GOLDING’S TAKE: VW’s finances: the magic tricks have yet to be staged
Volkswagen wasn't pulling any punches when it told investment analysts about the state of its finances yesterday (Thursday).
Too much fantasy in the short-term would be misguided, said finance director Hans Dieter Potsch. Deep restructuring still lies ahead.
He was laying down the framework surrounding the financial results which showed that profitably was creeping back, and that the profit forecast provided for the full calendar year was pretty much in the bag.
That's no big deal though. What is crucial is the three-year view. The forecast is that VW will make EUR5bn plus in pre-tax profit in 2008. As one of the analysts pointed out, that is three times up from the likely out-turn for this year.
Potsch reckons that there will be profit recover progress every year. But for the time being, the feat must retain some of the character of a magic trick. "We have our plans but we cannot give detail on a plan that still does not have final approval."
The big guess is just how many people will have to go, where they are, and how the payoff will be funded. There was nothing on that except to say that it was not all (high cost) Germany. It looks quite likely that China and South America will have to share much of the pain. That's where the financial sinks have been. In China VW's market leadership and share has been decimated. There is capacity for 900,000 vehicles a year and there is no short-term intention to defend any more than 600,000
In South America, the financial performance has been garrotted by the Euro/Brazilian Real exchange movement. In Brazil there is massive cost inflation and no scope for price inflation, is the judgement on that fine mess. There has been a EUR500m negative swing in Brazil and most of that was currency. The only bright consequence is that the tiddly little Brazilian-built Fox can ship cheaply to Europe.
North America has been pretty horrid also with 380,000 deliveries against 420,000 for the nine-month period last year. It has been impossible to get a good price for modest little Jettas while Ford and GM have been tossing out humungous trucks and utes for the price of a sausage roll.
The bad boy of the business, the VW brand, has been thrust back into profit (only just and only at operating profit level) by squeezing down hard on capex, salary and one-off expenditures. Audi is still going like a dream however and is boasting operating margins over 4%. "Audi is heading for record profits". Skoda is "on a successful path". SEAT needs help, big time. Currently there is a union impasse that is holding up profit recovery. Skoda is going into China by 2007 to soak up some of that surplus capacity. There will be twelve models built there in total from the VW group by 2009. VW brand in Western Europe is doing very well apparently, with little in the way of incentives needed to shift the new models. The brand is therefore expected to be profitable for the full year.
There isn't going to be a share issue to bankroll the cost of redundancies. Or at least the response to the question was "we do not see a necessity for shares or an equity increase (like popping the treasury shares into circulation) because we have a very comfortable financial position for even a very big restructuring."
Whether that will be funded with a huge provision in the 2005 financial year or taken on the run is undecided. Until it is, it makes a bit of a nonsense of setting annual financial targets for profit.
One additional bit of nonsense to look out for is the sale of Europcar. Car companies collect car hire companies like footballers collect wives. Except when car companies want to raise a bit of emergency cash (cp Ford's recently announced sale of Hertz) they tend to get pushed out as a stock market listing bereft of the supply of cheap cars that made them profitable in the first place. If you see a sparkly share issue for Europcar in the near future and quite fancy the terms, go to a dark place and lie down.