VW shares climb despite €1bn charge

Sales of higher-margin sports utility vehicles and cost cuts helped Volkswagen shrug off a €1bn legal charge to meet first-quarter operating profit forecasts, sending its shares 4% higher.

Earnings before interest and taxes, or Ebit, fell to €3.9bn from €4.2bn a year earlier but were in line with the €3.92bn expected by analysts despite the extra legal charges.

Adjusted for one-off factors, earnings rose by a forecast-beating 14%, or €600m, to €4.8bn, at a time when other carmakers and suppliers were cutting their outlook.

Luxury brands Porsche and Audi remain key profit contributors, making up around 40% of group earnings. 

“VW is defying the odds and growing earnings while others decline,” Bernstein Research analyst Max Warburton said in a note.

By contrast, Daimler’s adjusted operating profit had fallen 30% in the first quarter, Metzler analyst Juergen Pieper said. 

Ongoing supply bottlenecks caused by difficulties getting cars certified for stricter emissions tests, as well as economic weakness in China, South America, and Russia, and legal issues pose risks to VW Group’s business, the carmaker said.

As a result, the return on sales for passenger cars will likely be at the lower end of its 6.5% to 7.5% margin target for the year, the carmaker said. 

Volkswagen stuck to its forecast of higher unit sales, revenue growth of up to 5% this year, and for a group operating return on sales of 6.5% to 7.5%.

VW maintained its guidance for free cashflow to reach €10bn by 2020, despite an inventory build-up due to difficulties getting vehicles cleared for sale in China and the US. 

VW said in March it planned to launch almost 70 new electric models by 2028, aiming to put itself at the forefront of the industry’s shift to zero-emissions driving following the 2015 scandal over its cheating of U.S. diesel emissions tests.

The company set aside €1bn for additional risks for the scandal which has cost it €30bn since it was caught using illegal engine control software to cheat US pollution tests in 2015.

VW said the provisions are not related to prosecutor charges filed last month against former VW CEO Martin Winterkorn and four other VW executives who are accused of fraud for failing to report systematic emissions cheating.

Passenger car sales fell 3% to 2.55 million vehicles during the quarter, with sales of the VW brand down 4.5%, but improvements in pricing and higher sales of sports utility vehicles helped the multi-brand group post resilient earnings.

Earnings at VW brand, Skoda, Audi, and commercial vehicles came in ahead of expectations, analysts at Citi said. 

And that’s despite falling demand at luxury brands Audi and Porsche which saw sales drop 3.6% and 12.3% respectively. 

VW’s Bentley brand also managed to reverse losses, the carmaker said.

Analyst at Warburg said the car maker had a very strong start to the year despite a challenging market, confirming that self- help measures and an improving mix are supporting earnings.

It said VW had benefited from a better sales mix and price positioning while volume sales declined. 

“All-in-all, the start of the year has been strong, mainly related to the individual performance of brands (VW brand) and the reconciliation line,” said JP Morgan analysts.

- Reuters and Bloomberg

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