German auto giant Volkswagen (NASDAQOTH:VWAGY) said that its operating profit rose slightly in 2018 despite headwinds related to unfavorable exchange rates and new emissions-testing rules in Europe. But it warned that rising pressures in markets around the world could make 2019 a tougher year.
In a release of preliminary full-year financial results ahead of its annual investor conference, VW said that its operating profit rose 0.7% from a year ago, to 13.92 billion euros ($15.8 billion). Revenue grew 2.7% to 235.84 billion euros ($267.9 billion). Both results fell short of analyst estimates.
Volkswagen will release its complete financial results for the fourth quarter and full year on March 12.
VW preliminary earnings: The raw numbers
|Vehicles delivered (thousands)||10,834||10,742||0.9%|
|Operating profit, excluding special items||13.92 billion||13.82 billion||0.7%|
|Operating margin, excluding special items||7.3%||7.4%||(0.1 ppts)|
|Special items||(3.184 billion)||(3.222 billion)||(1.2%)|
|Net income||11.827 billion||11.179 billion||5.8%|
|Earnings per share||23.57||22.28||5.8%|
|Automotive operating cash flow||18.531 billion||11.686 billion||58.6%|
VW's 2018 performance: The nutshell summary
VW followed a strong 2017, in which it made considerable progress recovering from the effects of the diesel-emissions scandal, with a so-so 2018 in which generally good execution was muted by the effects of external forces.
The good news was pretty good: Sales increased slightly from a very good 2017 result, and improvements in the "mix" of vehicles sold helped boost profitability. That contributed to the big year-over-year improvement in automotive operating cash flow, as did the nonrepeat of some heavy 2017 expenditures related to the diesel scandal.
But the headwinds were significant. In Europe, a new emissions-testing protocol that took effect in September led to delays in certifying many VW Group vehicles for sale in the European Union. That led to substantial increases in European inventories of Audi and VW models, which in turn led to a significant increase in receivables at year-end. That, plus unfavorable exchange-rate movements and a slipping China market in the last few months of 2018, weighed on overall results.
VW's operating margin (excluding special items) slipped slightly to 7.3%, down 0.1 percentage point from a year ago. While that fell short of VW's largest rivals -- Toyota (NYSE:TM) reported a 8.6% operating margin for the first three quarters of its current fiscal year through December 31, and General Motors' (NYSE:GM) full-year margin for 2018 was 8% on a similar basis -- it compared well with Ford Motor Company's (NYSE:F) 4.4% full-year result, Fiat Chrysler Automobiles' (NYSE:FCAU) 6.3% adjusted operating margin for the full year, and Honda Motor's (NYSE:HMC) 5.8% operating margin for the period from April 1 through December 31.
Special items and net liquidity
VW took one-time charges of 3.184 billion euros in 2018, nearly all related to the diesel-emissions scandal. That's a big set of charges, but it's down slightly from the 3.22 billion euros in diesel-related charges that VW took in 2017, and down a lot from the 7.52 billion euros in charges that it had to take in 2016.
As of December 31, 2018, Volkswagen had net liquidity of 19.4 billion euros, down from 22.4 billion a year earlier, partly due to higher research-and-development costs and capital spending related to VW's electrification push.
What VW's CFO said about its 2018 results
Frank Witter, the member of the VW Group Board of Management responsible for finance (a role equivalent to chief financial officer of a U.S. company), said that all things considered, the company is satisfied with its 2018 results.
Our operating business proved resilient once again and we are satisfied with the overall result. Sales revenue performance benefited from an improved mix, while currency effects had a negative effect. The Group's financial situation remains solid. The Group's ongoing transformation in connection with the electrification and digitalization of the fleet will once again require tight cost discipline in 2019.
Looking ahead: Cautious guidance for 2019
VW said that it expects its deliveries to grow slightly in 2019 versus 2018, but noted that it will probably face "continuously challenging market conditions." Specifically, it expects an increase in overall group revenue of up to 5%, an operating margin of between 6.5% and 7.5% in passenger cars, a slightly lower margin in commercial vehicles, and an operating profit in its financial services division roughly equal to its 2018 result.