Results of Operations

Results of operations of the Group

Between January and December 2019, the Volkswagen Group generated sales revenue of €252.6 billion, exceeding the prior-year figure by 7.1%. Particularly mix improvements, higher sales volumes and the healthy business performance of the Financial Services Division had a positive impact; whereas the negative exchange rate trend had an offsetting effect. At 80.6 (81.4)%, most of the sales revenue was generated abroad.

Gross profit rose by €2.8 billion to €49.1 billion. The gross margin stood at 19.5 (19.7)%. Adjusted for special items recognized here in both periods (positive in the reporting period due to the reversal of provisions for technical measures in connection with the diesel issue), gross profit amounted to €48.8 (46.6) billion. Excluding special items, the gross margin was 19.3 (19.8)% in fiscal year 2019.

The Volkswagen Group’s operating profit before special items improved by €2.2 billion to €19.3 billion in the reporting period. The operating return on sales before special items amounted to 7.6 (7.3)%. The increase was mainly attributable to positive mix effects, higher volumes, the reversal of impairment losses following the remeasurement of development costs, product cost optimizations, and the fair value measurement of certain derivatives. A rise in fixed costs had a negative impact. Special items in connection with the diesel issue weighed on operating profit, reducing this item by €−2.3 (−3.2) billion. The Volkswagen Group’s operating profit increased to €17.0 (13.9) billion, while the operating return on sales rose to 6.7 (5.9)%.

The financial result was down by €0.3 billion to €1.4 billion. The interest expenses included in this item rose markedly, driven by the rise in the refinancing volume, the interest expense on provisions and application of the new IFRS 16. The share of the result of equity-accounted investments was at the same level as in 2018. Measurement effects on the reporting date, especially resulting from net income from securities and funds, were positive compared with the prior-year period. The previous year’s figure had also been negatively impacted by the remeasurement of put options and compensation rights in connection with the control and profit and loss transfer agreement with MAN SE.

The Volkswagen Group’s profit before tax improved by 17.3% to €18.4 billion in fiscal year 2019. The return on sales before tax rose to 7.3 (6.6)%. Income taxes resulted in an expense of €4.3 (3.5) billion, which in turn led to a tax rate of 23.6 (22.3)%. Profit after tax increased by €1.9 billion to €14.0 billion.

SHARE OF SALES REVENUE BY MARKET 2019
in percent

SHARE OF SALES REVENUE BY DIVISION/BUSINESS AREA 2019
in percent

Results of operations in the Automotive Division

The Automotive Division’s sales revenue amounted to €212.5 billion in the reporting period, 5.7% more than in the previous year. Primarily, improvements in the mix and higher vehicle sales offset negative exchange rate effects. As our Chinese joint ventures are accounted for using the equity method, the Group’s business performance in the Chinese passenger car market is reflected in consolidated sales revenue primarily by deliveries of vehicles and vehicle parts.

Cost of sales was up, driven primarily by higher volumes and a rise in depreciation and amortization charges due to the large capex volume, as well as by a year-on-year increase in research and development costs recognized in profit or loss. The reversal of provisions for items related to the diesel issue led here to positive special items in the fiscal year. The ratio of cost of sales to sales revenue rose somewhat compared with the prior-year period. Total research and development costs, expressed as a percentage of the Automotive Division’s sales revenue (research and development ratio or R&D ratio), stood at 6.7 (6.8)% in fiscal year 2019. In addition to new models, our activities focused above all on the electrification of our vehicle portfolio, a more efficient range of engines, digitalization and new technologies.

Distribution and administrative expenses were both higher in the reporting period. The ratio of distribution expenses to sales revenue was down on the prior-year period, while the ratio of administrative expenses was virtually unchanged year-on-year. The other operating result amounted to €−1.0 (−2.5) billion. The year-on-year improvement resulted from the reversal of impairment losses following the remeasurement of development costs, positive exchange rate effects and lower expenses arising from the fair value measurement of derivatives to which hedge accounting is not applied, as well as from a decline in special items related to the diesel issue.

At €13.7 billion, the Automotive Division’s operating profit was €2.6 billion higher than the prior year. The main contributing factors were improvements in the mix as well as higher vehicle sales, the reversal of impairment losses following the remeasurement of development costs, product cost optimization, the measurement of certain derivatives and a decline in negative special items. Higher depreciation and amortization charges and a rise in research and development costs had an offsetting effect. The operating return on sales increased to 6.5 (5.5)%. The negative special items included in operating profit totaled €−2.3 (−3.2) billion. Excluding the special items, the Automotive Division’s operating profit rose to €16.1 (14.3) billion. The operating return on sales before special items improved to 7.6 (7.1)%. Our operating profit largely benefits from the business performance of our Chinese joint ventures only through deliveries of vehicles and vehicle parts and of license income, as the joint ventures are accounted for using the equity method and therefore included in the financial result.

The Passenger Cars Business Area recorded sales revenue of €182.0 billion in the period from January to December 2019, 5.4% more than in the prior-year period. The growth was mainly attributable to positive mix effects and the higher sales volume. This was set against a negative exchange rate trend. The operating profit of the Passenger Cars Business Area totaled €12.2 billion, up €2.2 billion on the prior year. The rise in profit was primarily due to mix and volume improvements, the reversal of impairment losses following the remeasurement of development costs as well as positive effects stemming from product costs and the measurement of certain derivatives and a decline in negative special items to €−2.3 (−3.2) billion in connection with the diesel issue. Higher depreciation and amortization charges and a rise in research and development costs were among the main factors reducing profit. The operating return on sales increased to 6.7 (5.8) %.

At €26.4 billion, sales revenue in the Commercial Vehicles Business Area exceeded the prior-year figure by 6.7% in fiscal year 2019. The operating profit of the Commercial Vehicles Business Area improved by €0.5 billion to €1.7 billion; the operating return on sales stood at 6.3 (4.8)%. Positive effects arising from higher volumes, mix and price improvements more than offset cost increases.

The Power Engineering Business Area recorded sales revenue of €4.0 billion in fiscal year 2019, 10.8% more than in the prior year. The operating loss amounted to €−0.1 (−0.1) billion. Volumes improved while fixed costs rose. The operating return on sales amounted to −2.3 (−1.8)%.

Results of operations in the Financial Services Division

In fiscal year 2019, the Financial Services Division generated sales revenue of €40.2 billion; the 15.5% rise year-on-year was due mainly to the higher business volume.

The cost of sales expanded by 17.1% to €33.0 billion, growing slightly faster than sales revenue. Distribution expenses and the other operating result declined, while administrative expenses rose. Costs increased on the whole due to volume-related factors. Overall, the ratio of costs to sales revenue was down slightly.

Higher volumes and exchange rate effects boosted the Financial Services Division’s operating profit to €3.2 billion, a 15.0% increase on the previous year, again representing a considerable contribution to consolidated net profit. The operating return on sales was unchanged at 8.0 (8.0)%. The return on equity before tax rose to 10.8 (9.9)%.

Principles and goals of financial management

Financial management in the Volkswagen Group covers liquidity management, the management of currency, interest rate and commodity price risks, as well as credit and country risk management. It is performed centrally for all Group companies by Group Treasury, based on internal guidelines and risk parameters. Some functions of the Scania, MAN and Porsche Holding Salzburg subgroups are integrated into the financial management. Additionally, these subgroups have their own financial management structures.

The goal of financial management is to ensure that the Volkswagen Group remains solvent at all times and at the same time to generate an adequate return from the investment of surplus funds. We use cash pooling to optimize the use of existing liquidity between the significant companies. In this system, the balances, either positive or negative, accumulating in the cash pooling accounts are swept daily to a regional target account and thus pooled. The aim of currency, interest rate and commodity risk management is to hedge the prices on which investment, production and sales plans are based using derivative financial instruments and commodity forwards, and to mitigate interest rate risks incurred in financing transactions. In the management of credit and country risk, diversification is used to limit the Volkswagen Group’s exposure to counterparty risk. To achieve this, counterparty risk management imposes internal limits on the volume of business allowed per counterparty when financial transactions are entered into. Various credit rating criteria are applied in this process. These focus primarily on the capital resources of potential counterparties, as well as the ratings awarded by independent agencies. The relevant risk limits and the authorized financial instruments, hedging methods and hedging horizons are approved by the Group Board of Management Committee for Risk Management. For additional information on the principles and goals of financial management, please refer to chapter “Financial risks” and to the notes to the 2019 consolidated financial statements.