Volkswagen AG (VWAGY 0.10%) said at its annual meeting that its fourth-quarter operating profit fell 4.2% from a year ago, to 3.05 billion euros ($3.45 billion), as new emissions-testing rules in Europe led to delays in getting several key models approved for sale in the region.
VW released preliminary full-year 2018 results and an overview of its 2019 guidance last month, on Feb. 25. At its annual meeting in Wolfsburg, Germany, on March 12, VW presented additional information, including detailed fourth-quarter and full-year figures, as well as new information around its plan to ramp up production of electric vehicles. The company also announced an increase to its annual dividend.
Here's what we learned.
Good sales of higher-profit SUVs in the United States helped VW offset higher spending on electric vehicles and costs related to new emissions tests in Europe. Image source: Volkswagen AG.
The raw numbers
| Metric | Q4 2018 | Q4 2017 | Change |
|---|---|---|---|
| Revenue | 61.27 billion euros | 59.49 billion euros | 3% |
| Vehicles delivered (thousands) | 2,704 | 2,935 | (7.9%) |
| Operating profit, excluding special items | 3.80 billion euros | 3.81 billion euros | (0.3%) |
| Operating margin, excluding special items | 6.2% | 6.4% | (0.2 ppts) |
| Special items | 749 million euros | 627 million euros | |
| Net income | 2.78 million euros | 3.92 million euros | (29.1%) |
| Automotive operating cash flow | 3.6 billion euros | 3.65 billion euros | (1.3%) |
Data source: Volkswagen AG. All financial results are shown in euros. As of March 12, 1 euro = about $1.13. "Vehicles delivered" includes vehicles delivered by VW's joint ventures with Chinese automakers; financial results for those joint ventures are not consolidated in VW's results. "Automotive" results exclude results from VW's financial-services subsidiary. Ppts = percentage points.
Highlights of VW's fourth-quarter performance
What helped:
- Despite a 28% year-over-year decline in the overall market for passenger vehicles in China in the fourth quarter, sales by VW's joint ventures in China fell just 2.2% from a year ago, to about 1.08 million vehicles.
- Even with the slowdown in China, and a decision to end sales of several models in Mexico, worldwide sales of VW-brand passenger vehicles rose 2.2% from the fourth quarter of 2017. Improvements in product mix -- including more SUVs sold in the United States -- drove a 10.1% increase in the brand's operating profit, to 613 million euros ($692.7 million).
- The VW Group's sales in South America rose 17.2% in the fourth quarter from a year ago, an impressive result in what has been a very difficult market for some of VW's key rivals. (For comparison, Ford Motor Company's (F +0.37%) fourth-quarter sales in South America fell 17% from the year-earlier period.)
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What hurt:
As noted above, VW's fourth-quarter results were hurt in part by the introduction of the new WLTP vehicle-testing protocol in the European Union. VW was forced to delay the introduction of some 2019 models because it needed extra time to get them approved for sale under the new standards.
VW's luxury subsidiaries, Audi and Porsche, were especially hard hit.
- Audi's sales fell 6% from a year ago, to about 360,000 vehicles; its operating profit fell 9.9% to 658 million euros.
- Porsche's sales fell 8.8% to about 62,000 vehicles; its operating profit declined 18% to 913 million euros.
While Audi and Porsche account for a relatively small portion of the total vehicles sold by the VW Group -- just 14.7% in the fourth quarter -- the two subsidiaries generate an outsized portion of the group's operating income. As they go, so goes the company.
Boosting investments in electric vehicles
"We are aligning Volkswagen with e-mobility like no other company in our industry," said CEO Herbert Diess.
During VW's annual-report presentation, Diess said that VW is boosting its investments in electric vehicles. The company now plans to launch almost 70 new electric models by 2028, up from 50 in its earlier plan -- and it expects to build about 22 million electric vehicles between now and then.
VW already has about 20,000 reservations for the first of those vehicles, the Audi e-tron SUV and the Porsche Taycan sports sedan. It expects that number to grow sharply once the final production version of its first mass-market long-range electric vehicle, the Volkswagen ID, is presented. VW isn't neglecting infrastructure: It's working with Ionity to have at least 400 fast-charging stations up and running in Europe by next year, and is making significant investments in recharging stations in the U.S. as well, via Electrify America.
The battery-electric Audi e-tron is now in production, with the first customer deliveries expected this month. Audi has several other electric vehicles in development. Image source: Volkswagen AG.
Of course, this commitment comes with a cost. Volkswagen will reduce the workforce at its core VW brand by about 7,000 workers in a bid to get the brand's operating margin up to 6%, and it will aim to generate 5.9 billion euros ($6.7 billion) worth of annual savings by 2023 via other cost cuts and productivity gains.
About the dividend increase
CFO Frank Witter said that VW will boost its annual dividend to 4.80 euros on "ordinary shares," or common stock (from 3.90 euros last year), and to 4.86 euros (from 3.96 euros) on its preferred shares. That in turn will increase VW's payout ratio to 20.4% from 17.6% last year -- still short of its long-term target of 30%, but a solid raise nonetheless.
Looking ahead: VW's guidance for 2019
Witter expanded on the guidance that VW provided with its preliminary 2018 earnings release in February. For 2019, the company currently expects:
- Deliveries to "slightly exceed" 2018 totals;
- Revenue to increase "by as much as 5%" over 2018's result;
- Operating margin to land in a range of 6.5% to 7.5%;
- Return on investment and cash flow in the automotive division to increase from 2018's totals.
