Bloomberg News

VW Profit Rises as Audi Gains Offset European Slump

July 26, 2012

Volkswagen Reports Slowing Profit Growth on Europe Market Slump

A Volkswagen AG Toureg sport-utility vehicle on display during the media preview of the China International Automobile Exhibition in Guangzhou, Guangdong Province, China, on Nov. 21, 2011. Photographer: Qilai Shen/Bloomberg

Volkswagen AG (VOW), Europe’s largest carmaker, reported slowing earnings growth as the impact of the sovereign debt crisis weighed on demand in its home region.

Second-quarter operating profit rose 3.4 percent to 3.28 billion euros ($3.98 billion), the Wolfsburg, Germany-based company said today. That compared with a first-quarter increase of 10 percent. Second-quarter revenue gained 19 percent to 48.1 billion euros. Sales climbed 26 percent in the first quarter.

Volkswagen, which sells nearly 25 percent of all cars bought in Europe, was unable to continue its global growth momentum as the region’s car market drops for a fifth year. The German manufacturer today stuck to its 2012 target of matching last year’s record operating profit of 11.3 billion euros as higher demand for Audi and VW brand cars in China and the U.S., the world’s two biggest auto markets, softens Europe’s slump.

“VW is not immune to the crisis,” said Michael Punzet, a DZ Bank analyst in Frankfurt who recommends buying the shares. “But the U.S. and Chinese markets can offset most of the negative effects in Europe. Another advantage compared with VW’s competitors is that its home market is still performing better than, for example, the French or Italian.”

Shares in the German manufacturer, which plans to become the world’s largest automaker by 2018, dropped as much as 4.80 euros, or 3.6 percent, to 128.85 euros, and were down 0.8 percent as of 5:00 p.m. in Frankfurt trading. The stock has climbed 14 percent in 2012, valuing VW at 58.9 billion euros.

Audi Profit

Audi, which accounted for 46 percent of the group’s operating profit in the second quarter, generated a return on sales of 11.6 percent, beating Daimler AG (DAI)’s Mercedes-Benz, which posted an 8.6 percent margin. VW’s Chinese joint ventures, which aren’t included in the group’s operating earnings, recorded a second-quarter profit of 930 million euros.

“Our strong position in the international markets will enable us to outperform the market as a whole -- despite the challenging environment,” Chief Executive Officer Martin Winterkorn said in a statement.

European governments and households are cutting spending, as the effects of the debt crisis extend beyond Greece, Spain and Italy. Business confidence in Germany, Europe’s largest economy, fell to its lowest level in more than two years in July. Moody’s Investors Service this week lowered the outlook on Germany’s Aaa credit rating to negative, citing the risk that Greece could leave the euro and an “increasing likelihood” that countries such as Spain and Italy will require support.

Pricing Pressure

The European auto market faces an “elevated risk,” as competition has increased “significantly,” Christian Klingler, VW’s sales chief, said today on a conference call. Auto pricing in Europe is “tense” and “pressure” will continue in the coming months.

VW’s second-quarter European sales declined 2 percent, compared with 0.5 percent growth in the first three months, according to figures from the ACEA auto industry group.

Volkswagen may face a tougher second half, as the German market shows signs of softening. The VDA industry association forecast German auto demand to slip to 3.1 million vehicles this year from 3.17 million in 2011. Softer demand has increased discounts in Germany, which reached a record level in July, according to Ferdinand Dudenhoeffer, director of the Center for Automotive Research at the University of Duisburg-Essen.

VW’s third-quarter earnings will be “weak,” as spending for introducing new models “peak” in the period, Chief Financial Officer Hans Dieter Poetsch said on the conference call. VW is preparing the introduction of a next-generation Golf, one of its bestsellers. In the first half, research and development costs totaled 4.4 billion euros, 25 percent more than in 2011.

Weak Competitors

Other automakers have felt Europe’s slump even more. PSA Peugeot Citroen (UG) is seeking to shut a factory in France and cut 14,000 jobs as part of a plan to cut costs by 2.5 billion euros by 2015. Europe’s second-largest carmaker yesterday said its auto operations lost 662 million euros in the first half.

Peugeot’s first-half sales in Europe tumbled 14 percent, while Fiat SpA (F)’s and Renault SA (RNO)’s deliveries each dropped 17 percent, according to ACEA. VW’s first-half European market share climbed to 24.1 percent from 22.7 percent a year earlier.

“The weakness of VW’s European competitors is the German carmaker’s strength,” Credit Suisse analyst Arndt Ellinghorst said. “This will support VW in the second half of the year when sluggish European demand will impact performance.”

Smaller Gains

Volkswagen’s first-half deliveries gained 10 percent to 4.55 million, while revenue in the period climbed 23 percent.

“In the second half, VW will not be able to maintain double-digit growth anymore,” said Frank Schwope, an analyst at NordLB, who recommends buying the stock. “Unit sales are more likely to be up 5 percent throughout the rest of the year.”

VW expects little earnings contribution this year from MAN SE (MAN) because of writedowns following the consolidation of the truckmaker in November, the company said today.

VW, which is forging a trucking alliance between MAN, its Scania AB (SCVB) affiliate and its own commercial vehicle operations, raised its stake in the Munich-based company to more 75 percent in June. MAN yesterday posted a 50 percent decline in second- quarter operating profit to 218 million euros.

“MAN’s bad performance in the second quarter out yesterday is dragging down VW’s shares”, Schwope said.

The owner of the Skoda and Bentley continued its expansion by agreeing earlier this month to pay Porsche SE 4.46 billion euros for the rest of the sports-car brand that it didn’t already own, adding the iconic 911 to its lineup. Porsche’s integration, expected to take place Aug. 1, will also make a limited contribution to earnings this year, VW said today. Last week, Audi completed the purchase of the Ducati motorcycle brand.

To contact the reporter on this story: Christian Wuestner in Berlin at cwuestner@bloomberg.net

To contact the editor responsible for this story: Chad Thomas at cthomas16@bloomberg.net


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