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VW Battens Down Hatches After Record 2008

Losses Expected For First Quarter, Maybe Second Quarter Too.

Volkswagen managed to stave off the effects of the credit crunch longer than most, but is resigned to a testing time in 2009.

It was the best of times for VW in 2008, with operating profit of €6.3 billion. Sales revenue rose 4.5 per cent to €113.8 billion. Actual sales rose 1.3 per cent to 6.3 million vehicles.

“A difficult 2009 lies ahead of us – one of the most difficult years in our company’s history,” CEO Martin Winterkorn said in a speech in Wolfsburg ahead of the annual news conference.

Investors agree, but mainly see a strong recovery.

“The results are set to continue to significantly deteriorate in 2009 as Volkswagen needs to adjust inventory on top of the falling demand. The group has clearly warned about an operating loss in Q1. We calculate possibly a €1 billion (loss) on a 30 per cent production cut,” said Nomura International analyst Jeremie Papin.

“A loss in Q2 can’t be ruled out either given the continued need to bring inventories to normalised levels,” Papin said.

Commerzbank reckons VW has excess stocks of about 200,000 vehicles now, and it will take until the end of the second quarter to return to normal.

Morgan Stanley’s Adam Jonas questions the strength of VW’s performance last year, which the company described as the best in its history.

Best ever
“2008 was VW’s strongest operating year ever. However the automotive division burned negative €108 million of cash in 2008 when excluding the €2.6 billion spent mainly on buying up more (truck maker) Scania shares. VW’s negative free cash flow compares to a prior year where the company generated €8 billion of positive cash. If VW burns cash in its best year ever, what can investors expect for 2009 – one of its most challenging years,” said Jonas.

No such inhibitions for Nomura’s Papin.

Sharp contrast to most competitors
“We believe that for now the group looks far better positioned both in its volume and luxury European competitors. On our forecasts, €8 billion of net cash could be preserved at VW and operating profit would remain positive in 2009. This would be in very sharp contrast to most of its competitors,” Papin said.

“We believe VW is set to continue further market share gains across most markets. The group is clearly taking advantage from its stronger balance sheet and financing access to push its products. The VW group and Audi brand in particular are coping much better than BMW and Daimler in the downturn without carrying similar financial services risks in the near term, not structural mix challenges in the longer term,” he said.

Neil Winton – March 13, 2009

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