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VW emissions cheating hits profit at biggest brand

May 31 2016 12:15

Frankfurt - Profit at Volkswagen’s namesake brand crumbled 86% in the first quarter, highlighting the challenge the carmaker faces in emerging from the nearly nine-month-old emissions cheating scandal.

Operating profit at the VW nameplate dropped to €73m (R1.28bn) from €514m (R9bn) last year, Europe’s biggest carmaker said in a statement. That gave the marque an operating margin of 0.3%, far short of a mid-term goal of 6%.

“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. “They need to safeguard pricing going forward as costs at the VW brand are relatively high.”

The cheating scandal complicated Volkswagen’s efforts to shore up eroding margins at its struggling namesake car brand because the manufacturer had to grant discounts to lure customers into showrooms. Restoring profits at the VW marque, the largest division by deliveries, is vital for a strategic shift at the company after years of aggressive sales growth and ballooning costs.

The VW 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% to €315m, with a 9.3% return on sales. At Seat, the long-struggling Spanish brand, the margin climbed to 2.6% from 1.5%.

The shares fell as much as 4.7%, the most in five weeks, and were down 2.3% to €134.8 at 11:27 in Frankfurt. The stock has risen 0.8% this year compared to a 3.9% drop in the benchmark DAX Index.

Operating profit for the 12-brand group climbed to €3.44bn from €3.33bn. That result included €309m 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 €16.2bn in 2015 to fix as many as 11 million diesel cars worldwide with manipulated engine-control software and pay for fines and lawsuits.

Revenue fell 3.4% to €51bn even as Volkswagen eked out 0.8% growth in group-wide deliveries to 2.5 million vehicles in the year’s first three months, passing global market leader Toyota Motor Corp.

China deteriorates

Volkswagen’s performance also suffered in China, its biggest market. Proportionate profit from its two Chinese joint ventures fell 27 to €1.17bn. The deterioration in Chinese earnings “will require some explanation,” Arndt Ellinghorst, a London-based analyst with Evercore ISI, wrote in a note to investors.

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

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

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 Volkswagen 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. The revelations of cheating last September triggered the departure of former CEO Martin Winterkorn and VW’s first annual operating loss since 1993.

The company plans in mid-June to present a new strategy through 2025, with eight key initiatives including digital features and electric vehicles.

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