FRANKFURT -- Audi's attempts to protect itself from rising aluminum costs backfired, contributing instead to a 99 percent plunge in the automaker's first-quarter operating profit when prices of the metal declined.
The depreciation in the price of aluminum in the quarter, and in March in particular, was a critical driver that hurt Audi's results, said Frank Witter, finance chief for Audi parent, Volkswagen Group.
Audi had purchased financial contracts meant to hedge its exposure, but under accounting rules these derivatives are subject to writedowns if they are speculated incorrectly. In this case Audi had bet the price of aluminum would be significantly higher than what eventually could be found on the spot market.
“If you look at a chart showing how the price of aluminum depreciated, then you can quickly imagine what sort of enormous leverage effects you can have if you hedged your exposure,” Witter told reporters on an earnings call on April 29.
Audi's interim first-quarter report referred to a hit of approximately 500 million euros from fluctuations in prices of raw materials and currencies. These factors contributed to nearly half of the 1.1 billion-euro decline in quarterly operating income.
Audi's raw material headaches suggests other automakers could also have suffered from such headwinds if they had also speculated on the rising cost of aluminum and purchased similar financial derivatives.
Audi has long been a leader in the use of lightweight materials. It heavily uses aluminum for exterior sheet metal such as body panels as well as for the overall body structure.
Its aluminum space frame carried the entire weight of the previous-generation Audi A8 flagship sedan. Audi engineers have now switched to a multi-material mix after perfecting the complicated process of bonding of steel with aluminum while avoiding corrosion risks.
The aluminum hit meant that Audi's profitability was effectively erased in the first quarter with the brand posting underlying earnings of 15 million euros, down from 1.1 billion euros in the same quarter last year, on revenue of 12.5 billion euros.
This allowed Porsche to surpass Audi as the largest overall contributor to VW Group results. Porsche had an operating profit of 529 million with less than half of Audi's revenue.
In a video statement posted on Audi's website, the automaker's new CFO Arno Antlitz said he was satisfied with first-quarter earnings because the sale of the company's Audi Electronics Venture software unit for 650 million euros to VW Group meant that net cash flow, a key metric in times of crisis, only fell by a fifth to 952 million euros.
"In view of the current situation, we delivered quite a solid performance in the first quarter. The positive net cash flow is clear evidence just how robust the Audi brand is," Antlitz said.