Thursday, 20 May 2010

Companies Focus – The Western 8 – VW AG: A Repeat Prescription from Dr Piech.

Volkswagen has been the undisputed star of the past few years, its innate size, strength and geographic spread placing it well amongst its less structurally robust contemporaries in the VM auto-sector. Piech, Winterkorn, Poetsch and other Board members recognise how important their synergistic, parallel integration, conglomerate formula has been throughout its history, and looking forward wish to maintain that philosophical and revenue generating momentum via the inclusion of Porsche AG and build-up of its truck division interests in advance of the eventual global economic rebound.

With a strong central, quality-perceived VW brand and a price-point 'ladder' of complimentary marques which sit both above and below, the group has built itself to withstand both regional economic vagaries and well placed in the EM regional boom, so underpinning achievable sales expansion. Its efficacious devotion to EM regions perhaps best seen by the illustration of Chinese strategy, early players with most recently the Lavida small saloon – part of the NCS (new compact sedan) exercise . This builds upon previous efforts such as Gol in S. Americaaa, City-Golf iS. Africacaca and Passat in China, all of which utilised previously amortised tooling with demand aligned product . However, now in a new era, the task is to align NPD globally, seen with Lavida.

More of this powerful formula then is the high-line basic tenant to “Strategy 2018”, the corporate ambition announced to investors in London in February. A concise PR release accompanied by detailed presentation, pre-cursing the Q1 2010 success story and the long-term 2018 horizon.

VW Group Performance Q1 2010 -

Q1 2010 saw a general increase of 19.4% in YoY sales. VW badge sales up 23.5% to 945,000 units, Audi sales up 22% to 316,000 units, Skoda sales up 31.7% to 142,000 units and SEAT up 55% to 91,000 units. Group share of the global TIV rose from 11% to 11.6% which is commendable, increasing revenue by 19.4% increase to E28.6bn vs E24bn for last year's comparable quarter.

This gave a revenue of E28.6bn from E24bn, and a near tripling of Q1 operating profit to E848m from E312m last year, and produced a Profit before Tax (PbT) of E703m against E53m a year earlier, E286m of which originated from Chinese JVs. Profit after Tax (PaT) was E473m vs E243m the previous year.

Critically, all important Net Liquidity increased from E10.6bn as at Year End to E14.2bn including a cash outflow of E1.7bn as a result of the new 19.9% stake in Suzuki Motor Corp.

Viewed at a business level Operating Profit / Loss: VW Cars gave E416m (vs E-279m YoY), Audi gave E478m (vs E363m), Skoda gave E100m (vs E28m), SEAT resulted in E-110m loss (vs E-145m), Bentley was E-36m (vs E-52m), whilst demonstrating the suffering of trade-buyers VW Commercial vehicles gave a E-16m loss (which wiped-out the E600m proceeds from VW Brazil's sale to MAN SE). With VW assistance in Brazil, Scania contributed E214m (vs 46m). VW Financial Services gave an operating profit of E167m (vs E156m)

However, as with other manufacturers executives forewarned that the assisted buoyancy of 2009 and early 2010 would not continue if unassisted private consumption stayed at depressed levels, as witnessed by April's sales figures. But this western market slack should continue to be off-set by demand in EM regions, so VW is optimistic about FY2010 beating FY2009 sales, revenue, margins and profitability

Strategy 2018 -

The Group's publicised goal is to overtake Toyota as global No1 and sell over 10m units annually.
To summarise, “Strategy 2018” wishes to: 1) Increase global penetration via >10m units, 2) Reduce investment costs & NPD 'time to market' & assembly time & cost, and increase scale efficiencies via 'modular toolkits', 3) Enable 'capital discipline' of a PbT Margin of >8%, RoI of >16% for Autos Division, RoE of 20% for Finance Division & approx 6% Auto CapEx in PPE/sales, 4) Operating Profit measures, 5) Maximising the cross-group Synergy Potential, 6) Potential 'Upsides' in: Product Extension / N.A market recovery / Commercial Vehicle market recovery / Financial Services better integrated into VW value-chain (presumably for wholesale funding access and lowered cost of capital and VW retail opportunity to greater customers).

Divisional Overview – VW Division (VW, Skoda, SEAT)
Investors' prime focus is inevitably on unit sales numbers, unit margins and achievable forecasts facing a contracting EU market and mixed EM arena. As seen elsewhere, Boards are talking-up technology stories, so off-setting the EU lull with 'jam tomorrow, whiz-bang' PR visibility. Thus VW is exploiting Germany's 'National Platform for Electric Mobility' initiative, with 'e' versions of the new Up A-segment city-car and Golf/Jetta/Lavida blue-e-motion vehicles. This then, with mutual political 'rub-off' with Angela Merkel, pitches Germany's VW against France's Renault as the EU's supposed vanguards in zero-emissions technology. Yet, though 'e' models will be made available, no doubt done so on a very limited basis, as we've seen with BMW's e-Mini. Although the political rhetoric speaks of clean-energy generation – given Germany's lead in this arena – the severely squeezed national budget means its ability to propagate such technology as seen in the recent passed is diminished.

However, one element of exception may be latter-day terms and conditions to the E750bn sovereign debt bail-out package from (largely) Germany & France. This, along with possible QE measures, could be used to have the near-default nations buy-in German & French technology, the relatively large government & municipality vehicle fleets of Greece and Spain used as effectively fabricated demand sources. Even so given similar failed efforts by the likes of PSA within the UK and France, ultimate success looks for such a Club-Med scheme looks unlikely. Greece & Spain would e required to install additional parallel clean-energy infrastructures to those created at heavy EU & national cost already to create a truly sizable scale-efficient zero-energy generation and consumption eco-system. Early efforts are seen, but at a cost run rate that looks ever less digestible.

Thus whilst the zero-CO2 initiatives are welcomed the mid and long-term real-world impact by 2018 will be massively counterpointed by improvement in conventional ICE and Hybrid technology, as now advertised as available here and now with the new Porsche Cayenne S Hybrid.

[NB the 'e-Golf' weighs 240 Kgs more than the standard diesel and whilst having fantastic pull-off from stationary & low speed torque has only 113BHP, with only a 90 mile 'light-foot' range. A long way from the standard car's usability at what will be a very expensive price without VW subsidy].

Ultimately investment-auto-motives suspects VW group will follow Toyota's and Honda's lead in hybrid technology, something by which VW can convert into real 'customer currency' given the integration of Porsche into the group and Ferdinand Porsche's origination of the petrol-electric hybrid in the 1998 Lohner-Porsche.

Thus investment-auto-motives expects VW brand to join its Japanese peers as the propagators of real-world 21st century technology for a Triad & BRIC global audience.

SEAT is being re-orientated as a more conservative brand offering both in terms of vehicle packaging (2-box hatchbacks and 3-box sedans as opposed to sporty mono-boxes) and styling; effectively aborting the more adventurous yesteryear initiative. This then fits in with the times and provides the group with a Southern Mediterranean iteration of Northern Europe's conservative Skoda. A central issue is the capacity efficiency of SEAT's Martorell plant, currently running at only 60%, and being fed with overspill from sister brands such as Audi's Q3. Given SEAT's inability to perform to date it faces a testing uphill battle and like Skoda appears to have to fight as offering more car for the money, a hard task given its small car roots and need to align to smaller car trends.
However, it experienced good demand pull in Q1, increasing 54% YoY due to rebound of the Spanish car market. But given the country's renewed sovereign debt economic woes and so consequences for its large state-employed populous such a demand level looks short-lived.

Skoda itself is increasingly placing itself at the top of the entry sector, so as to differentiate from Kia and Dacia pricing rivals, using a prominent 'face', sheet-metal gravitas and higher quality finishes as the enabler aswell as entering new sub-segments with variants such as the Yeti city SUV.

Audi Division - (Audi, Lamborghini, Bentley, Bugatti)
Audi has been the darling of the premium sector as BMW and Mercedes clientele moves on to try a sportier yet still handsome Audi that sits in perceptional terms equi-distance between its rivals. Its S performance sub-brand has become a real alternative to BMW's overtly set high M sub-brand, whilst it has also made use of its historical functional credentials with 4WD and 'Avant' offerings combined in Q7 and Q5 – the latter smaller vehicle most pertinent to Europe and Asia Moreover it has garnered perhaps greatest success over BMW and Mercedes in the compact category with A3 and newly introduced A1; as well as lateral expansion into pure sportscar territory beyond R8/10 with an upcoming R4. In short Audi has been the premium sector success story of the last decade, something VW will continue to foster and who's sales performance is keenly presented to the investment community.

Lamborghini sales after great success have faltered more so than peers such as more robust Ferrari and indeed stablemate Porsche, its 2 car line-up of Murcielago and Gallardo at respectively their end of, and ¾ or so through, their respective life-cycles. Sant'Agata finds itself increasingly caught between its 'Italian Yesteryear' and 'German Future', the operational limitations of an aged factory and what appear set in their ways workforce set against the technical offerings and demands of its VW parents. Lamborghini must ride-out this demand lull on limited resources given its realistic lowest order importance within the group.

[NB see previous investment-auto-motives' web-log post dated 20.04.2010 for dedicated evaluation]

Bentley introduces its new Mulsanne sports-sedan, intended to be a high-margin car that helps to off-set the reduction in sales if the lower priced GT and GTC Continental series that have served so well in accessing a non-traditional, younger and more flighty buyer set. Although the PR rhetoric announces the car as wholly new and wholly Bentley, investment-auto-motives has been led to believe that major BIW, chassis and electrical systems from the new A8 serves as the basic yet intendedly invisible Mulsanne platform, which delivers quality at reduced costs to Crewe.

Bugatti, having ended the production of Veyron now looks to go into hibernation for a period, whilst possible new product is being developed. That appears to be another A8 derived vehicle in the form of a new sports-sedan titled the 16C Galibier, a merge of Veyron face and Porsche Panamera 4-door coupe side-profile, with 'Atlantique' style rear – so clearly delineated from the more classically traditional 3-box Mulsanne. Though publicly slated for release in 2013, much of course depends upon VW resource prioritisation, and given the real focus on the US and China plus the fact that cars such as Phaeton and Veyron were such business model disasters, investors – unless intended purchasers – may wish to see the development monies ploughed into core operations, and if not put to good work, returned to shareholders.

Porsche AG:
Ongoing integration into the parent group is obviously the intention, but hurdles are arising and seemingly being dealt with.

Firstly is the case of Porsche AG's financial contribution to the group, and the fact that it comes in 'limping' given the state of depressed western markets – though still the leading performer – and the fact that IFRS based write-downs called 'PPA effects' have had to be absorbed. "These accounting charges more than off-set VW's share of profit from Porsche" CFO Hans Dieter Poetsch recently said.

Onto a legal matters, and 6 further Hedge Funds have joined the initial 4 alleging that Porsche SE deliberately misled the market in its hidden acquisition of VW stock as part of its previous takeover bid, using 3rd party proxy buyers and providing misleading public statements of its intentions. The accusation set forward by 35 funds controlled by 10 individuals, is that "the scheme induced the plaintiff funds to establish short positions on VW stock" is the accusation. And that Porsche SE aimed to trigger a massive short squeeze in late Oct 2008 to sell at inflated price and so help rescue the "near bankrupt" group. The plaintiffs include: Glenhill, Elliot, Glenview & Perry, with now the addition of Canyon, DE Shaw, Greenlight, Ironbound Royal Capital, & Tiger Global. Porsche SE stated that it continues to find the accusations without merit/substance, with the case pending in the Southern District NY, with a response required by June 15th. Undoubtedly Porsche will deny the charge and possibly counter with assertion of the old adage regards 'Pots and Kettles' (NB no pun intended vis a vis Herr Poetschee) given the apparent uses of proxy parties as part of standard modus operandi in the HF community. To buoy remaining institutional investors Poetsche insists these legal wranglings will not derail the integration of Porsche into VW, an implicit promise which the plaintiffs hope will place a time squeeze on Porsche to act in their favour in ending the matter.

VW acquired 49.9% of Porsche AG for E3.9bn, expecting 100% control to cost E12.4bn, paid in equity and debt. As investment-auto-motives has stated previously, it suspects the airing of the legal case could in fact be leveraged by both VW AG and Hedge-Fund parties: to effectively depress the Porsche AG stock price for new HF buy-in, and/or stock-returned 'placation', in full knowledge that VW AG will be keen to buy the stock given its VW-Porsche integration pledge; thus a form of witting or unwitting form of event-driven arbitrage.

They may have been looking for Porsche AG to settle the case in Porsche stock, possibly stating that they simply recoup their original positions/holdings, yet recognise the inherent value-rise between June and end of the year.

[NB see previous post 'VW AG - St James's and the Giant Piech of 29.01.2010]

To add to the (possibly inadvertently advantageous) Porsche woes a recall of all new Panamera cars will have dampened market enthusiasm, as will the untimely emergence of the WW2 'forced labour' issue which tends to periodically beset older German corporations and the whole 'Mittelsand'.

Lastly with regards to the Truck Division (VW Commercials, MAN, Scania), there has been on-off conjecture for years about the type of inter-relationship between MAN and Scania, with VW AG acting as both side's protagonist given Dr Piech's desire (indeed the recognised need) to build a strong VW-led truck business that can operate successfully on the global stage in the face of Volvo AB and Japanese, American and Korean others. Seeking to merge the patchy world-wide geographic presence of Scania AB (largely in Europe) with the EU and Latin American centres of MAN SE – the latter formed by amalgamation with VW truck & Bus Brazil, and add additional competence to MAN's JV with Force Motors (trucks) in India

Given the fractious background between both parties as effective competitors, a full blown integration may or may not emerge, depending upon each's individual performance, but through VW persuasion it seems that areas of technical compatibility are being slowly investigated, as is allied procurement, something Piech will be glad to see given the economic environment facing the smaller players within the truck sector at present. Ironically Scania reported good Q1 results so probably post-poning the urgency for deep-level co-operation.

[NB VW and MAN own 59% of share-capital in Scania AB (45.6% &13.4% respectively), and VW owns 29.9% of MAN SE]

Strategic View -
In the goal for profitability, accompanying the ideal of globalised market penetration giving scale volume is the ability to create an efficient new product development process that enables both segment and variant model coverage. Since the early 1990s VW has been the greatest proponent of common platform capability whilst simultaneously demonstrating the ability to faithfully brand-engineer its separate marques. Cost, Time and Quality are the prime issues for all new product development and to be seen to maintain its benchmark lead VW Group extols what it calls its Transition from 1990s Platform Strategy to 2000s Modular Strategy into now the 2010+ Modular Toolkit Strategy. This claims to expand the cross-segment, cross-variant and cross-brand utilisation of core Body, Chassis, Electronic and Powertrain systems.

Undoubtedly key to its brand and product expansion methods has been the ability to cross-pollinate systems/parts from one nominal family member to another. Beyond expected platform & powertrain shared similarities, this cross-fertilisation approach has generated an innate internal NPD flexibility to fill portfolio vacuums or create all new offerings: ie the Audi derived SEAT Exeo, VW LCV derived Skoda Roomster, etc etc. On this basis the world of opportunity can look limitless, providing the ability to create a plethora of vehicle types by which to combat competitors. However, as exemplified by Toyota's 'over-bloating' on its previous quiet mastery of commonisation, if unchecked it can lead to a situation of falling marginal returns. The innate desire for competitiveness or indeed justification of CapEx budgets can lead to paper-based NPD arguments at the programme approval stage which ultimately do not materialise in market.

Thus although the world of opportunity created by ever-sophisticated common parts engineering philosophy is a 'presentation corker' (see for possibly NPD illiterate investment analysts, to convert the real IRR and NPV numbers into RoS & RoE figures often takes a degree of NPD restraint.

As is necessary for all VMs to overcome FX fluctuation and fulfill government industrial growth agendas, VW continues its promote locally sourced parts and assemblies from its target BRIC & NA regions. The US, Brazil and India present little obstacle to continued high integration levels, given the historical existence and/or increasing existence of multinational Tier 1 &2 s, India promoting itself as the small car export hub. Interestingly, China has now started to import low-value or labour intensive parts from its neighbours so effectively discounting the meaningfulness of the localisation percentage which appears at lower rate than elsewhere. A similar effect is apparent in Russia, where a relatively low localisation rate of 10-30% by 2015 reflects both BRIC comparatively high labour rates and a substantial OEM base (especially for VW) throughout the near-by CEE region.

Thus the call for localisation cost savings whilst a darling ideology of capital markets may be somewhat misleading as a guide to reduced cost sourcing, especially so in close-knit transport interconnected regions with emerging trade blocs. Investors should see past the surface of abject localisation given its geographically case relative foibles and instead seek better understanding of the presented percentages. Are they relative to the vehicle parts count or the car's unit based BoM (Bill of Materials) or indeed relative to new programme procurement cost savings. The true understanding is in the detail not in over-simplified generalisations.

Regards the the CO2 and general emissions reduction challenge, the Group has a strong R&D capabilities engendered primarily at Audi and Porsche which is ostensibly trickled-down where cost-benefit can be achieved. The use of fuel efficiency technology in power-train, conventional & LW Steel monocoques, along with pure aluminium alloy and mixed steel/aluminium structural solutions, plus various Chassis and Electrical architecture solutions create a very broad (BIC) palette of 'mix and match' vehicle specification options.

To bolster VW's design and engineering prowess – and importantly deny competitors from building-up their European R&D capabilities – early reports conject that VW AG is looking to secure the purchase of ItalDesign Giugiaro SpA in Italy. This mimicsits capture of Karmann, and so bolsters its Italian presence and importantly generates a formal or informal affiliation with Automobili Lamborghini, which as stated previously may be over-stretched in by its future demands versus capabilities. Furthermore, investment-auto-motives suspects that it is also a vehemently strategic move by VW AG. Given that Giugiaro is presenting a Proton-Badged flexi-powertrain city-car at the Geneva Autoshow; with Proton owning Lotus Group (Engineering & Cars) a company which has been intendedly 'over-run' by ex-Ferrari (ie FIAT) management, Piech et al may fear FIAT's potential use – or perceived use - of a technically disruptive new product appearing from FIAT-Chrysler. So seems to be either taking over Italdesign Giugiaro to either integrate the project into VW or suffocate the project so as not to interfere with VW Up and its own e-vehicle kudos.

Operational View -

As is the present and expected norm, the ending of previous car scrappage schemes set greater toll on all volume manufacturers into 2010, especially so for the EU & US centric 'Western 8'. This retraction of sales has been off-set by still buoyant car-markets in EM areas, especially China.

However, it cannot be ignored that the level of EM economic cooling witnessed over the last 3-6 months may have an adverse effect on EM sales rates and so previous revenue estimations. This condition created by both the previous contraction of Triad export demand and EM government efforts to temper their own inflation rises. For EM administrations this situation may now be exacerbated by the new additional heavy drag of Europe's present macro-economic woes, and so compel them to counter by de-incentivising B2C & B2B local consumption.

This may be of special significance in China as its seeks to restructure its auto-sector, reducing the number of its own auto-producers via consolidation. VW of course remains in a prime position as the China nation's favourite, looking forward to another record sales year and obviously rightly continuing to invest in 2 additional factories and plant in Chengdu & Nanjing, but it will face increased retailing pressures as previous tax incentives are withdrawn and the marketplace becomes 'choppy'. Having been through this situation on previous occasions VW should ride any forthcoming storms created by Chinese brands' price-led, inventory reduction, sales efforts that temporarily churn the marketplace.

Recognising slow but steady North American improvement renewed vigour appears to be being put into re-generating VW brand alongside the massive sales potential for Audi success – presently a minnow versus BMW & Mercedes sales volumes). And so Wolfsburg will be bolstering VWoA's (VW of America) managerial capabilities under Stefan Jacoby and closely assessing the deployment of its US strategy for positive early phase results. As part of its US ambition VW is building a new factory in Chattanooga, Tennessee due for NMS (New Medium Sedan platform – spanning Jetta & Passat) SoP in late 2011; able to contribute 150,000 units per year. The ambition is to generate approximately 1.1m units pa by 2018, holding 6% of the US market share.

Without substantial US manufacturing capability, much of this volume will be imported from Germany, Mexico and China , thus Euro vs Dollar, Peso vs Dollar and Renminbi vs Dollar FX differentials will be key for both large car Audi imports and eventually small & compact car (Polo & Rabbit) imports from the NAFTA region.

Importantly, the heavily de-valued Euro will give VWoA the advantage of better competing against US, Japanese and Korean peers on US soil, circumstances not seen at such a comparative level since the 1960s. Even so, effectively re-positioning the brand 'future-forward' over 2010 will mean VWoA will in all likelihood require heavy marketing (TV, web, quality press – though not 'incentives') spend, and so early profiteering from the US looks unlikely as strategic aims over-ride Quarter on Quarter N.A. Margins. Importantly the VW brand must be successfully re-positioned as premium to Toyota and Honda if it is to sustain it's 5-10% price premium whilst simultaneously growing volume. This is VW's biggest NA challenge given its past of cheap and cheerful transport (Beetle, Mk1/2 Rabbit), Audi's previous late 1980s safety debacle and the very real pressure from not only the Japanese and Koreans, but BMW and Daimler's intention to eat into Polo/Golf/Jetta territory with all new products.

Lastly, even though April YoY sales took a steep decline, Germany will obviously continue to be VW's prime EU market both as a result of national champion and the relatively healthier German economy. Moreover investment-auto-motives expects a 're-patriation effect' of German consumers increasingly buying German-made products as the public's mood is tilted subtly away from its previous broader 'inter-nationalisation' toward the greater German good. This effect, combined with powerful PR efforts such as the VW-Merkel 'rub-off' on eco-tech should mean that Germany's retracted scrappage scheme should not impact as greatly upon deflated car sales, as say that of Italy or indeed the US. Furthermore. Elsewhere around Europe VW should benefit by consumers continued 'flight to affordable quality' amongst more responsible new-car buyers. However, VW must be sensitive to buyer group types and resultant effects.

[NB Today most mainstream car sales are now credit and value driven (as with VW's own O% finance and 2 year's free servicing in the competitive UK), but it must critically identify and segment its buyer types so not to fall into the trap of offering good terms to less than reputable buyers. This is now being witnessed by investment-auto-motives relative to the credit-driven sales impetus of Vauxhall-Opel whose vehicles are to a large extent being absorbed by a different (younger, more ethnically diverse and typically less responsible) demographic. A group which in recent historically was part of the problem in creating a value-destructive, negative feedback loop via debt payment default, requiring vehicle recovery and so generating reduced vehicle residuals which in turn adversely effects used and new inventory asset values and thus damaging balance sheet health].

Hence, a level of resilience amongst within the domestic attitude and demand together with China's buoyant demand will be VW twin pillars across a 2010 in the face of the corporate squeeze of reduced sales and continued need for investment.

2010 sees an increased level of new vehicle launches, more so than for some years, with in all 21 new (and important variant) models across its 10 brands (including VW commercial), as one would expect spanning both high-margin vehicles (eg Toureg, Passat, A8, A7, R8 V10 Spyder, Cayenne & Cayenne Hybrid, GT Supersports Convertible, Gallardo Superleggara). And amongst volume vehicles (eg Polo BlueMotion, NCS-Jetta, Touran, Alhambra, Ibiza Sport Tourer, Caddy and Amorok)

[NB Amorok is a JV programme using the renowned Toyota Hi-Lux as a base for VW efforts to create a presence in the (large global) 1-tonne pick-up market, so expanding its involvement and credibility within the commercial vehicle sector. This, investment-auto-motives believes could lead possibly to a shared Toyota-VW production agreement at Toyota's US Mid-size & Large truck manufacturing site in San Antonio, Texas, since Tundra sales have not met the N.A. forecast.
A fundamental rationale may also be argued that in a shrinking US & global SUV market that the VW-Toyota alliance could be formed for many if not all SUV & Pick-Up development programmes, thus reducing capex drag and increasing unit margins for both parties and provide a dual attack on both GM and Ford market masters – though this would take a great deal of strategic planning and corporate willingness for a long-term battle . Additionally VW may wish to access Toyota's large Minivan products as a replacement to the FIAT-Chrysler sourced Routan].

Ultimately for VW Group, good product cadence, its broad brand and product portfolio and a level of comfort afforded by previous conservative, pragmatic executive attitude, however still allows VW to operationally punch high, and initiate its global production ambitions via new Chinese, Indian, Russian and US plants.

Looking briefly at at the Financial Services Division and “VW Bank” outperforms the captive finance houses of its European peers by a sizable amount. By 30.09.09 VW had customer deposits of E19bn, versus E13bn at Daimler, E10bn at BMW, E1bn at RCI Banque, E0.4bn at Banque PSA, and E0 at Ford Credit Europe (though we must recognise that since US owned Ford Europe is not directly comparable). However, once again the advantages of VW's innate size and financing conservatism regards capital reserves is demonstrated, especially when compared to #2 ranked PSA.

However, the comparative % EBIT contribution of Finance vs Cars has been declining over the last 7 year, markedly so from 2004 onward, and no 2009 details were shown after slim '06-08 given the credit-driven push that raised car sales and so Car's EBIT in those years. That latter-day 'slimness' demonstrates VW divergence from reliance on Financial Services as the sector was undergoing major convulsion and reform, and absence of 2009 figures indicates that VW was intendedly very shy in using FS as a then unstable pillar, instead requiring greater customer deposit demands which by its nature separated the responsible from irresponsible and provided its substantial capital liquidity cushion.

Financial View -

In the Q1 2010 presentation Winterkorn and Potsche delighted in highlighting the Group's essential business model advantages over rivals, primarily the leverage of volume scale efficiencies and tiered brand stable with high-tier margin advantage. Thus able to outperform all but 1 of the mass-market and all but 1 of the premium-market players during the heart of the downturn. Proffering 1.6% EBIT margin versus typically loss-making Japanese and Euro peers, only beaten by Hyundai's impressive 7.0% given its innate structural advantages. Per premium players, VW proffered its 1.6% EBIT margin versus loss making German peers, only beaten by (consistently sector leading) Porsche's 10.3%.

Thus the 'industrial shape' of the Group allows it a level of anti-cyclical reprieve, as witnessed in previous recessions, which also promoted a stable credit rating over the last 30 months as others wavered considerably.

VW rightly prides itself on maintaining financial flexibility via good liquid-assets and cash-at-hand levels. However, the resurgence of the 'PIGS' sovereign debt issue may continue to hamper wholesale capital access for all across European capital markets, especially so in the contested states. This was recently demonstrated by VW's postponement of its Spanish car-loan backed bond issuance programme called 'Driver Espana One'. Given Spain's previous position as best placed of the 'PIGS', this raises the concern that only an overtly high cost of capital will be available directly from these capital markets in the near future, and so precludes tenable access. For VW, this will presumably have an impact on both SEATs company aspirations and a knock-on effect as an effectively temporarily closed funding avenue for the Group at large.

Thus it appears that VW will have to exploit internal German, US & Asian company retained cash for further liquidity requirements or possibly tap these regions more amenable capital markets, even though the US's NYSE and S&P500 has stumbled recently. Unlike Daimler's NYSE-Euronext de-listing investment-auto-motives expects VW AG to maintain its US listing so as to demonstrate its corporate commitment to the nation.

The real near and mid-term issue is of course the heavily weakened Euro. In approximately 6 months the Euro has fallen from $1.50 to $1.23. Whilst this provides VW with additional pricing flexibility in foreign markets - very necessary in NA - to help boost local market-share - the disadvantage is that top-line inbound revenue may fall once US market incentives have been absorbed and after the FX conversion back into Euros. It is imagined however that given group global ambitions that to partially defray this concern locally generated revenue will be maintained by VWoA or VW India and pumped back into its local efforts at both investment level and to bolster vehicle buy-backs so as to try and control local residual values.

As previously stated Q1 2010 offered good news with a doubling of profit from a year earlier.
Gross Turnover in Q1 was E28,647m (vs last year's E23,999), up 19.3%. [Of this Automotive gave E25,454m (vs E20,923m) whilst Financial Services gave E3,192m (vs E3,076m)]. Cost cutting measures ensured that CoGS increased by a lesser 14.3%, E-24,542m (vs E21,472m). Gross Profit came in at E4,105m (vs E2,527m), whilst after other distribution & administrative deductions, Operating Profit came in at E848m (vs E312m).

VW's equities portfolio boosted investment income to E204m (vs E71m), but other interests (possibly counter-party hedge backs) dragged by E-350m (vs E332m). Thus giving a Financial Result of E-145m (vs E-261) so showing investment loss improvement as one would expect given the typical rebound conditions.

Thus, the Operating Profit minus Financial Result gave a PbT of E703m (vs E52m), which after tax considerations gave a PaT (ie Net Income) of E473m (vs E243m). Deducting E50m (vs E-20m) for 'minority interests' gave E423m (vs (E263m) for full or partial shareholder dividend. The Ordinary Dividend was paid at E1.03, whilst Preferred Dividend at E1.09.

This immediately lifted its share price by 2.4% to E74.35, but since immersed in the general stocks sell-off the company now resides at E69.07 for Pref Shares (and E68.05 for Ord Shares), down a heavy 2.88 on previous trading, yet still showing its resilience relative to an out-performance compared to the DAX, DJ EuroStoxx 50, FTSE 100, Dow Jones and S&P 500.

Presently the combined Ordinary & Preferred Share based MarketCap now sits at approximately E31.83bn.

Looking to the Balance Sheet. (Non-Current) Long-Term Assets rose to E104,712m (vs E99,402m) of which the greatest increased component was investment/financial assets, plugging much of the fill-up between Q109 and Q1 2010. Intangible Assets rose to E13,134m (vs E12,907m).
Current Assets rose to E83,409m (vs E77,776m), of which the greatest assist was in the level of Receivables & Other Financial Assets (presumably extended loans) up by approximately 21% - demonstrating vastly improved control of creditor payment schedules, possibly offering dealer-group loans for speedier payment terms on vehicles received. Beyond this inventories rose as did cash & equivalents and marketable securities. Total Assets rose to E188,121m (vs E177,178m).

Set against Assets is of course Liabilities and Equity. (Non-Current) Long-Term Liabilities rose to
E73,938m (vs E70,215m) of which the greatest component is financial liabilities, nearly 3 times the size of pension liabilities provision. Current Liabilities rose to E72,292m (vs E69,534m), with a growth of Trade Liabilities showing leverage over suppliers so as to defer payment, with other liabilities rising to E22,609m (vs E18,703m).
Equity rose to E41,892m (vs 37,430m) much of which was the previous E4bn re-capitalisation exercise. Of course Total Liabilities & Equity is thus a parallel E188,121m (vs E177,178).

Conclusion -

VW is bullish about global TIV growth over the 8 period, with using Global Insight data, expectations that the Global TIV grows by 43% from 62.4m units to 89m units annually. Of that the US see a massive 56% from 12.6m to 19.5m units, W.Europe up 12% from 14.9m to 16.6m units, E.Europe up 117% from 2.8m to 6.0m units, Japan up 1% from 4.4m to 4.5m units, China up 52% from 12.6m to 19.2m units, India up 100% from 2m to 4m units, S.America up 42% from 4.3m to 6.1m units, and RoW up 48% from 8.9m to 13.1m units pa.

These are of course in reality 'guestimate' figures based on a married guestimate GDP growth and consumer vehicle take-up scenarios. Most corporations inevitably over-bake the optimism pie using more positive independent data to enthuse investors. And it appears VW may be no exception given its and the whole auto-sector's need to generate much needed investor buoyancy and stay on the hold or buy roster of large institutionals as general stock market volatility threatens to return. Much the same can realistically be said about the electric car announcement, far more style than substance at present, and has been the PR story for many a volume and niche manufacturer during these lean times.

In contrast the grass roots structural improvement such as Polo's 15% reduced assembly time and firm grasp on Sales vs CoGs ratio, aswell as investments in near 'ready-made' facilitiesssss such as Karmann's Osnabruck site and now seemingly ItalDesign Giugiaro highlight the cherry-picking of R&D and niche assembly centres that can be better exploited at lower cost inside the VW fold.

Of critical importance will of course be the eventual integration of Porsche AG/SE, the time-frame of which and concomitant fiscal contribution will be balanced by the cost of either passifying or fighting external parties. If investment-auto-motives' conjecture that a depressed Porsche stock could be useful to both VW AG and hedge-funds, then the battle may be ultimately advantageous to both.

Opposite the Sports-Luxury sector, in the Small Car sector, VW will be exploring its use of its new Suzuki stake to gain access to its Indian Low Cost capabilities, with consequence to run-on Fox, new Up and possibly next generation Polo. Just as VW has a massive medium size car capability with SAIC in China, so it will want a similar advantage in 'small car India' care of Suzuki, adding to its Indian production footprint.

In the important near term that affects stock purchase behavior even though the western region's constrained sales outlook may be a shadow, the depreciated Euro assists in a slowly re-awakening US market and China looks set to deliver steady sales probably undented by the PRC's governmental efforts to defuse its housing inflation, given that in China vehicle sales and house-prices are not as closely correlated as in the west.

Of all the volume manufacturers and even premium producers VW Group is perhaps best placed to leverage its global scale and quality reputation, and appears to be able to make good its efforts on continued internal cost containment in the face of macro-level and input-cost headwinds. VW's cars section is perhaps the sector's best arbiter of mass-customisation, with the timely incorporation of Porsche both adding not only additional volume but critically advanced capability internal resources and the ability to balance NPD and platform transfer costs between its 2 primary car divisions.

To this end, for the near and mid-term, VW is best placed to ride the present dynamics of global car markets both where customer attrition is ongoing and importantly where new customers are amassing.

Exactly how the VW story beyond Q1 2010 evolves for the investor can be gained from investment-auto-motives' company & stock performance expectations note.