-hailing app. Toyota and GM already have partners in this domain — Uber and Lyft — respectively.
Volkswagen’s future might start to look brighter with the settlement approval and its new Strategy 2025, but in the near term, lower sales in markets such as North America and South America, where the economic conditions continue to remain weak, will loom large on the financials. In particular, the performance of the namesake brand of passenger cars will be crucial in shaping Volkswagen’s overall results. The brand reported a 0.7% year-over-year drop in its vehicle deliveries through June. Volkswagen Passenger Cars operated at only 2% margin through last year, dragging down the group’s overall operating margin to 5.7%. The brand’s margin fell further to 0.3% in Q1 due to added expenses and lower sales. In comparison, Toyota’s margin stood at 10.8%. Volkswagen also employs ~2x and ~3x the workers employed by Toyota and GM, respectively, and spends a considerable amount of research and development, weighing on its profitability. Just for reference, while Volkswagen spent 48% of its gross profit on R&D in 2015, Toyota and GM spent 14.7% and 21.8% of their gross profit on R&D, respectively.
Volkswagen Passenger Cars’ struggle to ramp up sales is expected to drag down Volkswagen’s Q2 results.
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