VW Group profits surge 40% as struggling core brand cost cutting bears fruit

03 May 2017 

Volkswagen (VG) Group announced Q1 operating profit launched 40%, despite falling vehicle sales. The group’s strategy is to boost profitability rather than chase sales, where it is currently the global leader, as it cuts costs following its Dieselgate emissions scandal, which is still set to cost the company ′double-digit billion-euro’ outflows this year, according to CFO Frank Witter. However, headwinds remain as core profit engine Audi struggles and overall group market share falls.

Group sales reached almost 2.5 million in the first quarter, down 0.5% year on year. This was led by a big drop of 6.7% in VW’s largest market of China, where Audi is struggling under intense competition. Sales in Europe and North America rose 4.4% and 6% respectively.

Q1 group operating profit rose to €4.37 billion, up 40% from €3.13 billion last year – making it one of the carmaker’s highest ever quarterly results. Group revenue rose 10.3% to €56.2 billion, but it is cautious in anticipating only a 4% full-year rise, anticipating a challenging market under ′intense competition’. Analysts broadly responded positively to the results. A turnaround at Volkswagen’s core VW brand is seen as fundamental to the long-term health of the group, and improved cost savings at this struggling division goes some way to achieving this.

However, the group is sticking with full-year group operating margin staying within the range 6-7% despite achieving 6.7% last year – suggesting the following quarters will not be as rosy as the first.

Group CEO Matthias Mueller said: ′Our efforts to improve efficiency and productivity across all areas of the company are paying off.’ This includes reducing ′nonsensical’ parallel drivetrain developments across its 13 brands. The ′robust’ results were also due to volume and mix-related factors, good exchange rates, product optimisation and – most significantly – the core VW group’s profit revival. This brand’s profit skyrocketed from €73 million last year to €869 million.

However, sales at the core brand fell 1.3% to 1.44 million vehicles in the quarter (more than half of the 2.5 million sales across the entire group). Analysts hope that improvements to Volkswagen’s core brand will be sustainable, as VW renews long-bestselling models such as the Polo subcompact and Touareg SUV, and continues to implement its hard-won turnaround plan with its unions. The brand’s Q1 operating margin rose massively from 0.3% a year ago to 4.6%, but this is still weak and behind the brand’s key rivals including PSA (Peugeot Citroën) and Renault. However, VW is on track to reach its goal to achieve a 6% margin long-term by 2025.

However, elsewhere across the sprawling group, results were mixed. The Group’s main profit engines Audi and Porsche saw falling and rising profits respectively, negating the impact of each. Audi’s profit fell from €1.3 billion to €1.2 billion year on year as its sales fell in its core Chinese market on intense competition. Improved mix and exchange rates lifted Porsche’s operating profit to €932 million from €855 million. Skoda rose healthily, up a hefty 32% year on year to €415 million, SEAT was flat at €56 million profit from €54 million, and luxury British brand Bentley narrowed its losses from €54 million to €30 million.

Photograph courtesy of Volkswagen Group