VW Profits Slip A Bit And Remind Investors Of Big Challenges.
“dis-economies of scale are glaring”
After the excitement of regime change, Volkswagen’s first quarter profits came in slightly under expectations, and pointed to the need for the company to improve to match the likes of BMW and Mercedes.
Group earnings before interest and taxes slipped 3.6 per cent to €4.21 billion, buffeted by accounting changes, currency headwinds and technology costs. VW retained its 2018 financial guidance which predicted a return on sales of between 6.5 and 7.5 per cent, compared with 7.4 per cent last year.
Earlier this month Herbert Diess replaced Matthias Mueller as Volkswagen Group CEO. Changes in the company’s structure were also announced and welcomed by investors and analysts as a credible start to the long awaited move to improve corporate governance, investor accountability and profitability.
Investment researcher Jefferies said after accounting changes underlying profit improved by about 10 per cent. Its forecast for VW’s 2018 EBIT (earnings before interest and taxes) was €18.4 billion with a margin of 7.6 per cent, slightly better than the company’s prediction.
Bernstein Research said VW was still on track to fulfil its 2018 profit growth targets.
Reuters’ Breaking Views columnist Liam Proud pointed out that this rate of profitability was well below the average 9.5 per cent operating margin for Daimler and BMW last year, and pointed to the big task ahead for the new group CEO Diess.
“Dig deeper, and VW’s dis-economies of scale are glaring. It generated a fifth less revenue per employee than the average of BMW, Daimler, Renault, PSA Group and Fiat Chrysler according to Breaking Views’ calculations. And its spending on materials like steel and aluminium soaked up 77 per cent of revenue from auto sales, while Diess’ former employer BMW managed a ratio of just 52 percent,” Proud said.
“That’s partly down to a messy historic structure with many sprawling brands, like Audi, Skoda, Seat and Porsche, overspending on raw materials. Diess’ recent streamlining of VW into three main divisions, around vehicle type rather than brand, should reduce double-spending and give the group greater pricing power with suppliers,” Proud said
Proud said the potential for profit gains could be huge, enough to bring VW’s margin close to 10 per cent.