Volkswagen:Quarterly Results/2024 Q1

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Earnings Call Summary

Video: Volkswagen Analyst and Media Call | Transcript: Volkswagen Analyst and Media Call

Here is the summary of Volkswagen's analyst and media conference call;

Outlook

• Volkswagen expects performance in the coming quarters to be supported by new and upcoming models such as the ID.7, Macan Electric and the Q6 e-tron.
• They said they are now in the process of ramping up the supply situation at Audi and performance should improve already in Q2.
• Efficiency programs initiated at the brand core in 2023 will will unfold its full impact in 2024.
• 2024 will be the big year for R&D spend as already seen in Q1 (factored in 2024 outlook).
• Volkswagen expects model and brand mix to improve in the coming months.
• They expect pricing to continue to be slightly supportive, "benefiting from rollover effect from last year's price increases but burdened by higher temporary sales promotions for our electric vehicles."
• Expect product costs to provide tailwind for the rest of the year (material cost to contribute 1 billion euros tailwind going forward).
• They said they review the global BEV sales expectations continuously and are prepared to adjust capacity and capex planning in Powerco accordingly, if necessary.
• Volkswagen expect an improvement in margin and financial performance already in Q2 and stronger earnings trajectory in the rest of the year.
• They will book a severance expense of 900 million euros in Q2 which will be compensated in the full year. They will make provision in Q2 and cash out will be in Q3.
• Their target for net cash flow in 2024 is 4.5 to 6.5 billion euros. About 6 billion cash out flow will go to the ramp up of the battery business, 4 billion out of that is R&D and Capex and 2 billion is for additional M&A (more control of the value chains eg raw materials such as cobalt, nickel and lithium.
• In Q2, they expect margin to be inline with their full-year guidance, but the €900 million severance cost might lead to a burden in that respect. However, they expect to compensate in the remainder of the year.
• They expect significant improvement in Audi margin in Q3 going forward.
• Wages were not increased in Q1 2023, hence Q2 2024 going forward will benefit from increases in the other quarters last year (n strong comps as a result of that).
• They expect order intake to increase throughout the year since some important models such as those of the Tiguan Brand were not available for order in Q1. They also expect BEV share to increase though they are margin dilutive.
• Powerco losses will increase with the ramp-up (that's clear until 2025).
• They expect CARIAD sales revenue to improve with the ramp-up of new models such as E Macan, ID.Tourer, Q6 e-tron.
• Their long-term target for automotive net liquidity is more than 10% of sales.
• They expect BEV order intake to remain strong until summer when new models will kick in.

Q1 2024 Results

• Q1 operating result benefitted from a one-effect swing in fair value effects outside hedge accounting, amounting to about 900 million euros.
• Product costs were slightly headwind y/y, mainly due to one-offs.
• Recorded a significant overhead cost in Q1 (against their overhead cost discipline) due to wage increases in 2023 and weaker sales revenue growth.
• R&D expenses increased by around 1 billion euros in Q1 .
• Brand Group Progressive operating profit was also burdened by valuation effects of about 0.3 billion euros, resulting from order residual value model. Adjusted for valuation effects, operating margin would have been 6%, still below their 8% to 10% 2024 target. The difference between the 6% and the 8% to 10% is the impact of supply chain issues.
• Contract volume at the Volkswagen Mobility Group was stable. A slightly lower number of financing contracts were compensated by an increase in leasing and insurance contracts.
• Operating profit at the Volkswagen Financial services was down 6% to 881 million euros due to normalization of used vehicles prices and provisioning of residual value risk as well as increased interest rates.
• The proportionate operating result from China joint ventures fell by 31% y/y to 0.4 billion euros driven by the margin dilutive effects of the rise in BEV share in a competitive market.

Delivery numbers

• From Q2 2024 they will no longer report monthly deliveries. They will shift to reporting quarterly deliveries since comparisons of monthly figures are often distorted due to, for, example the number of days.
• Arno said deliveries in Q1 were held back by supply chain issues affecting Audi vehicles with V6 and V8 engines.
• In Q1, Volkswagen Group received 730,000 orders in Western Europe, with BEV orders more than double compared to the same period in 2023. As a result, new orders improved to 1.1 million in Western Europe at the end of March, including 160,000 BEVs.
• BEV deliveries were down by 24% and 16% in Europe and U.S, respectively while volumes in China almost doubled.
• Volkswagen confirmed their BEV share target of 9% to 11%.
• Deliveries by China joint ventures were up 8% to 694,000 in Q1, driven by growth in BEVs (which pushed BEVs share to 6% from 3% in Q1 2023).

Products

• CFO Arno said the 8th generation of the Golf was just launched this quarter and the full lineup from entry level to GTI will hit the markets this year.
• The new Tiguan is currently in the rollout with new variants to be added over the course of 2024. Same case to the new Passat, an important model for their fleet customers.
• Golf, Tiguan and Passat new models will come with a PHEV option, offering up to 120km fully electric range.
• Arno said they see an encouraging order intake for the three models.
• SKODA recently revealed its Epiq, its first entry-level BEV that will be delivered to customers from 2026 starting at 25,000 euros.
• Q1 marked launch of the first Porsche and Audi models based on the PPE platform.
• When it comes to order intake, they still have more chance with Q6 e-tron and the ID.7 Tourer, which are not in the market yet.
• They still plan until 2023 to have a BEV share of 50%. But the development speed will not be linear, China will develop very fast but Europe and U.S will not develop as fast as expected. In short, BEV penetration will not develop as fast as they expected.

China

• They have a strong ICE business with strong margins and cash flow delivery in China.
• The BEV market is very challenging when it comes to pricing, hence they will always make sound compromise between price and volume in order to achieve a balanced approach.
• In the coming quarters, ICE business will jump over 20% market share.

Residual values

• They have seen normalization in residual values, with more pressure on the BEV side.
• But the residual values in general are still strong.

Free float

• Arno only said they are open for free float at the right time.

CO2 emissions compliance in 2025

• They expect to be 100% compliant in 2024.
• Arno said the compliance in 2025 will be challenging due to new targets but they strive to do so due to the new models such as the E Macan and Q6 e-tron.
• Pricing conditions for BEVs could affect their compliance since they will follow the strategy of value over volume.

Management Guidance and Analysts Estimate

Management Guidance

Key Items	Q1 2024	2024	Y/Y
Revenue	Volkswagen expect Q1 to be weaker compared to the overall year due to current Audi headwinds and product launches that are expected to ramp up as we approach the second half of the year.	EUR 338.4 billion	5%
Deliveries		9,516,685	3%
Operating return on sales		7.0%-7.5%

Analysts' Estimate

Key Items	Q1 2024	Y/Y	Q2 2024	Y/Y	2024	Y/Y
Revenue	EUR 74.98 billion	-1.6%	EUR 82.67	3.26%	EUR 326.9 billion	1.45%
Operating return on sales	6.62%		7.76%		7.0%

Earnings Revisions

Key Items	Q1 2024 revisions in the last 3 months		FY 2024 revisions in the last 3 months
	Up revisions	Down revisions	Up revisions	Down revisions
Revenue	2	0	15	0

Analysts' Opinions

Positive comments on China Capital Markets Day

• Neutral, €150: China capital markets day raised as many questions than it answered, Bernstein Research said in a note (April 29, 2024).
• Analyst George Galliers of Goldman Sachs said Volkswagen continues to see China as an attractive and growing market (April 25, 2024).
• Buy, €135: Analyst Henning Cosman said Volkswagen delivered a solid China Capital Markets Day (April 25, 2024).
• Neutral, €128: Analyst Jose Asumendi of JP Morgan said Volkswagen provided 'excellent" details during its China Capital Markets Day. Details on all divisions such as powertrain mix, competitive landscape and financial targets were clearly explained (April 24,2024).

Q1 is likely to be weaker

• Neutral, €146->€140: Analyst George Galliers of Goldman Sachs expects Volkswagen's Q1 to be weaker due to model changes (April 22, 2024).
• Buy, €150: Analyst Philippe Houchois of Jefferies said a strong price development since the start of the year and a mediocre business in Q1 made him cautious about its Q1 results (April 22, 2024).

Positive mood on Q1

• Outperform, €143-> €140: Analyst Tom Narayan of RBC said the mood on Q1 results is positive. He notes that prices have held up while pent up demand after Corona pandemic is still there (April 17, 2024).

Subsidiaries Management Guidance and Analysts' Estimate

Porsche

Management Guidance

Key Items	2024	Y/Y
Revenue	EUR 41 billion at the midpont (EUR 40-42 billion)	1.2%
Operating return on sales	16% at the midpoint (15%-17%)	-11.1%

Analysts' Estimate

Key Items	Q1 2024	Y/Y	2024	Y/Y
Revenue	EUR 8.77 billion	-13.2%	EUR 40.6 billion	0.24%
Operating profit	EUR 1.28

Competitor Results and Expectations

Renault

• Renault's Q1 2024 revenue rose by 1.8% y/y to 11.7 billion euros, exceeding analysts estimate of 11.4 billion euros.
• Automotive revenue fell by 0.7% y/y to 10.47 billion euros impacted by unfavorable exchange rates in markets like Turkey and Argentina and higher destocking by independent dealers.
• Renault's financial unit revenue grew by 27.9% y/y to 1.25 billion euros, aided by rising interest rates and a rise in average-performing assets.
• Renault confirmed its operating margin outlook of 7.5% for 2024.
• “Q1 revenue continues to illustrate the strict application of our commercial policy focused on value,” said Thierry Piéton, CFO of the Renault Group. “The strong orderbook at the end of March and our upcoming launches will provide sequential acceleration in the activity. Coupled with an increase in cost reduction, they will drive our financial performance,” he added.
• Renault said pricing effect contributed a 4.1 points increase in revenue while devaluation of currency led to a -4.3 points decrease in revenue.

General Motors

• GM's Q1 2024 revenue was up 7.6% y/y to $43.01 billion, higher than $41.92 billion estimate, driven by higher wholesale volumes in North America.
• GM said they saw steady pricing trends during the quarter. Pricing trends were below the 2%-2.5% headwind built into the full-year guidance and pricing has remained relatively consistent so far in April.