ForMotion Program and New Model Initiative Generate Significant Increase in Volkswagen's Earnings

The Volkswagen Group significantly increased its earnings last year thanks to the ForMotion program and a comprehensive new model initiative. Profit before tax rose by 58.2 percent to €1.7 billion in 2005. Despite a continued difficult market environment, the Group was able to meet the forecasts, said Dr. Bernd Pischetsrieder, Chairman of the Board of Management of the Volkswagen Group, on Tuesday at the presentation of Volkswagen’s financial statements in Wolfsburg. “Overall, however, the level of earnings we achieved remains unsatisfactory”, he emphasized. “That is why we will continue our performance enhancement program in the form of “ForMotion plus”, and in particular systematically restructure the core Volkswagen brand. There is no alternative for our Group. Considerable efforts are still needed to safeguard the long-term future of Volkswagen AG” Pischetsrieder stressed.

“Last year, we already made substantial progress in improving our competitiveness. Nevertheless, nobody in the Group can assume that we have already reached all our goals”, underlined the Chairman of the Board of Management. “Together with all involved, Volkswagen’s management must now prepare the way for ensuring the long-term survival of the Group. Only a successful company can safeguard jobs.” The Group’s new model initiative in 2005 had been successful on world markets, said Pischetsrieder. A record 5.24 million vehicles were delivered to customers (+3.2 percent). “We continued our new product initiative with a total of 16 new vehicle models and derivatives in Europe alone, and extended our market share in the face of stiff competition, especially in Europe.” The large number of new models again underscores the Group’s innovative strength. Sales revenue rose by 7.1 percent to €95.3 billion.

Model rollout
Pischetsrieder announced that the Group would continue its new model rollout this year and in 2007. There will be 28 new models in Europe alone. “We are expecting worldwide Group deliveries to be slightly ahead of the previous year’s level, as all brands are lining up with new volume models”, said Pischetsrieder. Based on preliminary calculations, the Group delivered around 790,000 vehicles to customers worldwide in the first two months of 2006, representing an increase of approximately 15 percent year-on-year. The global passenger car market grew by approximately seven percent in the same period. Pischetsrieder added: “Competitive pressure on global automotive markets remains high. The Volkswagen Group still has surplus capacity despite rising deliveries. But because this also applies to most of our competitors, price pressure in the markets is high.”

ForMotion Program
At last year’s Annual Press Conference, the Group announced its intention to improve Group earnings by €3.1 billion through ForMotion measures. With an actual earnings contribution of €3.5 billion, this target was significantly exceeded, said Pischetsrieder. Well over 10,000 individual measures were implemented in the Group under this program. “The energy released by ForMotion in all areas and among all employees was tremendous”, said Pischetsrieder.

CFO Hans Dieter Pötsch added: “In particular the disciplined approach to investments improved net liquidity in the Automotive Division by €2.6 billion year-on-year, and at €0.7 billion, this returned to a positive figure for the first time since 2002.” It was particularly encouraging to note that investments were reduced without cutting back on the development of new models. Pötsch: “New cars are our future.” Pötsch explained that consolidated sales revenue increased by €6.3 billion in 2005, with the automotive business accounting for €5.4 billion of this increase and the Financial Services Division contributing €0.9 billion. Of the €5.4 billion from the automotive business, €2.8 billion is attributable to volume effects, €1.0 billion to improvements in the product mix and €0.9 billion to price increases. In contrast to the previous year, exchange rates increased sales revenue by €0.7 billion in 2005.

Restructuring
Pischetsrieder emphasized that the Volkswagen brand has considerable productivity deficits by international standards. “Some German plants are no longer able to export on competitive terms.” For this reason, the Board of Management and all involved are discussing a restructuring program with the following objectives to safeguard competitiveness:

• Competitive production and labor costs by focusing on designs that reflect production and assembly requirements, and by introducing differentiated working time models.
• Increased productivity, especially at the vehicle assembly plants, for example by using innovative working time models and accelerating part-time schemes for employees near to retirement.
• Full capacity utilization at plants, inter alia through capacity adjustments.
• Restructuring of component production.

The analysis of in-house component production facilities is guided by the following key questions: Is this a core competency, and can the component in question be produced at competitive costs? Pischetsrieder stressed: “As an automobile manufacturer, the production of engines and gearboxes is part of our core production competency and is not therefore covered by this review.” As already announced, up to 20,000 employees directly and indirectly involved in the activities of the Volkswagen brand could be affected by the restructuring program over the next three years. The question of how productivity and structural improvements can be achieved and implemented in concrete terms is currently the subject of negotiations with the Works Council and the IG Metall trade union.

The Chairman of the Board of Management emphasized that “the restructuring program, coupled with the implementation of ForMotion plus, are necessary measures that will allow us to meet our long-term responsibility for the future of the Company and its employees. Making particularly good products is not enough: they must also be affordable for our customers and generate an adequate return to secure the future. That is the only way we can safeguard jobs at Volkswagen and ensure the survival of our Company.”

Outlook for 2006
The Volkswagen Group expects deliveries to customers and sales revenue to increase slightly in the current year on the back of a large number of new model launches. Operating profit before special items will increase year-onyear in 2006. In particular, the measures under “ForMotion plus” will help cut material costs and optimize production processes. It is not possible at present to put a figure on the expected impact of special items in the current year. In the Automotive Division, the capex/sales revenue ratio will remain at a competitive level of around 6 percent. In addition, a positive net cash flow that will enhance the liquidity position of the Automotive Division, as well as a further improvement in net liquidity, are expected for the automotive business. Pischetsrieder reiterated the medium-term earnings forecast when he presented the consolidated financial statements. This projects a consolidated profit before tax of €5.1 billion for 2008, a €4 billion improvement as against 2004. “These goals represent a challenge”, said Pischetsrieder. “However, we are confident that we will achieve them with the support of our new products, the restructuring program and ForMotion plus.”