VW Back in the Black but Diesel Scandal Takes a Stiff Toll

Profits down 20% year-over-year.

by on May.31, 2016

VW gets back into the black for Q1, but the maker see lower sales and smaller margins for all of 2016.

Volkswagen AG clawed its way back into the black during the first quarter of this year following the spectacular plunge it took last year as it dealt with a global diesel emissions scandal.

Even so, the maker’s $2.6 billion profit for the January-March quarter was down 20.1% from year earlier numbers. Excluding one-time items, VW’s operating profit was down 5.9%, to $3.5 billion. Sales and other revenues, meanwhile, slipped 3.4%, to $56.8 billion.

By the Books!

“In light of the wide range of challenges we are currently facing, we are satisfied overall with the start we have made to what will undoubtedly be a demanding fiscal year 2016,” VW CEO Matthias Mueller said in a statement.

(VW announces major ride-sharing partnership. Click Here for more.)

The German giant’s profits were down slightly less than many analysts had expected, largely due to strong demand for products from the Audi and Porsche brands. The consensus forecast was an operating profit of $3.1 billion.

2016 will "undoubtedly...be a demanding fiscal year," says VW CEO Matthias Mueller.

“With its portfolio of strong brands and its good position in many global automotive markets, the Volkswagen Group sits on very robust foundations,” said Mueller.

The numbers could have been significantly worse in light of the ongoing diesel scandal which impacts 11 million vehicles, more than 500,000 of them sold in the U.S. VW wrote off about $18 billion in anticipated charges in 2015. That resulted in one of the company’s biggest losses ever – indeed, one of its few losses in recent decades.

But VW officials acknowledged they still have some hard times ahead. While the company has begun repairing its rigged diesel models in many markets, it has yet to come up with a fix for vehicles sold in the U.S. that will satisfy the Environmental Protection Agency. It is facing hundreds of lawsuits filed by owners, dealers and investors that could add billions of dollars to the ultimate cost of the scandal – not including potential penalties that could result from a U.S. Justice Department criminal probe.

(Major investor latest to sue VW. For details, Click Here.)

Those uncertainties led analysts at DZ Bank to say they are taking a “skeptical view” of VW for at least the near-term.

For the full year, VW reiterated previous guidance that it could take as much as a 5% hit to sales, in part due to the diesel scandal – which saw the maker install software designed to help it pass emissions tests illegally.

Sales by the flagship Volkswagen brand did show some signs of recovery during the first quarter of this year, but were still off from a year ago. Other members of the group’s 12 brands fared better. Audi – which had several models impacted by the diesel scandal – reported flat sales for the quarter, but the Porsche brand delivered a sizable bump in both sales and profits.

Overall, the group saw sales dip in the U.S., South America and Eastern Europe, but demand rose in Western Europe and the Asia-Pacific region.

But results were mixed in China, VW’s largest market. Though sales were up 6.4% for the latest quarter, VW said earnings at its two Chinese joint ventures took a sharp, 25% dive. VW is facing increased competition in China, not only from traditional rivals like General Motors but also from increasingly popular domestic brands. That has forced it to ramp up costly incentives.

Despite the challenges the diesel scandal still poses for VW, several analysts were upbeat about the company’s future, Evercore ISI analyst Arndt Ellinghorst saying he saw a “huge restructuring opportunity” that would justify investors buying into the automaker.

(Early investigation results clear VW execs of wrongdoing in diesel scandal. For more, Click Here.)

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