Dear Shareholders,
Our involvement as the largest individual shareholder in Volkswagen AG provided the stock exchange with the makings of an impressive success story. Since the start of our investment in Europe’s biggest automotive group around a year and a half ago, Porsche’s share price has risen by 50 % and Volkswagen’s share price has doubled. Any initial doubtful voices in relation to our shareholding in VW have long since faded.
In the first half of the 2006/2007 fiscal year (August 1, 2006 to January 31, 2007) we reinforced our strategic and industrial partnership with VW by increasing our shareholding to 27.3% of the ordinary shares. As a result, our total capital expenditure for this equity investment has risen to over four billion euro taking account of hedging transactions. Our investment has increased in value by more than a billion euro since we first acquired a share.
With the outdated ‘VW law’ due to expire in the near future, our role as a long-term investor in Volkswagen will be strengthened substantially. On February 13, 2007, the advocate general presented a final ruling at the European Court of Justice in Luxembourg in the negotiations concerning the VW law. In this final ruling he recommended that the lawsuit brought by the European Commission be upheld.
The lawsuit claimed for example that the cap on voting rights to 20% and the special rights of the state of Lower Saxony contravened European law. We expect that the Court will back up the advocate general’s recommendation. As a result, it is possible that we will be able to exercise our full shareholder rights in proportion to our shareholding before the end of the year.
Unit sales and sales revenue at a high level
The Porsche Group was able to maintain its successful course in the first six months of the current fiscal year. The 7.0% drop in unit sales to
39,265 vehicles is a result of the model change for the Cayenne. Production of the first generation of this model range was discontinued in November 2006, with the sale of the new Cayenne not commencing in Europe and Asia until February 24, 2007 and in America until March 3, 2007. We wanted to avoid having the predecessor model and the new Cayenne in dealers’
showrooms at the same time, and accepted the fact that unit sales of our sporty all-terrain car would fall as a result. The corresponding decrease totaled 41.4% to 9,940 vehicles. All in all our strategy was successful:
the predecessor model is more or less sold out and a healthy level of orders has been received for the launch of the second generation Cayenne.
The two sports car series were linked to sustained growth. 17,329 vehicles were sold from the 911 series, of which 3,461 were the top model, the 911 Turbo. Total growth for the 911 series amounted to 15.7%. The Boxster series even experienced growth of 19.6% to 11,979 vehicles; this figure included 7,687 Cayman and Cayman S models. After adjustment of the prior- year figures to account for the sale of CTS Fahrzeug-Dachsysteme GmbH, Bietigheim-Bissingen, sales revenue thus only declined marginally by 1.4 % to € 3.07 billion in the first six months of the fiscal year.
A closer look at the breakdown of unit sales by region shows just how difficult the market in the USA has become. Unit sales in the US fell by 19.3% to 14,545 vehicles, while Porsche increased unit sales in Germany by
0.2 % to 5,498 vehicles and in the rest of the world by 2.7% to 19,222 vehicles.
Earnings significantly higher
The large earnings power of the Porsche Group continued in the first half of the current fiscal year. The final half-year figures, determined on February 15, 2007, are even higher than the preliminary figures (as of the cut-off date January 13) published at our annual general meeting on January 26, 2007. Earnings before taxes rose to € 1.59 billion after a figure of €
277.8 million in the prior-year period. Earnings after taxes reached € 1.14 billion after € 169.8 million in the previous year.
The increase was principally attributable to special effects in connection with the involvement in Volkswagen. Income from hedging transactions in connection with the purchase of the VW shares was in the range of a substantial three digit million figure. In addition, a positive effect on earnings stemmed from the revaluation at € 520 million of the VW share package, which had increased to 27.3% of ordinary shares. This step became necessary because the value of the company increased considerably in line with the VW share price. Furthermore the result from operations increased thanks to an improved model mix in the vehicles division.
As far as the half-year result is concerned, it was only possible to consolidate the result for the third quarter of 2006 in terms of the VW shareholding. This was because the figures from VW containing the final quarter of 2006 were not yet available when Porsche’s half-year result was calculated. Consequently these figures will be included in Porsche’s group result for the second half of the 2006/2007 fiscal year.
More jobs created
Porsche created new jobs once again in the reporting period. The decline in the Group’s headcount by 4.3% to 11,393 employees was a result of the sale of CTS Fahrzeug-Dachsysteme GmbH, Bietigheim-Bissingen, and of Porsche Engineering Services (PES) in Wilmington, USA. These two companies together accounted for more than 1,000 employees. Adjusted to account for these disposals, the headcount in the Porsche Group actually increased by 4.5% or
493 employees. The additional staff were needed especially at the Leipzig plant, in the services area and in research and development at Porsche AG.
Increase in capital expenditures
Investments in intangible assets and property, plant and equipment climbed by 32.0% to € 227.0 million. The financial services companies accounted for capital expenditures of € 267.8 million. In the first six months of the
2006/2007 fiscal year, Porsche invested mainly in expanding the plant in Leipzig, the Porsche Museum currently under construction at the head office in Zuffenhausen and the preparation of future model projects such as the Gran Turismo Panamera.
Outlook
Porsche is more optimistic for the 2006/2007 fiscal year as a whole than it was at the beginning of the fiscal year. Even the difficult market environment in the USA does not overshadow this optimism. Porsche aims to match the high prior-year level of unit sales and sales revenue with the growth markets in eastern Europe and Asia contributing substantially to sales. In Russia, for example, the distribution network will encompass 16 dealers this fiscal year after just 10 in the previous year. Porsche will expand even more dramatically in China, increasing the number of dealers from 12 to 20. As a result, Porsche is confident that it can double unit sales in China this year by comparison with the previous year, during which roughly 1,920 vehicles were sold. The pace of development in these markets is restricted by the limited availability of qualified service and sales employees who have to be hired and trained accordingly.
The powerhouses behind Porsche’s success in the current fiscal year will be the two sports car series. We expect record unit sales of around 36,000 vehicles from the 911 series alone, and some 6,000 of these are expected to be the top model, the 911 Turbo. The Cayman S is also holding its own in the face of ever-increasing competition. Porsche’s model mix is thus influenced by a preference on the market for the models in the upper end of the price scale. Provided that there are no surprises at VW or in the development of the VW share price, Porsche is confident that it will exceed the prior-year earnings of € 2.1 billion in the current fiscal year. This figure takes account of burdens such as the development costs for the fourdoor Gran Turismo Panamera, which are expected to be in the three digit million euro range.
Sustained positive impetus from the Cayenne series is not expected to ensue until the coming 2007/2008 fiscal year, when it will have been present on the market for a first full fiscal year. Nevertheless we aim to match the unit sales figures for the predecessor models in the previous year before the end of the current 2006/2007 fiscal year, as the new Cayenne thanks to its direct fuel injection system uses up to 15% less fuel and the Turbo model up to 20% less fuel. The sporty all-terrain vehicle sold around 34,000 times in the previous year.
The next boost to growth is likely to be the market launch of the Panamera in 2009. On a global scale, we see substantial demand for four-door, four-seater sports cars, that offer excellent performance. This model series will provide material for a further chapter in Porsche’s success story.
With our very best regards,
Dr. Wendelin Wiedeking
Chief Executive Officer
Holger P. Härter
Chief Financial Officer
Dr. Ing. h.c. F. Porsche
Aktiengesellschaft
Stuttgart, February 15, 2007