Diesel scandal hit Volkswagen sees profits fall in Q1

Flagship brand barely breaks even, luxury brands do better.

May 31, 2016   by ASSOCIATED PRESS

FRANKFURT — German automaker Volkswagen saw its net profit fall 19% in the first three months of the year as it grappled with a costly scandal over cars it had equipped to cheat on diesel emissions tests.

The company called it a “respectable” result considering the tough conditions and said it had the financial resources to weather the scandal.

The flagship Volkswagen brand, the one most associated with the scandal and with the most rigged cars, barely broke even. The company made most of its profits at its luxury brands Audi and Porsche and the financial services branch.

Profits in the January-March period fell to 2.37 billion euros ($2.63 billion) from 2.93 billion euros a year earlier, the company said. The figure fell short of the 2.44 billion euros expected by analysts surveyed by financial information provider FactSet. Revenue fell 3.4% to 50.96 billion euros due in part to shifts in currency exchange rates.

Still, the company reported it had bulked up on its cash reserves and said it was well-funded to deal with the effects of the scandal, which include costs for recalls, fines and lawsuits. The automotive division was sitting on 26 billion euros in net liquidity, up 5 billion from a year ago. The earnings release contained no new estimate of the overall cost of the scandal; the company set aside 16.2 billion euros from earnings last year, when it lost 1.4 billion euros.

CEO Matthias Mueller said in a statement that the company “managed to limit the economic effects of the diesel issue and achieve respectable results under difficult conditions.”

The company’s ordinary shares traded down 2.75% at 134.15 euros in midday trading in Europe.

The effects of the scandal were seen most strongly at the Volkswagen brand, which made only 73 million euros in the quarter, down from 514 million euros a year earlier. That left a bare operating margin of only 0.3%.

Earnings and profit margins were supported by luxury brand Audi, typically a pillar of the company’s profits. Operating profit there fell slightly to 1.3 billion euros from 1.4 billion euros a year earlier. Audi was the biggest single contributor to company operating profit. But it saw its profit margin, a key indicator for investors, fall to 9% from 9.7% in the first quarter of 2015.

Things went better at the Porsche brand. Operating profits, which exclude financial items such as interest and taxes, rose 14 per cent to 895 million euros. The sportscar and luxury SUV division turned in a fat profit margin of 16.6%, up from 15.1%.

The company also faced plummeting sales in Russia and Brazil due to those countries’ troubled economies. Sales fell 35% in Russia, which has seen its currency dive along with the price of oil, and 17% in Brazil, which is in a deep recession.

Volkswagen, based in Wolfsburg, Germany, faces heavy costs recalling and fixing cars that are equipped with engine-control software that could detect when a car was on a test stand and turned off the emissions controls during everyday driving.

The company has reached a tentative agreement in federal court in San Francisco with US authorities, who first uncovered the cheating, to buy back or repair some 500,000 vehicles. Volkswagen, the US Department of Justice and attorneys for Volkswagen owners have until June 21 to file a final settlement with the court.

The company reaffirmed its forecast for the full year, saying that it expects sales revenue to fall 5% for all of this year compared to 2015.

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