Net Assets, Financial Position <br>and Results of Operation

 

The financial position of the Volkswagen Group continued to improve in fiscal year 2007. The following sections give an overview of the Group's liquidity development and outline the operating factors by division. 

 

The Volkswagen Group's gross cash flow increased by €4.6 billion year-on-year to €14.7 billion due to the profit for the period.

 

Cash flows from working capital increased by €1.0 billion (€4.4 billion). Cash flows from operating activities were €15.7 billion (€14.5 billion). 

 

As net cash used in investing activities increased by 13.3% year-on-year to €13.5 billion, net cash flow fell by €0.4 billion to €2.2 billion.

 

The Volkswagen Group reported cash and cash equivalents of €9.9 billion (€9.4 billion) on December 31, 2007. At €19.1 billion, gross liquidity was up €2.6 billion on the previous year. Net liquidity in the Group improved by €3.4 billion year-on-year to €–38.9 billion.

 

 

 

The Automotive Division recorded gross cash flow of €11.9 billion in 2007, an increase of 55.4% as against the previous year due to the higher profit for the period. Following the release of substantial funds tied up in working capital in 2006, the Division again recorded a cash inflow. At €1.8 billion, working capital was nevertheless €2.3 billion lower than in the previous year, when provisions were increased by the effects of the restructuring measures. Most of these funds were used in 2007. Working capital was also reduced by the increase in the level of receivables and inventories caused by volume-related factors. At €13.7 billion, cash flows from operating activities were 16.4% higher than in 2006.

 

While investments in property, plant and equipment in the Automotive Division were up 25.0% on the previous year to €4.6 billion, the ratio of investments in property, plant and equipment to sales revenue (capex) still remained well below the long-term average at 4.6% (3.8%). This clearly shows that we are continuing to pursue a policy of disciplined investment despite the renewal and expansion of our vehicle portfolio. We have invested mainly in new production sites in Russia and India as well as for models that we launched in 2007 or plan to unveil in 2008. Specifically, these are the Tiguan and the Audi Q5 as well as the successors to the Audi A4, Gol, Golf and SEAT Ibiza. In contrast to investments, capitalized development costs fell by 2.2% year-on-year to €1.4 billion. Taking the acquisition of equity interests into account, the net cash used in investing activities was, at €6.6 billion, €0.5 billion higher than in 2006, when the sale of equity interests had a positive effect. The net cash flow generated by the Automotive Division nevertheless rose by 26.2% year-on-year to €7.1 billion.

 

With regard to financing activities in the Automotive Division, the further reduction of debt resulted in an outflow of €4.5 billion (€3.7 billion). Cash and cash equivalents increased by €0.8 billion, amounting to a total of €8.9 billion (€8.1 billion) at the end of the reporting period. The net liquidity of the Automotive Division improved by a substantial €6.3 billion in fiscal year 2007. Including securities and loans and net of borrowings, it amounted to €13.5 billion on December 31, 2007.

 

 

 

The Financial Services Division's gross cash flow rose by €2.8 billion in 2007, an increase of 16.1% year-on-year. The Division recorded a further increase of €0.8 billion in funds tied up in working capital, mainly through short-term vehicle rentals and receivables. As the increase in receivables from customer and dealer financing was higher than in the previous year due to the expansion of business, cash flows from investing activities rose to €6.9 billion (€5.8 billion). With regard to financing activities, the issue of bonds by Volkswagen Bank GmbH and Volkswagen Leasing GmbH generated a positive cash flow of €4.7 billion (€3.5 billion). Cash and cash equivalents amounted to €1.0 billion as of December 31, 2007. Including securities and loans, gross liquidity amounted to €3.1 billion (€3.0 billion). At €55.5 billion, third-party borrowings were €3.0 billion higher than as of December 31, 2006 on account of the expansion of business. The negative net liquidity – common to the industry – in the Financial Services Division thus rose by €3.0 billion to €52.4 billion.

 

 

 

The Volkswagen Group generated sales revenue of €108.9 billion in 2007, 3.8% more than in the previous year. The positive business development in European markets outside Germany, especially in Central and Eastern Europe, and in South America was the main driver of this success. Accordingly, the largest proportion of sales revenue was generated outside Germany with 75.3% (72.8%). The cost of sales increased at a slower pace of just 1.7% as a result of the optimized cost structures. This lifted the gross margin from 13.2% to 15.0%. At €6.2 billion, the Group's operating profit more than tripled compared with the operating profit after special items in the previous year. The operating return on sales increased significantly to 5.6% (1.9%).

 

 

 

The Volkswagen Group generated profit before tax of €6.5 billion in fiscal year 2007 (€1.8 billion). This means that the target originally set for 2008 of profit before tax of at least €5.1 billion was not merely reached a year early, but in fact significantly exceeded. The return on sales before tax increased to 6.0% (1.7%). Profit from discontinued operations in the previous year contains the net gain on the disposal and the profit after tax of Europcar for the period January to May 2006. Although the prior-year result was boosted by extraordinary tax income, the Volkswagen Group's profit after tax was around 50% higher than in 2006 at €4.1 billion (€2.8 billion).

 

 

 

The sales revenue of the Automotive Division was €98.8 billion in the reporting period. This represents an improvement of 2.9% year-on-year that is mainly due to the increased sales volume. In addition to the higher sales revenue, the cost savings achieved lifted the gross margin to 14.3% (12.1%). The gross profit was €14.1 billion (€11.6 billion). At €8.8 billion, distribution expenses were 1.1% higher than in the previous year. Administrative expenses amounted to €2.0 billion. The other operating result grew strongly from €46 million to €1.9 billion. While restructuring expenses negatively impacted earnings in 2006, currency hedging activities had a positive effect in the reporting period. 

 

In total, the operating profit more than quadrupled to €5.2 billion compared with the operating profit after special items in the previous year. The ratio of operating profit to sales revenue was 5.3% (1.2%).

 

 

 

*	Including allocation of consolidation adjustments between the Automotive and Financial Services divisions.

 

 

SEGMENT REPORTING – SHARE OF SALES REVENUE BY MARKET 2007

in percent

 

 

The financial result improved by €0.7 billion to €0.3 billion, mainly due to the increase in investment income from joint ventures included in the consolidated financial statements using the equity method, as well as higher interest and securities income.

 

 

 

Sales revenue in the Financial Services division improved by 14.4% in the reporting period to €10.1 billion thanks to rental business and to dealer and customer financing. At €2.2 billion, gross profit fell marginally short of the high figure in the previous year as a result of the intense competitive pressure and higher refinancing costs. Distribution expenses of €493 million and administrative expenses of €483 million were lower than in 2006, both in absolute terms and as a proportion of sales revenue. This clearly illustrates that we are also pursuing strict cost discipline in the Financial Services Division. At €–283 million, the other operating result improved by €117 million versus the previous year. In spite of tougher competition and higher refinancing costs as a result of the crisis in the US subprime market, the Financial Services Division improved its operating profit by 13.5% year-on-year to €957 million in fiscal year 2007, again making a significant contribution to the consolidated profit.

 

The return on equity before tax fell to 16.1% (16.9%).

 

 

1	Ratio of cash flows from operating activities to current and noncurrent financial liabilities.
2	Including allocation of consolidation adjustments between the Automotive and Financial Services divisions.
3	Including the vehicle-production investments Shanghai-Volkswagen Automotive Company Ltd. and FAW-Volkswagen Automotive Company Ltd. These companies are accounted for using the equity method.
4	For details, see Value-based management.
5	Ratio of property, plant and equipment to total assets.
6	Ratio of inventories to total assets.
7	Profit before tax as a percentage of average equity (continuing operations).

 

 

The economic position of the Volkswagen Group continued its positive trend in fiscal year 2007. The Group's earnings power and, consequently, its competitiveness improved sustainably thanks to the optimized cost structures. We achieved our objective of at least covering our cost of capital in the reporting period and also achieved the earnings target originally set for 2008 a year earlier. The higher net cash flow generated by the Automotive Division and a further sizeable increase in net liquidity are the proof of this success.

 

An overview of the development of the Volkswagen Group over the past five years can be found in the following tables. More information on the economic position of the Volkswagen Group by brand and business field can be found in the Divisions chapter.