VW brand profit soars as cost cuts start to pay off

BERLIN (Reuters) - Volkswagen VOWG_p.DE said profit at its troubled core division soared in the first three months of the year, a sign that long-overdue cost cuts are having an impact as the carmaker seeks to move beyond its diesel emissions crisis.

VW, Europe’s biggest carmaker, is aiming to beat rivals for profitability rather than chasing sales volumes through aggressive pricing as it invests billions of euros in electric cars, new mobility services and self-drive technology.

First-quarter operating profit at VW’s largest division surged to 869 million euros ($948.9 million) from 73 million a year earlier, the carmaker said on Wednesday, even as its sales slipped 1.3 percent to 1.44 million vehicles.

Investors have said a turnaround at the VW brand, which has long been saddled with high fixed and R&D costs, is key to turning the German giant into a more attractive business.

Despite the damage to its reputation from the dieselgate scandal, the VW group last year eclipsed Toyota 7203.T as the world's biggest selling carmaker.

It is facing cash outflows in the “double-digit billion-euro range” this year to pay for costs of the emissions cheating, CFO Frank Witter said.

The quarterly profit gain reflects VW’s improving operating performance and will help the carmaker cushion the financial blow from the scandal. VW has to date set aside 22.6 billion euros to cover the costs of dieselgate including fines and compensation payouts.

A man uses phone under a Volkswagen logo at the Shanghai Auto Show, in Shanghai, China April 20, 2017. REUTERS/Aly Song

Structural changes since the scandal broke in Sept. 2015 include streamlining vehicle development, cutting material costs by reducing complexity in parts, dropping unprofitable models and shifting more power to brands and regions to respond more quickly to market needs.

“Our efforts to improve efficiency and productivity across all areas of the company are also paying off,” Chief Executive Matthias Mueller said.

Witter backed that up by saying that the quarterly earnings yielded the “first tangible results” of cost savings.


Analysts hope improvements will be sustained as VW renews core models such as the Polo subcompact and Touareg SUV and implements a hard-fought turnaround plan with its unions.

“I can see all sorts of reasons suggesting that profit dynamics will stay high,” said Bankhaus Metzler analyst Juergen Pieper who has a “Buy” recommendation on the stock.

The operating margin at VW's core brand jumped to 4.6 percent in the January-to-March period from 0.3 percent a year ago, still lagging French rivals PSA Peugeot Citroen PEUP.PA and Renault RENA.PA but nearing its long-term 2025 target of 6 percent.

Group operating profit jumped 40 percent to 4.37 billion euros in the three months to the end of March, one of the carmaker’s highest-ever quarterly results, even as vehicle sales at the 12-brand group declined.

Shares were trading down 1 percent at 143 euros as of 0939 GMT as VW stuck to its outlook despite the robust quarterly showing.

The Wolfsburg-based group expects the 2017 return on sales to come in between 6 and 7 percent, after reaching 6.7 percent in 2016, and group revenue to exceed last year’s record 217 billion euros by as much as 4 percent.

Quarterly profit at luxury division Audi slipped to 1.2 billion euros from 1.3 billion euros a year earlier as VW’s biggest earnings contributor grapples with falling sales in the core Chinese market while pushing new models and technologies.

Reporting by Andreas Cremer; Editing by Maria Sheahan