Volkswagen profitability surges in post-scandal savings push

[FRANKFURT] Volkswagen AG's profitability surged as turnaround efforts at the struggling namesake car brand gained traction, providing much-needed support to stem an unprecedented financial hit from its diesel-emissions crisis.

First-quarter operating profit widened to 7.8 per cent of revenue from 6.8 per cent a year earlier, the Wolfsburg, Germany-based manufacturer said Wednesday in a statement. The improved margin is key as the carmaker said it faces a cash outflow in the "double-digit billion-euro range" to pay for damages of the emissions-cheating scandal.

"These quarterly results represent the first tangible results" of Volkswagen's spending discipline in the wake of the diesel crisis, CFO Frank Witter said in the statement. "We will continue to fight for every single customer."

The world's largest automaker is intensifying efforts to rein in bloated costs and revive weak margins at the VW marque, its largest division, to reduce dependence on profits from the Audi and Porsche nameplates and its sprawling Chinese operations. Those efforts, initiated years ago, have intensified since the September 2015 revelation of cheating on diesel emissions tests.

Volkswagen shares declined 0.3 per cent to 143.95 euros as of 9:40am in Frankfurt. The stock has gained 8 per cent this year, valuing the manufacturer at 73 billion euros (S$111.1 billion).

Excluding one-time items, the VW brand posted a 4.6 per cent return on sales, compared with 0.3 per cent a year earlier. Division chief Herbert Diess has set a goal of 4 per cent for the measure by 2020. The unit signed a landmark labor agreement last year to save 3.7 billion euros in expenses in a renewed savings push, partly in response to the scandal. It has also started to weed out a convoluted reporting structure, including simplifying sales allocations among divisions.

Volkswagen has set aside 22.6 billion euros so far to cover fines, buybacks and repairs stemming from the diesel scandal, with the bulk of those funds flowing out this year. The financial burden comes as the auto industry faces huge investments to develop self-driving features and expand electric cars to comply with tightening emissions regulations. Over the next five years, the German auto giant plans to invest about 9 billion euros on battery-powered and hybrid cars, triple its previous spending level.

Even with the improved first-quarter performance, VW stuck to its 2017 forecast of a 6 per cent to 7 per cent operating return on sales, warning that "challenges will arise particularly from the economic situation, intense competition in the market, exchange rate volatility and the diesel issue."

BLOOMBERG