VW pays a high price for emission cheating
Operating profit drops by 86%
PROFIT at car manufacturer Volkswagen’s (VW) namesake brand crumbled 86 percent in the first quarter, highlighting the challenge the car maker faces in emerging from the nearly nine-month-old emissions cheating scandal.
Operating profit dropped to €73 million (R1.28 billion) from €514m last year, Europe’s biggest car maker said.
That gave the marque an operating margin of 0.3 percent, far short of a 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 Frankfurtbased analyst with Commerzbank. “They need to safeguard pricing going forward as costs at the VW brand are relatively high.”
The cheating scandal complicated VW’s efforts to shore up eroding margins at its struggling 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 its other mainstream marques.
Operating profit at Skoda, the Czech maker of the Octavia sedan, jumped 30 percent to €315m, 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.
Stock has risen
The shares dropped as much as 4.7 percent, the most in five weeks, and were down 2.3 percent to €134.8 at 11.27am in Frankfurt. The stock has risen 0.8 percent this year compared to a 3.9 percent drop in the benchmark DAX index.
Operating profit for the 12brand group climbed to €3.44bn from €3.33bn.
That result included €309m in positive special items, including currency-related adjustments on the provisions the vehicle manufacturer 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 dropped 3.4 percent to €51bn even as the car manufacturer eked out 0.8 percent growth in group-wide deliveries to 2.5 million vehicles in the year’s first three months, passing global market leader Toyota Motor Corporation. VW’s performance also suffered in China, the company’s biggest market.
Proportionate profit from its two Chinese joint ventures fell 27 percent 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 car maker stuck to its full-year outlook, saying that revenue would decline as much as 5 percent, while the operating profit margin excluding special items would be in a range of 5 percent to 6 percent of revenue after reaching 6 percent last year.
Respectable
The company has “achieved respectable results under difficult conditions”, chief executive Matthias Mueller said yesterday. “2016 will be a transitional year for VW that will see us fundamentally realign the group.”
VW 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 VW must hammer out a settlement with US authorities by the end of this month. A European recall will probably last until at least early next year.
The revelations of cheating last September triggered the departure of former chief executive Martin Winterkorn and VW’s first annual operating loss since 1993.
The company plans in the middle of this month to present a new strategy until 2025, with eight key initiatives including digital features and electric vehicles. – Bloomberg