Cost Cuts Pay Off as Volkswagen Profit Surges 40%

By John

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.

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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.

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.

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

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.