Presentation - subject to modification during presentation -

Axel Strotbek, Member of the Board of Management for Finance and Organization, AUDI AG

Audi Training Center at Munich Airport, 2014-08-01

Speech at the Audi Group Press Conference
for Interim Financial Report 2014

Axel Strotbek, Member of the Board of Management for Finance and Organization, AUDI AG

Ladies and Gentlemen,

A cordial welcome also on behalf of the Audi Board of Management. In the next few minutes, I will explain to you our most important figures for the first half of the year. To put it briefly: We continued along a clear growth path in terms of unit sales and achieved a respectable operating profit despite high advance expenditure for our future.

First of all, the development of our unit sales: With deliveries to customers of nearly 870,000 automobiles, we achieved volume growth of 11.4 percent compared with the prior-year period. Let me now point out some of the aspects of that growth:

  • In the first half of 2014, we sold more cars than in the entire year 2005, which means that we have doubled our worldwide deliveries in just ten years.
  • In the United States, we sold more than 84,000 cars in the first half – up 13.6 percent compared with the prior-year period and more than the total for full-year 2009.
  • China remains the strongest growth driver with an increase of 17.8 percent. In that market, we delivered more than 50,000 automobiles in one month for the first time this June. Ten years ago, that was our annual volume.
  • Even in Europe, where the situation of some markets is still difficult, we achieved growth of 7.2 percent.
  • The bottom line is that we grew in each of Audi’s individual sales regions worldwide. What is more: We developed everywhere better than the respective overall car market.

What are the financial effects of this growth? The Audi Group posted first-half revenue of approximately 26.7 billion euros, representing growth of about 6 percent. This development reflects not only negative exchange-rate effects, but also the success of our young Audi A3 family as well as strong growth in the SUV segment and the positive development of the large models.

On the cost side, our growth had the following effects: Cost of sales increased to 21.9 billion euros, whereby this increase is due not only to the volume effect, but also to our increased expenditure for research and development. Gross profit therefore amounted to 4.8 billion euros – slightly less than for the first half of 2013.

Along with our growth and also because of the greater intensity of competition in major markets, our distribution costs increased to 2.4 billion euros. Administrative expenses amounted to 300 million euros and other operating income amounted to 570 million euros.

In total, all of this leads to an operating profit of 2.7 billion euros, which is slightly higher than in the prior-year period. When financial income is added, which increased to 430 million euros, we arrive at profit before taxes of 3.1 billion euros.

Which are the most important factors influencing these results? The main drivers of earnings were the volume growth I have described, a further increase in productivity, and optimized product and material costs. Negative factors were, as I mentioned, exchange-rate effects, the high intensity of competition – for example in major European markets and in China – and our high advance expenditure for new technologies, products and production capacities.

I would like to give you some more details of the last point: We increased our investments in business operations from 1.24 billion to 1.55 billion euros, representing an increase of 25 percent.

This development shows quite clearly: Audi is continuing with its high rate of investment. And nonetheless, our net cash flow in the period of January through June 2014 was significantly positive at just under 2.2 billion euros and was 8.6 percent higher than in the prior-year period. That means that we finance our investments from our own resources.

We will push forward with our investment program also in the future. It amounts to 22 billion euros from 2014 until 2018. The focus is on three areas:

  • First: the next stage of our model offensive, which will begin with the new Audi TT at the end of the year. By the end of the decade, we will expand our model range from today’s 50 to 60 models. We will add to our SUV family for example. The Q1 will come in 2016, and we will also add to the upper segments.
  • Second: the extension of our “Vorsprung durch Technik.” The emphasis here will be on all aspects of efficiency. For example, we are developing the next generation of our high-tech drive systems while underscoring our claim to leadership with conventional engines. Our ultra models show what is possible here. They are our CO2 champions of each model series and are in leading positions also with regard to their competitors. For example, the A6 2.0 TDI ultra with 114 grams of CO2 per kilometer. Due not least to ultra, the A6 is a leader in the German fleet business. We are also expanding our range of alternative drive systems. In our second training center here at the airport, we are now training 2,000 sales and service employees from all over Europe for the market launch of the Audi A3 e-tron. Advance sales of this plug-in hybrid started yesterday. It is our first step into the world of electric mobility – and of course it will not be the last: In the future, we will launch one e-tron model each year. The Audi Q7 will come as an e-tron in 2015, followed by the Audi A6 L in 2016. This means that we are tackling electrification also in China.
  • Our third investment focus is on the expansion of our worldwide manufacturing network. Last year, we put new plants into operation in Győr in Hungary and in Foshan in southern China. In 2014, we will for the first time produce more cars abroad than here in Germany. Nonetheless, our domestic plants continue to be the main pillars of our success: This is demonstrated by the numerous special shifts worked in Ingolstadt and Neckarsulm this year. By the end of the third quarter, we will have had 90 of them. In the next two years, we will focus more on the American continent: on Brazil and especially on Mexico. The construction of our plant in San José Chiapa is meanwhile a main driver of our investment. At the same time, this site plays a key role for our future growth and will help us to reach the next milestone of two million cars in a year.

 In view of all these plans, some words also about the fitness actions at Audi, about which many of you already reported yesterday. I would like to emphasize: Each brand at the Volkswagen group is responsible for its own competitiveness and profitability – along with all the synergies that we of course utilize. This means that the measures we are taking are independent of the program at Volkswagen – Audi goes its own way. It is simply important to us to manage our growth efficiently and to tackle the challenges in a focused manner, for example those resulting from the worldwide CO2 legislation or from our entry into electric mobility.

It generally applies that anyone who wants to achieve more has to work harder. The crucial point is to tackle these tasks as intelligently as possible. New models, new technology, new plants – all of this on the one hand means a lot of work and resources; on the other hand, it also offers the opportunity to utilize new synergies, to profit from past experience, and to manage things efficiently.

This is where we are starting: with targeted optimizations along the entire value chain and with further increases in our earnings, so that we achieve our business and profitability targets. This approach has proven its worth for us so far – also in the major economic crisis of 2009. And we are now applying it to tackle the tasks ahead.

We are doing this from a position of strength. Because despite the high levels of advance expenditure, the Audi Group continues to be one of the most profitable companies in the industry. That is confirmed by our key earnings figures: With an operating return on sales of 10 percent for the first half of the year, we are at the upper end of our strategic target corridor of 8 to 10 percent. And our return on sales before tax of 11.6 percent is also an indication of our financial strength.

With regard to the future, you are aware of our philosophy: We do everything for our long-term competitiveness, and to those ends we are prepared to accept temporary burdens on earnings. Nonetheless: Our target corridor for return on sales remains unchanged.

Thank you!

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