After a two-week leadership dispute, less drama is expected at tomorrow’s meeting of Volkswagen’s shareholders. There is still plenty for shareholders to think about, though, as the car maker reveals weaknesses alongside record figures.
The public contest started when supervisory board chairman Ferdinand Piëch withdrew his support from chief executive Martin Winterkorn.
It was resolved last week when Mr. Piëch resigned from the supervisory board together with his wife Ursula; but conflict continues as Mr. Piëch has contested the appointment of two new appointees to the non-executive board, preferring his own candidates.
These topics will likely see plenty of discussion at tomorrow’s meeting, perhaps because the car company’s figures present less cause for concern.
Nonetheless, alongside record sales and profit, VW still has some serious weaknesses from low margins to slow sales in the United States.
Last year, for the first time, VW delivered more than 10 million vehicles and reported more than €200 billion, or $224 billion, in sales. Operating profit rose by 9 percent to reach a new record high of €12.7 billion, while net profit increased by 20 percent to €11 billion. The company’s dividend is also expected to rise by a fifth to €4.80 per share of common stock and €4.86 for preferred shares.
The Group’s consolidated financial statement also reveals problems.
One is segment reporting and the large yield gap between VW’s segments. The two premium brands, Audi and Porsche, accounted for 62 percent of the total operating profit but less than a third of consolidated sales. Audi’s operating returns on sales are 9.6 percent; Porsche’s are 15.8 percent, making these two areas the strongest contributors to income at Volkswagen.
But the two premium subsidiaries saw only moderate improvements in operating revenue. For managers at Audi, 2014 was a transitional year, because the brand will only introduce major model changes and innovations this year, when it unveils the new version of its top-selling sedan, the A4, at the Frankfurt International Motor Show in the fall.
Porsche is further ahead. A new, smaller SUV helped boost its revenue by 20 percent to €17.2 billion. In contrast, operating profit grew by only 5.4 percent, to €2.7 billion. Profit lagged behind revenue mainly because of higher development costs for new technologies, measures to reduce carbon emissions and higher fixed costs.
The group's largest brand by far, Volkswagen Automobiles, lags far behind the premium brands. Its operating return on sales declined once again in 2014, from 2.9 to 2.5 percent, low compared to the company's stated target of 6 percent by 2018. Even the up-and-coming mass-market brand, Skoda, is operating more profitably, with a 7-percent return on sales. The €5 billion efficiency program Mr. Winterkorn launched last year for the VW brands seems urgently necessary.
The situation for the MAN is also problematic. Its sales fell by 10 percent, but the truck subsidiary improved its operating profit from €319 million to €389 million, and its margins were below 3 percent.
All told, in terms of sales, VW still lags far behind its competitors Daimler and BMW, as well as Toyota, when it comes to return on sales. Although VW has outpaced Toyota in terms of sales, the Japanese carmaker is still a full three percentage points ahead when it comes to operating margins.
Relative to sales, the VW Group operates with both higher administrative and higher sales costs than Daimler and BMW.
Its personnel cost ratio of the price of labor to sales, is 16.7 percent, 1.5 percent higher than at Daimler and more than 4 percentage points higher than at BMW.
With €16 billion for fixed assets and capitalized development costs, VW also has a higher investment ratio. Nevertheless, VW has experienced less organic growth recently than its competitors in Germany. All of this shows it has some catching up to do on the efficiency front.
This also applies to the dividend. It has grown substantially but still seems modest compared to the size of the company and its profits. With a total dividend of €1.96 billion in 2014 and €2.2 billion this year, VW ranks only fourth in the auto industry. The board has announced an increase in the distribution ratio from 21 percent today to 30 percent in the medium term.
VW’s growth is costing liquidity and in terms of free cash flow, it can’t actually afford a dividend. Like almost all automobile companies, its free cash flow is negative. That isn’t due to the operating business and high real investments, but to strong growth in the financial business. In 2014, Volkswagen Financial Services expanded its inventory of financing, leasing and insurance contracts by 15.6 percent and total assets by almost a fifth, to €137 billion. It increased the operating result by 5 percent, to €1.7 billion, and it also benefited from the fact that more and more consumers in the most important market, China, are financing or leasing cars.
In contrast, the auto segment alone reported a clearly positive and significantly higher free cash flow of about €6 billion. The group is reinvesting liquidity from auto manufacturing straight into receivables from the financing business and leased vehicles.
Mr. Piëch sees the appointment as an affront, because, as he claims, the proposal came from Wolfgang Porsche and he was not consulted.
VW’s finances were also strained by its acquisition strategy of recent years, which has called for a total of €19 billion in spending since 2010, including €6 billion most recently for the complete takeover of truck maker Scania. To manage, the group had to collect about €14 billion in capital increases in the last five years – twice as much as it paid out in dividends.
The VW Group's tremendous expansion is also reflected in the balance sheet, with the banking business accounting for more than a third of the balance sheet total. Close to €60 billion apply to goodwill, trademark rights and capitalized R&D expenditures, a third more than VW recognizes in fixed assets.
On the liabilities side, the group is endowed with an equity ratio of 26 percent, solid by industry standards. This is offset by a similarly high net debt. There is also the record sum of close to €30 billion in uncovered pension liabilities.
In short, the VW Group is a complex giant, both industrially and financially, and it doesn't really have the time for power struggles at the top.
Those struggles, however, do not yet seem to be over.
Although Mr. Piëch and his wife Ursula have resigned from the supervisory board, the rift continues between the Piëch family and the Porsches, this time over the board’s two new members.
Both Julia Kuhn-Piëch and Louise Kiesling are Mr. Piëch’s nieces but he has filed a complaint against the appointments, arguing that he was not consulted.
Julia Kuhn-Piëch, 34, is the daughter of Ferdinand's brother Hans Michel Piëch, who had positioned himself against Mr. Winterkorn at the beginning of the leadership conflict. He had criticized Mr. Winterkorn for failing to come to grips with problems in the U.S. market, and he also noted that the VW brand wasn't earning enough and that there had been too little discussion for years about entering the low-cost segment. Ms. Kuhn-Piëch, an independent real estate manager with a law degree, has had a small amount of experience within the group, after having been a member of the supervisory board of truck subsidiary MAN since 2014. Apparently her uncle, Ferdinand Piëch, had recommended her for the job at the time.
Louise Kiesling, 57, is the daughter of Ferdinand Piëch's sister, Louise Daxer-Piëch, who died nine years ago. Ms. Kiesling holds degrees in fashion design from the Vienna University of Applied Arts and in automobile design from London's Royal College of Art. She has worked in Germany, Austria and Great Britain. She is a shareholder and managing director of several companies today.
Mr. Piëch’s preferred candidates were former Siemens board member Brigitte Ederer and former BMW executive Wolfgang Reitzle. He can no longer block the appointment of his two nieces but apparently, Mr. Piëch has filed a protest against the move and has hinted that he might sell his shares in the company.
Mr. Piëch sees the appointment as an affront, because, as he claims, the proposal came from Wolfgang Porsche and he was not consulted. The Porsche camp denies the accusation, saying that Mr. Piëch was informed and did not object to the appointments.
It is unclear how far Mr. Piëch’s protest will be effective. He could only file a complaint in court if he had submitted his own petitions for new appointments, according to Matthias Terlau, a legal expert specializing in stock companies from the law firm Osborne Clarke.
Further obstacles stand in the way of Mr. Piëch’s preferred candidates.
The former Siemens board member Brigitte Ederer is a member of several supervisory boards today including Infineon and Boehringer Ingelheim.
Wolfgang Reitzle, a former BMW executive and supervisory board chairman at supplier Continental, is also constrained: Continental chief executive Elmar Degenhart said: "We’re not going to give up Mr. Reitzle anyway."
The atmosphere is tense between the Piëch and Porsche families. Mr. Piëch holds his shares in VW through Porsche SE and is a member of the company's supervisory board, as is his cousin Wolfgang Porsche – who reportedly wanted to "kill" him. Mr. Piëch is apparently no longer willing to sit at the same table as Mr. Porsche.
It is not the first time that the families have clashed. The two clans, Porsches and Piëchs, extend to some 60 members. During the 1970s, Ferdinand Piëch clashed with the Porsches over who had the say at the carmaker. In 2009, Mr. Piëch fought with Wolfgang Porsche over the attempt to take over VW. Mr. Piëch won, taking over Porsche into the VW group. For the Porsches, that still hurts.
If Mr. Piëch again suggests that he might sell his shares in the company, this would put the VW share price under pressure. The Porsche family has a right of preemption, but it would have to come up with billions to acquire Mr. Piëch's shares.
For now, Berthold Huber, formerly chief of the metalworkers' union IG Metall, has assumed the chairmanship of the supervisory board. Though initially an interim solution, if Tuesday’s shareholder meeting goes well, Mr. Huber may stay on a little longer.
VW’s problems, after all, remain; after the strife of recent weeks, it seems there’s a broader preference to resolve these as smoothly as possible.
Handelsblatt's Siegfried Hofmann and Christian Schnell cover companies and markets, Martin Murphy and Markus Fasse both specialize in reporting on the automotive industry. Dietmar Lamparter contributed reporting to this article. To contact the authors: [email protected], [email protected], [email protected], [email protected]