Volkswagen: Quarterly Results/2023 Q4

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Results

• Volkswagen’s Q4 2023 revenue rose by 14.5% y/y to 87.2 billion euros, above analysts' estimate of 81.8 billion euros (+7.2%) and management's upper guidance of 85.9 billion euros (+10%) while its operating margin was 7.3% above analysts’ estimate of 7.05%.
• Volkswagen is guiding 2024 revenue to grow by 5% y/y to 338.4 billion euros, above analysts’ estimate of 317.1 billion euros (-1.6% y/y) and operating margin to range between 7% and 7.5% (analysts’ estimate: 6.9%, 2023:7.0%).
• The company is also guiding 2024 automotive net cashflow of between EUR 4.5 and EUR 6.5 billion, the midpoint representing a decline of 48.6% y/y due to investments for the future and mergers and acquisitions for its battery business (2023: EUR 10.7 billion).

  "We are confident about 2024, despite the muted economic outlook and intense competition. On that basis, we will consistently drive the transformation of the Volkswagen Group forward. We expect a tailwind from a large number of new product launches, a positive trend in product costs and continued cost discipline. Our flexibility is our strength: we are continuing to invest in the electrification and digitalization of our product range, while simultaneously keeping our combustion vehicles competitive during the transition phase,” Arno Antlitz, CFO & COO of Volkswagen Group said.

  • Volkswagen Group said it expects its order book in Western Europe to pick up speed in the coming months compared to the previous year due to a number of new product launches.
  • The company said it has successfully launched its all-electric premium platform (PPE).
  • It added that the operating margin of its Brand Group Core improved to 5.3% from 3.6% in 2022, representing an addition of more than 3 billion euros in operating profit before special items, mainly due to the strong increase in sales (+21% y/y).
  • The operating margin of its Brand Group Progressive (Audi, Lamborghini, Bentley, Ducati) fell to 9% from 12.3% due to valuation effects associated with commodity hedging of -1.4 billion euros. Adjusted operating margin rose to 11% from 10.6%.
  • Financial services operating profit was 3.8 billion euros, a third of the previous year’s level due to the normalisation of used car prices.

Earnings Call Summary

Video: Volkswagen Analyst and Investor Conference 2024 (englisch) | Volkswagen Group Annual Media Conference 2024 (englisch) | Volkswagen Group Annual Media Conference 2024 (german + Q&A)

Here is a summary of Volkswagen's Q4 2023 analysts earnings call transcript;

2024 Outlook

• They expect global vehicle sales to slightly increase in 2024. Their positive order backlog from 2023 is gone. They are now at normal levels.
• Aim to gain market share in North America and sustain their position in Europe.
• They expect to lose market share in China in line with their value-over-volume strategy.
• They expect the price/mix to benefit from a number of product launches.
• They expect lower material prices and product costs in 2024.
• They see first psoitive effects from the execution of their performance programs in 2024.
• However, they expect significant ramp-up costs for new models, continued upfront investments in their battery business and China Joint Ventures and rising BEV share, which dilutes their profitability.
• They expect sales revenue to grow by 5% y/y.
• They forecast operating margin before special items of between 7% and 7.5%.
• They forecast automotive net liquidity of between 39 and 41 billion euros in 2024.
• CFO Antlitz said they are currently experiencing temporary headwinds, in particular , from supply constraint at selected Audi Models ( six and eight cylinder models) and a significant amount of new product launches across all brand groups over the coming two years. But they expect to catch up in the course of the year, specifically in the second half.
• 2024 will mark a record year in product launches. They plan to launch not less than 30 new models across the brands. Half of these new models will be combustion hybrid versions and the other one, electric (Q&A).
• 2024 will be ambitious in terms of volume since they will be phasing out old models and introducing new models. However, from 2025 they see greater opportunities with volume (Q&A).
• The new models will come with more content eg Macan will have 8% more content; hence they will be able to lift prices.
• Deliveries outlook is not a relevant factor for them.
• They expect a weaker Q1 due to mdel launches and supply constraint at Audi.
• Antlitz said when they say revenue growth of up to 5% it would be best to take the midpoint of that, which would imply a cautious outlook. 'It's much better ti rather plan with a cautioned top line and not overpace it," he said.
• Antlitz said they reversed the headwind from hedging losses.

Markets

China

• Blume said they are stepping up the pace with local partners in China and catching up with the competition with their in-China for China strategy.
• China Joint Ventures delivered 3.2 million vehicles in 2023 (+2% y/y).
• They advanced their ICE market share in China in 2023.
• Their proportionate operating result held up well at 2.6 billion euros in 2023.
• They expect the BEV market to remain highly competitive in 2024 as they transition to new energy vehicles. This will affect their profitability in the short term, hence they expect the proportionate operating profit in the range of EUR 1.5 billion and EUR 2 billion in 2024.
• Their ICE business in China is facing some margin pressure but is healthy overall.
• From today to 2026, they will make sound compromises between margin and volume, hence they are prepared to give up BEV market share in the next 2 years but from 2027 they want to pick up market share significantly.

Europe

• In Europe, they are operating in a position of strength. They are particularly concentrating on their sustainable value creation i.e. they are adapting their production capacity to their core workforce.
• There are comments from analyst about the european EV market

North America

• They are focusing on greater localization and development and production as a basis for a stronger presence.

Products

• Oliver Blume said many of their vehicles were renewed in 2023 eg the ID.BUZZ, the Passat, the Porsche 911 Dakar, the Skoda Superb, the Bentley Bantayga, the Volkswagen ID.7 and the Lamborghini Ruvuelto etc.
• Blume said the strong growth of BEV deliveries in 2023 (+35%) and upcoming launches of some highly attractive, new BEV models make them confident that they will be able to grow their BEV share also in 2024 (2023:10%).
• Blume said the Audi Q6-etron and the new Porsche Macan (the first models based on the PPE platform) are ready for market launch.
• They are getting a very positive response to the product they are launching right now. The Macan has received an order intake of over 10,000 units in the first weeks.
• Blume said they are working on 25,000 entry EV models e.g. ID 2 (Q&A)

Operating performance in 2023

• Oliver Blume said volume was the main growth driver in 2023 but price and product mix also contributed as well.
• Passenger Cars Business recorded an operating profit of 9.5 billion euros. 7 billion was due to strong volume growth, 2 billion was due to pricing while mix was slightly positive.
• Overall contract volume for the Financial Services was stable while the credit loss ratio was largely unchanged versus 2022 despite a worsened macroeconomic environment.
• Financial Services operating income fell by a third to 3.8 billion euros, reflecting normalized used car prices and provisioning for residual value risk and higher interest rate levels.

Strategy

• They plan to leverage both partnerships and vertical integrations , depending on how useful it's to have each. For instance, they chose both vertical integrations and partenerships when it comes to developing and producing batteries (50% in-house and 50% with partners). Their decision is based on speed, quality and know-how. They are now focusing on single partners instead of many small partners (Q&A).
• Blume said they are capable of building trucks (Q&A).
• They are convinced the future will be electric and will continue to invest accordingly(Q&A). But in the mean time, they will keep their combustion engine cars competitive to be flexible, that's, invest in the last generation.
• They will still pursue to Scout project despite other players pulling back due to soft sales (Q&A). This is because the C-pickup segment and B-SUV segment in the U.S is turning electric and that's a big opportunity for them. They are the most promising segments in terms of profit pools.
• They do M&A planning for like 4 to 5 years ahead but in the magnitude of EUR 2 to 3 billion y/y.
• Current headwind in EV is likely only cyclical. They continue to remain convinced about EVs

2023 set goals

• CEO Oliver Blume said they implemented and delivered along the 2023 defined measures.
• He said that the 2023 results are the first testimony that their Top-10 programs are having an impact.
• Blume said the clean-up work (restructuring) has been completed.
• They budgeted for a 700 million euro headwind associated with early retirement (Q&A) in the Brand Group Core but that is already captured in the margin guidance (6-7% in 2024 and 8% in the medium term).

Investment Planning

• Blume said their investments are oriented towards the most attractive profit pools.

2025 CO2 Compliance in Europe (Q&A)

• They expect from EU politics a clear orientation.
• Regarding the CO2 2025 compliance, they have strong products offensive.
• They will leverage products to avoid the CO2 2025 payments.
• The ramp-up of electrification in Europe is factored into their long-term margin gudance.
• The many products that are coming in the second half of 2024 will give them a tailwind for 2025.

Tariffs (Q&A)

• They don't know what will happen in the U.S in terms of tariffs.

• Blume said they are in favor of a free world trade and they are concerned of rising protectionalism.

Xinjiang Plant Audit (Q&A)

• Blume said they haven't seen any evidence of the forced labor.
• They are considering further steps together with their partner, in terms of economic evaluation since they are concerned about continued media reports.
• Blume said the firm is very small, only has 200 people compared to VW's more than 680,000 people.

Competitor Results and Expectations

Tesla

• Tesla missed revenue and earnings estimates.
• In the earnings call, Elon Musk said, "Our observation is generally that the Chinese car companies are the most competitive car companies in the world. So I think they will have significant success outside of China depending on what kind of tariffs or trade barriers are established. Frankly, I think if there are not trade barriers established, they will pretty much demolish most other car companies in the world."
• Net income was impacted a number of factors including reduced vehicle average selling price (ASP) due to pricing and mix, increased in operating expenses and the cost of the Cybertuck production ramp.

Key Items	Q4 2023	Analysts estimate	Y/Y Growth
Revenue	$25.17 billion	$25.87 billion	3%
Adjusted EPS	$0.71	$0.73
Automotive revenue	$21.5 billion	$21.7 billion	1%
Automotive gross margin (excluding regulatory credits)	17.2%	16.7%
Adjusted net income	$2.49 billion	$2.61 billion	-39%