Cost Cuts Pay Off as Volkswagen Profit Surges 40%

By John Rosevear Markets Fool.com

Volkswagen AG (NASDAQOTH: VLKAY) said on May 3 that its first-quarter operating profit rose almost 40% from a year ago, to 4.37 billion euros ($4.77 billion), as an aggressive profitability-boosting effort at its core VW brand more than offset a year-over-year decline in worldwide deliveries.

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Volkswagen's headquarters in Wolfsburg, Germany.

Volkswagen earnings: The raw numbers

All financial results are shown in millions of euros. As of May 3, 1 euro = about $1.09.

Metric Q1 2017 Change vs Q1 2016
Revenue 56,197 10.3%
Vehicles delivered (thousands) 2,495 (0.5)%
Operating profit (excluding special items) 4,367 39.5%
Operating profit margin 7.8% 1.7 ppts
Net income 3,403 43.9%

Data source: Volkswagen AG. "Ppts" = percentage points.

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The nutshell summary: Why VW's profit surged

VW attributed its year-over-year gains to a more favorable "mix" of vehicles sold, positive exchange-rate effects, and the effects of its ongoing cost-cutting campaign.

VW CEO Matthias Mueller has been pushing to boost the company's profitability as it grapples with the costs of its diesel-emissions scandal. While VW has generated good profits for a few years now, a disproportionate share of those profits have come from its luxury brands, particularly Audi and Porsche. Mueller wants the core VW brand -- the company's volume leader, by far -- to carry more of the weight.

For a long time, the VW brand's operating profit margin has been very slim. That's starting to change, thanks to new products and cost-cutting success: The VW brand's operating margin rose to 4.6% in the first quarter.

Data source: Volkswagen AG.

The VW brand's profitability gainhelped boost the overall company's operating margin by a full point in the first quarter.

How VW's business units performed in the first quarter

Here's a quick look at how each of VW's business units performed. Note that all of the individual units' profit numbers are reported on an operating basis.

  • The VW brand's operating profit (before special items) rose to 869 million euros from just 73 million euros a year ago, on a more favorable mix of products and positive exchange-rate movements. As noted above, the brand's margin rose to 4.6% from 0.3% a year ago.
  • Audi's operating profit fell 4.5% to 1.244 billion euros on a 3.4% decline in sales. The brand's margin fell to 8.7% from 9% in the year-ago period. Lower sales volume and higher spending on technology, offset somewhat by favorable exchange rates and improvements in mix, explained the decline.
  • Porsche's operating profit jumped 9% to 932 million euros despite a 3% drop in worldwide sales (to about 57,000 vehicles). Strong demand for the Macan SUV and Panamera sedan helped drive an overall improvement in mix. Favorable exchange rates also helped.
  • Sales and profit increased at the lower-cost SEAT and KODA brands.
  • Despite some cost challenges, sales and profit rose across VW's commercial-vehicle and truck businesses.
  • As of Jan. 1, results for VW Financial Services incorporate results for Porsche's financial-services arm. The unit earned 551 million euros in the first quarter, up 12.2% from a year ago on incremental business growth.

What VW executives said about the quarter

In a statement, Mueller summarized the factors driving the company's improved profit performance.

Our quarterly figures were positively impacted by the strong performance of the Group brands, the launch of new, compelling products and solid earnings in Western Europe. Our efforts to improve efficiency and productivity across all areas of the Company are also paying off.

CFO Frank Witter emphasized that VW has the financial strength to weather the diesel scandal.

The quarterly results are further proof of our Group's solid financial foundation. The fact that we always made safeguarding our robust financial strength a top priority is now paying off, particularly in light of the diesel issue. Although this will lead to a cash outflow in the double-digit billion euro range in the current fiscal year, our current net liquidity gives us the financial stability and flexibility to overcome this challenge.

Looking ahead: VW confirmed its full-year guidance

VW reiterated its guidance for the full year. It still expects a 4% year-over-year gain in revenue, and overall operating profit margin to come in between 6% and 7% for the full year.

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John Rosevear has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.