October 27, 2017 / 7:22 AM / a year ago

VW lifts profit target as cost cuts pay off, shares at eight-month high

BERLIN (Reuters) - Volkswagen (VOWG_p.DE) lifted its profit target for the year on Friday after cost cuts at its core autos division helped it outstrip third-quarter earnings forecasts.

FILE PHOTO - A Volkswagen logo is seen at Serramonte Volkswagen in Colma, California, U.S., October 3, 2017. REUTERS/Stephen Lam/File Photo

Shares in the world’s largest carmaker rose 1.9 percent to an eight-month high at 148.20 euros by 0756 GMT, making them the biggest risers on the STOXX Europe 600 automobiles index .SXAP, which was up 1 percent.

VW is spending billions of euros to reposition itself two years after a diesel emissions scandal, focusing on electrification of its mass-market and luxury brands while developing what it calls “digital mobility services” for those who do not want to own a vehicle.

Higher earnings at mass-market divisions such as VW’s namesake brand and Czech unit Skoda as well as the trucks business lifted group results, while premium brands Audi (NSUG.DE) and Porsche posted flat and lower profit.

“Earnings in the first nine months make us quite optimistic about the year as a whole,” Volkswagen finance chief Frank Witter said. “This is a strong foundation we can build on.”

Quarterly group earnings before interest and taxes (EBIT) and before special items jumped 15 percent to 4.31 billion euros ($5 billion). That beat even the highest estimate of 4.17 billion in a Reuters poll of banks and brokerages.

VW said it booked 2.6 billion euros in the three months ended Sept. 30 to fix diesel engines in the United States, confirming an announcement last month that will raise total provisions for its “Dieselgate” scandal to 25.1 billion euros.

Wolfsburg-based VW said it expected the group operating margin to moderately exceed a target of between 6.0 and 7.0 percent, having previously said the margin would hit that range.

VW said its results benefited from cost cuts, agreed a year ago with labor unions, and growing vehicle sales.

“The results show that customers at least abroad are ready to forgive VW the diesel scandal,” NordLB analyst Frank Schwope who has a “buy” rating on the stock, said. “The strength is enormous.”

Quarterly VW brand deliveries rose 7.3 percent on strong demand from China, the United States and South America, almost triple the 2.7 percent gain in year-to-date sales and offsetting declines in Germany, helped by orders for the new Tiguan SUV.


VW’s core brand is in the midst of cutting thousands of jobs through natural attrition, has ceased unprofitable models, reduced parts complexities and streamlined model development to lift the core division’s margins.

Restructuring helped more than double its quarterly return on sales to 3.8 percent from 1.5 percent a year ago, nearing VW’s target of at least 4 percent by 2020.

“This is a strong result,” said M.M. Warburg analyst Marc-Rene Tonn, who rates the stock “hold”. “There is growing evidence of cost savings and benefits from modular production.”

Quarterly profitability at Porsche fell to 17.2 percent from 19.3 percent, weighed down by spending on new facilities at its Zuffenhausen headquarters to build the all-electric Mission E sportscar and falling demand for the expiring Cayenne SUV, the brand’s second-best selling model.

Margins in VW’s truck operations nearly doubled to 5.2 percent, benefiting from the deepening cooperation between the MAN and Scania brands which have been sharing purchasing and developing of gearboxes, axles and engines.

Although group revenue was up 6.8 percent after nine months compared with year-ago levels, VW kept its guidance for an increase by more than 4 percent from last year’s 217.3 billion euros, citing risks from protectionist tendencies, financial market turbulence and structural deficits in countries.

While VW is producing a strong operating performance, the carmaker is facing a barrage of lawsuits from customers, investors and regulators over Dieselgate and is staking its future on a costly electric vehicle (EV) program.

Rolling out battery-powered cars in high volumes at Golf-type price points “has the potential to lose significant amounts of money,” Bernstein analyst Max Warburton said.

Together with rivals Daimler (DAIGn.DE) and BMW (BMWG.DE), it has also become the target of investigations by European and German antitrust staff into alleged collusion.

Reporting by Andreas Cremer. Additional reporting by Jan Schwartz.; Editing by Maria Sheahan and Alexander Smith

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