2019 was a good year for Volkswagen (OTC:VWAGY) -- but 2020 is going to be difficult.

How difficult? It's impossible to say right now.

In a news conference to present VW's 2019 results (which were good), CEO Herbert Diess said that the company is preparing to shut down all of its European factories due to the spread of the novel coronavirus, but that the longer-term ramifications are impossible to predict right now. 

"Given the present significant deterioration in the sales situation and the heightened uncertainty regarding parts supplies to our plants, production is to be suspended in the near future at factories operated by group brands," Diess said on Tuesday morning.

Volkswagen Group factories in Spain, Portugal, and Slovakia, as well as the Lamborghini and Ducati factories in Italy, will all be shut down by the end of this week. VW's other European factories will begin preparing to suspend production, likely for two weeks, Diess said.

He was unwilling to give any guidance on the longer-term impact of the virus pandemic on VW's results. "The corona pandemic presents us with unknown operational and financial challenges," Diess said, noting that there are also serious concerns about the longer-term economic effects of the responses to the pandemic. 

Put another way: Shutting down factories will be expensive in the near term. If the virus passes and leaves Europe and North America deep in recession, that will be another financial challenge for the company.

The VW sign on the roof of Volkswagen's global headquarters in Wolfsburg, Germany.

Image source: Volkswagen AG.

About those 2019 results

In contrast to Diess' grim forecast, the company's 2019 results were good. Operating income before one-time items rose 12.8% from a year ago, to 19.3 billion euros ($21.19 billion), on a 7.1% increase in revenue. 

Some highlights: 

  • Sales of VW-brand models actually fell about 1% from 2018, but revenue and operating profit both increased from a year ago thanks to an improved mix of models sold. (Good sales of VW-brand SUVs in the U.S. were particularly helpful.) Revenue rose 4.5% to 88.4 billion euros; operating profit before special items increased to 3.8 billion euros from 3.2 billion euros in 2018.
  • The VW brand's operating margin (before one-time items) was 4.3%, up from 3.8% in 2018. One-time charges attributed to the VW brand totaled 1.9 billion euros in 2019, roughly unchanged from charges in 2018, and were all related to the diesel-emissions scandal. 
  • Audi's revenue and operating profit both fell, in part because of internal accounting changes (VW shifted the way it accounts for its multibrand sales units) and in part because of higher costs due to new-product development and model launches. The higher costs were offset somewhat by improved sales mix and cost reductions elsewhere. 
  • Audi's operating margin was 8.1% in 2019, up 0.2 percentage points from its 2018 result. 
  • Porsche's revenue jumped 10.1% from 2018, to 26.1 billion euros, on a 9.5% year-over-year increase in vehicles sold. Operating profit before special items rose 2.4% to 4.2 billion euros, as higher costs and unfavorable exchange-rate effects cut into profitability. 
  • Porsche's operating margin (excluding special items) fell to 16.2% in 2019 from 17.4% in the year prior. 

Volkswagen's 2020 guidance is unchanged, but...

The guidance that VW issued to investors in February calls for 2020 deliveries to be roughly the same as 2019 figures, with an operating margin between 6.5% and 7.5%. For the moment, that guidance stands unchanged, with a huge caveat: "Currently, it is almost impossible to make a reliable forecast" for 2020, CFO Frank Witter said. 

Witter emphasized that right now, VW's senior management is focused on supporting its employees and stabilizing its business as Europe scrambles to respond to the pandemic. The company will update its 2020 outlook later in the year. 

VW earnings: The raw numbers

All financial results are shown in euros. As of March 17, 1 euro = about $1.10.

Metric 2019 Change vs. 2018
Revenue 252.6 billion 7.1%
Vehicles delivered  10.975 million 1.3%
Operating profit, excluding special items 19.3 billion 12.8%
Operating margin, excluding special items 7.6% 0.3 pp
Special items (2.34 billion) 848 million improved
Net income 14.03 billion 15.4%
Earnings per share 26.60 12.9%
Automotive operating cash flow 30.73 billion 65.8%

Data source: Volkswagen AG. "Automotive" results exclude results from VW's financial-services subsidiary. Earnings per share are for ordinary shares, the German equivalent of common stock; pp = percentage points.

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