Audi and Porsche help VW limit damage from emissions scandal

Volkswagen’s underlying profit fell less than expected in the first quarter as demand for upmarket Audi and Porsche models helped to offset a hit to VW sales from its emissions test cheating scandal.
Europe’s biggest car maker said yesterday operating profit before one-off items fell 5.9% to €3.1bn ($3.5bn) on a 3.4% drop in sales revenues.
While better than analysts’ average profit forecast of €2.8bn, Volkswagen said it was still braced for a tough year as it battles to rebuild following the biggest business crisis in its 79 year history.
Volkswagen plunged to a record loss last year and ditched its long-standing CEO after it admitted in September to cheating diesel emissions tests in the United States.
It has set aside €16.2bn to cover vehicle refits and a settlement with US authorities, but still faces potential US Justice Department fines and questions over who was responsible for the cheating, with investigations ongoing.
The company has been slashing costs, investing in electric vehicles and working on a new business structure aimed at improving accountability and speeding up model development.
First-quarter results showed some signs of improvement at the mass-market VW brand, which was struggling with high costs and weak sales even before the emissions scandal.
It swung to a €73mn profit, having made a loss in the previous quarter.
But that was still well down on a profit of 514mn in the first quarter of 2015, with sales revenues down 4.6% and an operating margin of just 0.3%.
Volkswagen shares, which hit an 8-month high heading into the results, were down 2.65% at 134.3 euros at 1010 GMT.
“The numbers are better than expected, people are taking profit on the positive news,” said NordLB analyst Frank Schwope, who has a “hold” rating on the stock.
Volkswagen has recently come under pressure from activist investor TCI to speed up and extend restructuring efforts.
Group results at the 12-brand company were supported by broadly flat sales at flagship luxury brand Audi and a big rise in both sales and profits at sports car maker Porsche.
Higher demand in western Europe and the Asia-Pacific also helped to offset declines in South America and eastern Europe.
However, Volkswagen reported a 25% plunge in operating profit at its two Chinese joint ventures - which are not included in quarterly results.
Analysts have said heightened competition in China has led the company to step up incentives for buyers ahead of the expiry of tax breaks for smaller cars at the end of this year.
Quarterly sales in China, Volkswagen’s biggest market, rose 6.4% after falling in 2015.
Including one-off items, group operating profit rose 3.4% to €3.4bn.
That was helped by €300mn of “currency-related adjustments” to provisions for the emissions crisis.
The company did not announce any further scandal-related provisions in its January-March results.
Volkswagen said net liquidity at its automotive division was €26bn at the end of March, around 1.4bn higher than at the end of 2015, bolstering its finances ahead of an expected bond issue to replace expensive bank loans and ahead of any further emissions scandal costs.
DZ Bank analysts said the prospect of additional costs led them to retain a “sceptical view” on Volkswagen.
However, Evercore ISI analyst Arndt Ellinghorst said the company represented a “huge restructuring opportunity” and kept a “buy” rating on the shares.
Volkswagen reiterated guidance issued in April for sales to fall this year by up to 5% and for a group underlying operating margin of 5-6%, versus 6% in 2015.