Volkswagen Earnings Review: Scandal Still Weighs On Financials, But Core Performance Improves

July 29th, 2016 by Trefis Team

Volkswagen AG (OTCMKTS:VLKAY) is the world’s highest selling automaker, selling 5.12 million vehicles through June, up 1.5% year-over-year. Toyota sold 4.99 million vehicles through the first half, down 0.6% year-over-year. This growth is led by the group’s luxury brands Audi and Porsche, and the 6% growth in commercial vehicle deliveries. However, revenue for the German giant declined through the first half as its biggest, and most significant division, Volkswagen Passenger Cars, continues to struggle to boost its operating performance.

Volkswagen Q&A 23

Volkswagen branded passenger cars 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, and stood at 1.7% in Q2, due to added expenses and lower sales. In comparison, Toyota operates at a 9.5-11% margin. 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.

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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. 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.

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 addition, expenses related to the diesel issue are also expected to dent earnings. Through the first half, Volkswagen recognized 1.6 billion euros mainly due to higher expenses attributable to the recognition of provisions for legal risks.

The good news for Volkswagen is that its core performance has improved, as compared to the first quarter. In Q1, the group’s revenue was down 3.4% year-over-year, and operating profit before special times was down almost 6%. Operating profit (before special items) has returned to positive growth in Q2. The namesake brand’s operating margin is also up from 0.3% in Q1 to 1.7% in Q2, as aforementioned. This reflects that Volkswagen might be ready to finally move on from the torrid dieselgate scandal.

Have more questions on Volkswagen? See the links below.

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Volkswagen

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