Volkswagen first quarter profits: Emissions scandal Hits VW profit ‘Details’

Volkswagen first quarter profits: Emissions scandal Hits VW profit
Volkswagen first quarter profits: Emissions scandal Hits VW profit "Details"

Volkswagen today reported a fall in pre-tax profits and sales in the first quarter of what chief executive Matthias Müller said will “undoubtedly be a demanding” year.

Profit at Volkswagen AG’s namesake brand tumbled 86 percent in the first quarter, highlighting the challenge the automaker faces in emerging from the nearly nine-month-old scandal over cheating on emissions tests.

Operating profit at the VW nameplate dropped to 73 million euros ($81 million) from 514 million euros last year due to lower deliveries and higher marketing costs related to the scandal, Europe’s biggest carmaker said Tuesday in a statement. With the unit’s revenue slumping 4.6 percent, its operating margin shrank to 0.3 percent of sales, far short of an earlier mid-term goal of 6 percent.

“The result at the VW brand showed yet again that earnings there are far too low,” said Sascha Gommel, a Frankfurt-based analyst with Commerzbank AG. “They need to safeguard pricing going forward as costs at the VW brand are relatively high.”

The revelation in September that diesel engines’ emissions-control software was rigged has complicated Volkswagen’s efforts to shore up eroding margins at its struggling namesake car brand as it granted discounts to lure customers back into showrooms. Restoring profits at the VW marque, the largest division by deliveries, is vital for a strategic shift at the German manufacturer after years of aggressive sales growth and ballooning costs.

‘Deep Changes’

The complex revamp of the VW brand is “one of the highest priorities within the group” and requires “deep changes,” Chief Financial Officer Frank Witter said Tuesday on a conference call with analysts. It would be “unrealistic” to expect the division to meet the 6 percent margin target in 2018 as initially outlined, while goals in the revamp plans are being finalized, he said.

The brand’s earnings paled by comparison with those of Volkswagen’s other mainstream marques. Operating profit at Skoda, the Czech maker of the Octavia sedan, jumped 30 percent to 315 million euros, with a 9.3 percent return on sales. At Seat, the long-struggling Spanish brand, the margin climbed to 2.6 percent from 1.5 percent.

Volkswagen shares fell as much as 4.7 percent, the most in five weeks, and were trading down 1.2 percent at 136.30 euros as of 4:27 p.m. in Frankfurt. The stock has risen 2 percent this year, in contrast to a 4 percent drop in Germany’s benchmark DAX Index.

Operating profit for the 12-brand group climbed to 3.44 billion euros from 3.33 billion euros, anchored by the Audi and Porsche divisions. That result included 309 million euros in positive special items, including currency-related adjustments on the provisions Volkswagen made last year to cover costs related to the diesel cheating. The company set aside 16.2 billion euros in 2015 to fix as many as 11 million rigged diesel cars and pay for fines and lawsuits.

Revenue fell 3.4 percent to 51 billion euros, even as Volkswagen eked out 0.8 percent growth in groupwide deliveries to 2.5 million vehicles in the year’s first three months, passing global industry leader Toyota Motor Corp.

China Deteriorates

Volkswagen’s performance also suffered in China, its biggest market. The German company’s profit from its two Chinese joint ventures fell 27 percent to 1.17 billion euros. “The market environment in China is challenging,” and that pressure is likely to persist, CFO Witter said.

The carmaker stuck to its full-year outlook, saying revenue will decline as much as 5 percent, while the operating-profit margin excluding special items will be in a range of 5 percent to 6 percent of revenue after reaching 6 percent last year. The first-quarter figure was 6.1 percent.

Volkswagen still has a long way to go to move past the crisis. Investigations into the origin of the cheating will drag on until the end of the year, and the carmaker must hammer out a settlement with U.S. authorities by the end of June. A European recall will probably last until at least early 2017. As part of the process to move beyond the cheating, the company plans to present a new strategy in mid-June, with eight key initiatives including digital features and electric vehicles.

The company has “achieved respectable results under difficult conditions,” Chief Executive Officer Matthias Mueller said in the statement. “2016 will be a transitional year for Volkswagen that will see us fundamentally realign the group.”