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Volkswagen Raises Deliveries For Customers and Increases Sales Revenue In First Half-Year

WOLFSBURG, Germany - In the first six months of 2004, the Volkswagen Group sold more vehicles to customers than in the same period in 2003. At the same time the Group significantly increased sales revenue, achieving a positive net cash flow in its Automotive Division. ForMotion, the Group’s performance enhancement program, has produced visible effects after just a few months in operation, and is partly cushioning the negative impact on earnings. Unfavourable market conditions, movements in exchange rates, as well as start-up costs for new models, are having a negative effect on earnings. Additional factors are special items such as adjustments for upfront expenditures. In view of these unfavourable conditions the 2004 operating profit will be lower than our original target.

In the first half of 2004 the Group succeeded in increasing deliveries to customers by 1.7 percent, or 2.516 (2.473) million vehicles, against the same period last year. Group sales revenue increased to € 45.94 (42.83) billion, up 7.3 percent. Operating profits before special items amounted to € 979 (1,220) million. Dr Bernd Pischetsrieder, Chairman of Volkswagen’s Board of Management, presenting the half-year figures, said:” Our performance enhancement concept ForMotion has clearly taken effect, contributing over € 400 million, and largely offsetting negative influences on business development in the Group.”

This program involves adjusting product-related upfront expenditures, as well as initiating structural and process changes, giving rise to special items amounting to € 128 million. The operating profit for the first six months was thus € 851 (1,220) million after special items. Profit before tax fell to € 639 (1,010) million, and profit after tax to € 383 (596) million.

Negative factors for the period under review mentioned by Chairman Pischetsrieder primarily included a still difficult situation in the USA, recent developments in China, unfavourable exchange rates and higher expenditure on parallel-running new model start-ups. The US market in particular impacted heavily on earnings because of its disadvantageous combination of the strong Euro and pressure on prices. Against that, operating profit in Europe increased significantly.

Positive Net Cash Flow

The Group’s Automotive Division succeeded in significantly increasing cash flow from operating activities by 31.0 percent to € 3.77 (2.87) billion. Investment based on operating activities was reduced by 11.2 percent to € 3.50 (3.94) billion. Of that total, € 2.44 (2.88) billion was invested in tangible fixed assets,  down 15.3 percent on prior year and representing 6.0 (7.6) percent of total sales revenue. The ongoing model initiative remains unaffected, and will be continued. There was a positive net cash flow of € 270 million in the Automotive Division.

ForMotion Kicks In

After a few months, ForMotion, the Group’s performance enhancement program, has already shown clear results. Some 75 percent of targeted improvement potential has now been identified, and almost half of the improvement measures have been decided. During the first six months of 2004, these steps contributed more than € 400 million to operating profit.

In the seven subject areas into which ForMotion is divided -product cost, one-off expenditure, overheads/process optimization, performance enhancement in the sales sector, commercial vehicles, financial services, and sales operations of foreign subsidiaries -some 6,000 individual projects and measures have been initiated, to be implemented by project teams in charge. Chairman Pischetsrieder cited a few examples that would have sustained effects:

- Engine range:Focussing on the most common vehicle/engine combinations and consolidation in the development of new engines will release potential of some € 60 million per year.

- IT infrastructure: Consolidation of the Group’s 35 computer centres  to seven will generate savings of about € 50 million per year.

- Brand group synergies:Full capacity utilization in the Group for the construction of testing vehicles, production planning and tooling will produce an extra € 20 million per year.

Pischetsrieder continued: “ForMotion, however, also requires upfront expenditures to implement individual projects, such as product-related and structural measures. These are special items to be charged against operating profit. But they are indispensable investments to secure our future and they will be rapidly amortized.”

Outlook

The Volkswagen Group is  adjusting its forecast full-year earnings to current market developments.  It is expected that the automobile business will not recover substantially in the second half of the current year, mainly as a result of still weak demand in key markets, the unfavourable exchange rate situation and current high oil prices. Volkswagen also expects that there will be ongoing competitive pressures in major car markets, such as the USA, Europe and China. In view of these unfavourable conditions, the operating profit before special items may drop to € 1.9 billion instead of the originally targeted € 2.5 billion. Special items are expected to amount to some € 400 million. The contribution to earnings made by the ForMotion program in the first half will be boosted to well above € 1 billion over the full year.

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