Volkswagen:Quarterly Results/2023 Q2

Return to: Volkswagen:Quarterly Results/2023 Q1| Volkswagen |Volkswagen:Deliveries/FY2023

Things to be checked

• Revenue and EPS results.
• Revenue and EPS outlook.
• Profit margin result and outlook.
• Pricing
• China revenue performance.
• Impact of the economy on the business
• Supply chain issues.
• CEO/CFO comments on the economy.
• Order backlog.

Earnings Results

Thoughts:

Volkswagen Group Q2 2023 earnings results were sub-par. Investors may not like the results given that its European competitors reported better results/raised guidance. Mercedez raised its profit outlook while Stellantis and Renault posted better-than expected margins.

Summary of the results

• Q2 revenue grew by 15.2% y/y to 80.059 billion euros versus analysts estimate of 80.25 billion euros(+15.4% y/y).
• Operating return on sales was 7% versus 7.3% estimate.
• Unadjusted operating margin for H1 was 8.9%, above the guidance range of 7.5-8.5%.
• Operating profit was 5.6 billion euros below analysts estimate of 5.9 billion euros.
• Volkswagen’s net cash flow declined by 72% y/y to 226 million euros during the quarter. In H1, net cash flow declined by 8% to 2.5 billion euros due to continuing bottlenecks in the logistics chains.
• Volkswagen maintained its revenue and operating margin outlook for 2023. It expects revenue to grow by 10% to 15% y/y in 2023 and operating margin to be 7.5%-8.5%.
• The group expects full-year net cash flow of EUR 6-8 billion “and has taken decisive measures to ensure that the lower end of this range is met.”
• However, Volkswagen adapted its deliveries outlook for 2023 from around 9.5 million to 9 to 9.5 million. It said it will compensate for this with higher pricing and increase in production efficiency in H2.

• Volkswagen noted that there were notable signs of recovery in China deliveries towards the end of the reporting period and that the group continues to see soid demand in general.

  “We have strategically realigned and restructured the Volkswagen Group, with a clear plan and measurable milestones. In the first half of the year, the Volkswagen Group delivered reliably with very solid results. Sales in North America are picking up, we are strengthening our position in China through technological partnerships and on top of that the trend for fully electric vehicles is moving in the right direction. What is important to us is long-term, sustainable growth, with a focus on value over volume,” CEO Oliver Blume said.

  "The focus for the second half is now on strengthening net cash flow. With the launch of performance programs at all brands and our strategic decisions in China, we will improve the competitive position of the Volkswagen Group even further,” CFO Arno Antlitz said.

  “As anticipated, supply chain disruptions have continued to ease in H1 2023, with pressure shifting from semiconductor shortages to transportation and logistics delays. H2 should be supported by lower raw material costs and gradually easing logistical bottlenecks,” the press statement stated.

Summary of the H1 2023 earnings call

China

• Aims to reduce development time of new products and technologies by around 30%.
• Partnerships with local tech companies will enable them to speed up time to the market.
• Local product partnerships will lead to tailored and superior ICV product offerings soon.
• Entered into partnership with Xpeng, a tech leader in Chinese ICV segment and smart ICV tech capabilities.
• Volkswagen acquired strategic minority investment of 4.99%.
• Products developed by Xpeng will expand its MEB portfolio. Oliver added that the cooperation will result in development and procurement cost savings of up to 20% for both companies.
• Audi deepened partnerships with JV partners, FAW and SAIC.
• Oliver said that ICV market in China is experiencing intense competition, hence partnership with Xpeng will enable them to consolidate their leadership position.
• Audi FAW NEV company will start production of PPE vehicles(e-models) for China by the end of 2024.
• Partnerships will not result in increased in investments(beyond the 180 billion euros planned)-Q&A
• Already built CARIAD in China with quite success-Q&A.
• Its Tech Co in Anhui(with 2,000 employees) will producing NEVs next year-Q&A.
• Operating result and margin of FAW JVs is stronger than SAIC-Q&A.
• CFO Arno said, "Volkswagen Group is more under pressure in the current pricing environment in China." -Q&A.
• Despite the partnership, Volkswagen aims to increase competitiveness of its MEB platform with Horizon Robotics, with in-car entertainment with Thundersoft and next generation battery, which result in reduced cost-Q&A.
• Xpeng partnership to help them tap into white spot in their product portfolio-Q&A.
• Will jointly develop two new EVs with Xpeng that are tailored for the Chinese market and expected to be launched in 2026.

Deliveries

• Deliveries grew by 13% y/y to 4.4 million vehicles in H1 2023.
• Order book stands at around 1.65 million vehicles in Western Europe(200,000 are BEVs).
• Sold 322,000 battery electric vehicles in H1(or 7.4% of deliveries).
• Order intake of BEVs in Europe is at 200,000 vehicles and is expected to improve as availability of BEVs and delivery times improve in H2.
• Saw a slower development of European BEV market due to reduce incentives and purchasing power but have seen improvement in order intake since May and expects the trend to continue.

Financials and operating results

• Vehicle sales grew 11% y/y to 4.4 million vehicles in H1 but excluding China, vehicle sales grew by 20% y/y to 3.1 million vehicles.
• FX headwind of 2%.
• Revenues grew 18% y/y to €156 billion, due to strong vehicle sales in Europe and North America coupled with favorable pricing.
• Recorded operating profit of €11.3 billion and a margin of 7.3% due to hedging effect of -€2.5 billion(H1 2022: hedging effect of -€0.9 billion). Excluding hedging, operating profit was €13.8 billion and operating margin was 8.9%(includes €0.4 billion Forex losses from liquidation of Russia business and headwinds from raw materials).
• Expects logistics issues which affected net cash flow to improve in H2.
• Volkswagen financial services recorded operating profit of €2.2 billion due to normalization of used cars and changed interest rate environment.
• "Pricing continued to be healthy and mix turned even slightly positive in Q2."
• Arno Antlitz noted, "At Financial Services, we saw an overall stable contract volume, slightly lower financing contracts were compensated by more leasing and insurance contracts. Credit loss ratio remained stable at the prior year level despite the worsened macroeconomic environment."
• Volkswagen Group China operating profit was €1.15 billion(-18% y/y) but within their FY23 target of €2.8 billion(-15% y/y).
• Not pleased with the free cash flow. But that was due to R&D and Capex investments as well as the fact that a lot of funds are tied up in inventories due to logistics issues-Q&A.
• Took down delivery target because of the run rate in China-Q&A.
• Positive on the product cost for the full year-Q&A.
• Expects operating margin in H2 to be better than H1 because they have to meet the target range of 7.5%-8.5%-Q&A.

ID.2 model

• ID.2 not the final model, they are still improving-Q&A.
• Feedback from customers and retailers is positive-Q&A.
• Will feature the MEB platform-Q&A.
• Haven't decided to bring smaller cars yet.
• MEB platform will also feature in SKODA and CUPRA models as well, with a price range of €25,000 and positive profitability.

Ecosystems

• The framework agreement that they have with Xpeng gives them the opportunity to go out of China-Q&A.
• Their objective is to have partnerships tailored for each region-Q&A.

Leverage for managers to hit their targets

• Adapt management compensation to the targets-Q&A.
• Competition between the brands-Q&A.
• Bringing enterpreneurship mindset to the brands-Q&A.

Industry

• Expects the industry to grow by 4-5%, specifically in Europe and U.S. China growth rate is expected to be abit lower-Q&A.

Shenyang plant audit

• Haven't began the audit-Q&A.
• Currently at the political agreements phase-Q&A.
• MSCI gave a red flag ESG rating as a result of what's alledged to be happening in the plant-Q&A.

Shift in Europe and Germany

• Underscores their new strategy, "value over volume."-Q&A.
• Production to be market-driven-Q&A.

Dividend payout

• Strategic target of 30% is still in play despite the weak cash flow in H1-Q&A.

Product portfolio

• The number of cars will reduce in future because of reduced number of ICE models-Q&A.
• Offers individualized cars unlike Tesla-Q&A.

• By reducing ICE models they will increase the model efficiency-Q&A.

• Individualization drives higher loyalty and profit margin-Q&A

Order book

• A huge part of the order book is end customers, some are fleet and some are private-Q&A.
• Order book can be direct to end customer or fleet-Q&A.
• Order book direct to end customer is mainly in Europe because they have " build-to-order model" where behind every order there is a customer-Q&A.

Complexity of the business

• Will significantly reduce the number of models.
• Plan to increase model efficiency.
• Argues that a time might come when the EV market is large and its models will be more relevant than today.
• Models will share the same platform, hence reducing complexity.

Subsidiary results and estimates

Porsche

• Revenue grew 14% y/y to 20.43 billion euros in the first half of 2023.
• Operating profit rose 10.7% y/y to to 3.85 billion euros in the first half. Porsche said that it faced higher costs compared to the same period last year. "The increased costs were due in part to the inflationary environment, intensified sales activities relating to the launch of the new Porsche Cayenne, digitalization and our increased motorsport engagement.”
• In the first half, Porsche return on sales was 18.9%(prior year:19.4%) while automotive EBITDA margin was 25.6%(prior year:14.5%).
• Porsche warned that supply chain problems are impacting EV production."There is no week where we have no supply chain issue," Chief Executive Oliver Blume said.
• Chief Financial Officer Lutz Meschke warned that hitting their EV target would require a better supply chain situation in the second half.
• Meschke said pricing was stable during the first half.
• The company also pointed to slower growth in Europe and China.
• However, Blume said that the luxury market is more resilient than the mass market. As such, they maintained their 2023 outlook. The company expects operating return on sales to range between 17% and 19% and sales revenue in a range of €40 billion to €42 billion.
• "The global economic situation remains tense. Efforts to secure supply chains and parts availability, general rising costs and various geopolitical tensions continue to pose challenges for Porsche AG," the press statement noted.

Q2 2023 Results and Estimates

Key Items	Q2 2023 Estimate	Q2 2023 Results
Revenue	EUR 10.699 billion	EUR 10.334 billion
EBITDA	EUR 2.786 billion	EUR 2.862 billion
Net Income	EUR 1.362 billion	EUR 1.361
EPS	EUR 1.50	EUR 1.49

Management Guidance and Analysts Expectations

Management Guidance

• The management only gave guidance for the full year 2023.

FY2023

Key Items	Lower-point	Y/Y Growth	Mid-point	Y/Y Growth	Upper-point	Y/Y Growth
Revenue	€ 307.155 billion	10%	€314.136 billion	12.5%	€321.117 billion	15%

Key Items	2023	Y/Y Growth
Operating return on sales	7.5%-8.5%
Deliveries	9.5 million vehicles	14.87%

Brands

	Passenger Cars		Commercial vehicles
Key Items	2023	Y/Y Growth	2023	Y/Y Growth	2023	Y/Y Growth
Revenue		7-13%		5%-15%
Operating return on sales	8%-9%		7%-8%
Deliveries

Analysts Estimates

Q2/2023

Key Items	Factset	Y/Y Growth
Revenue	€ 80.25 billion	15.40%
EPS	€ 8.295	29.23%

Key Items	Goldman Sachs
Operating Profit	€ 5.9 billion euros
Operating Margin	7.3%

Q3/2023 and FY 2023

Key Items	Q3/2023	Y/Y Growth	FY2023	Y/Y Growth
Revenue	€ 71.433 billion	1%	€ 305.693 billion	9.5%
EPS	€ 8.115	141.8%	€ 32.222	8.75%

Anlysts Commentary

Juan Perez-Carrascosa, UBS

• Maintained neutral rating and a price target of 135 euros.
• He said that used car prices stagnated in the second quarter in most European countries, particularly in Germany.
• He notes that new car production will likely remain high in the coming quarters, putting further pressure on used car prices.
• He adds that negative EV price trends is continuing.
• Perez prefers luxury to premium procucers such as Mercedes-Benz and Porsche AG.

Daniel Roeska, Bernstein Research

• Maintained market-perform rating and price target of 140 euros.
• He said that european car makers are likely to confirm their annual targets and point to the uncertainty in the second half of the year.
• He pointed to slow down in electric vehicle growth and bleak consumer sentiment in China, which is clouding the outlook.

Tom Narayan, RBC

• Kept buy rating and price target of 160 euros citing second quarter delivery figures.
• "Thanks to low comparative values ​​from the previous year, the car company did better than the industry in Western Europe, as expected, but worse in China," He wrote.

George Galliers, Goldman Sachs

• Lowered price target from 151 euros to 147 and kept neutral rating.
• Predicts operating profit of 5.9 billion euros and an operating margin of 7.3 percent for Volkswagen.

Jose Asumendi, JP Morgan

• Maintained buy rating and price target of 193 euros.
• He said that should have performed solidly overall in the quarter.
• 'With regard to the divisions, the Wolfsburg-based company should have achieved stable margins with the mass production brands," he said.

Tim Rokossa, Deutsche Bank

• Maintained buy rating and raised price target to 190 euros from 180.
• "If the automaker's annual forecasts were recently criticized for being too cautious, this time the opposite is the case. With a view to the volumes sold, VW is the most optimistic in the entire sector," he said.

Insights

Moody's affirmed ratings on Volkswagen Group

• On July 21, 2023, Moody's affirmed its ratings on Volkswagen group, including its long-term issuer rating of A3 and its short-term Prime-2 (P-2) commercial paper rating.
• Moody's said the outlook remains stable.
• "The rating affirmation balances the company's strengths as one of the world's two largest automotive manufacturers and its moderate leverage, with the overall challenges in the automotive industry, especially its high cyclicality and the transformational trends towards electrification and autonomous driving technologies," Moody's Vice President and Senior Credit Officer and Lead Analyst for Volkswagen, Matthias Heck said. "The stable outlook reflects the continued recovery of global light vehicle sales, and the expectation that Volkswagen will be able to maintain leverage and margins commensurate with the A3 in 2023 and 2024," he added. "We expect that the relatively low profitability of the brand group "Core" will improve to a more competitive level, supporting a more balanced profit generation within the group", Heck noted.

IFO Survey

• According to IFO survey, the future expectations of Volkswagen, Mercedes-Benz and BMW declined for the fifth month to -56.9 points in June from -10.3 in May-not far from the 2008 lows of -67.8 points.
• The deterioration in the future view is due to competition from Tesla and Chinese competitors, rising interest rates and subdued economic growth in Europe.
• However, the carmakers’ appraisal of their current situation improved to 37.5 points in June from 28.4 in May.
• The indicator for price increases rose to 38.7 points from 25.6 points in May. “These price increases will mainly affect the premium segment and electric vehicles,” Director of the ifo Center for Industrial Organization and New Technologies, Oliver Falck noted.
• Automotive suppliers rated their current business situation as poorer. The indicator dropped to 32.6 points, down from 41.3 points in May. “Suppliers are suffering from a lack of demand from abroad,” Falck said. Confidence regarding the months ahead is also in short supply. Business expectations slipped to -32.1 points, down from -20.3 points in May," Falk added.

Competitor expectations and results

Tesla

Tesla reported gross margin of 18.2%, lower than analysts expectations of 18.8% while its operating margins declined 5% year-over-year to 9.6%, partly driven by discounts and incentives. "Our operating margin remained healthy at approximately 10%, even with price reductions in Q1 and early Q2. This reflects our ongoing cost reduction efforts, the continued production ramp success in Berlin and Texas and the strong performance of our Energy and Services & Other businesses," Tesla said in the press release.

Its automotive gross margin ex credits was 18.1% in-line with Street's estimate. But when asked whether this metric will improve in the near future after price cuts and factory improvements, CEO Elon Musk responded, “The short-term variances in gross margin and profitability really are minor relative to the long-term picture. Autonomy will make all of these numbers look silly.”

Elon Musk said that they had to reduce prices because demand was tracking production due to high interest rates. He noted that the economy is uncertain. " So, I mean, one day, it seems like the world economy is falling apart and the next day, everything is fine. I don’t know what’s going on. It’d be totally fine. I wish I did," he said. He added that they will be willing to reduce prices further if the market condition will not be stable, "In fact, if you look at the rise in credit card debt, they are, in fact, not breaking even every month. Credit card debt is looking scary. So, we just don’t control the market conditions. If market condition is stable, I think prices will be stable. If they’re not stable, then we would have lower prices," Musk said.

Its VP of Supply Chain, Karn Budhiraj said that they have seen price reduction in some of the raw materials that they use in production. "But we have seen reduction in pricing across the board for all commodities that specifically go into batteries such as nickel, cobalt and graphite. And the reductions in pricing translate into thousands of dollars when you look at it from a per-vehicle impact," he said.

Elon Musk said that they are willing to sacrifice margins in favor of volume since the cars that they sell will be worth almost 5 times in future what is today- since they have full autonomy capability. " I think it -- it does make sense to sacrifice margins in favor of making more vehicles because we think in the not too distant future, they will have a dramatic valuation increase. I think the Tesla fleet value increase at the point which we can upload full self-driving and is approved by regulators will be the single biggest step change in asset value maybe in history." he said.

Summary of results

Key Items	Q2 2023	Analysts expectations	Y/Y Growth
Revenue	$24.93 billion	$24.47 billion
Adjusted Net Income	$3.1 billion	$2.87 billion
EPS	91 cents	82 cents
Automotive Revenue	$21.27 billion		46%
Gross Margins	18.2%	18.8%
Automotive Gross Margin	18.1%	18.0%

Insights for Volkswagen

• Reduced gross margin for Tesla cars will hurt demand for Volkwagen's EVs.
• Volkswagen will benefit from reduced prices for raw materials.
• Industry outlook(demand) seems uncertain.