VW Keeps Lid on Diesel Scandal Fallout as Car Brand Margin Rises

VW Diesel Dupe Hits Q3 Profits Hard
  • VW brand widened return to 3% of sales as profit rose
  • Cheating scandal caused 6.7 billion euros in special costs

Volkswagen AG contained the initial financial fallout from cheating on emissions tests as its namesake car brand lifted third-quarter margins and provisions to cover recalls rose only moderately.

The VW brand, which faces the biggest impact from years of rigging diesel engines to pass emissions tests, widened its return to 3 percent of sales in the third quarter from 2.8 percent a year ago as operating profit jumped 17 percent. Some 6.7 billion euros ($7.4 billion) in special costs linked to the cheating scandal pushed Wolfsburg, Germany-based Volkswagen to a 3.48 billion-euro operating loss, its first quarterly deficit in at least 15 years.

Volkswagen rose the most in three weeks as Chief Executive Officer Matthias Mueller, appointed in the wake of the scandal, vowed to lead the company out of the crisis. The confidence was bolstered by a 29 percent surge in net liquidity to 27.8 billion euros. Funds set aside for recalls last quarter were only slightly higher than an initial provision of 6.5 billion euros. Those are positive signs for the carmaker’s ability to weather the crisis, said Sascha Gommel, a Frankfurt-based analyst with Commerzbank AG.

“I expect VW to have a high degree of visibility on what’s needed to fix the cars by now, so there would be a high degree of confidence” behind its provisions figure, he said.

The shares rose as much as 4.5 percent to 109.90 euros and were up 1 percent at 2:01 p.m. in Frankfurt. Volkswagen, which was tumbling on concerns about a slowdown in China even before the crisis, has lost more than 20 billion euros in market value since the scandal became public on Sept. 18.

Forecast Update

Still, the financial impact remains uncertain as Volkswagen has yet to secure regulatory approval for its recall plans for 8.5 million cars in Europe or 480,000 in the U.S. The current provisions also don’t include regulatory fines, which could total as much as $18 billion from the U.S. Environmental Protection Agency alone. It’s also too early to estimate potential legal costs as lawsuits pile up in the U.S. and Europe, Chief Financial Officer Frank Witter said on a conference call with analysts.

CEO Mueller was also on the call, unlike his predecessor Martin Winterkorn, who typically delegated the task of communicating with investors. Mueller said he will be “ruthless” in his pursuit of those responsible for the cheating and that taking care of VW’s customers is his top priority.

While the company predicted its profit will drop significantly this year because of the costs, its underlying business is holding up. Volkswagen said its return on sales will be between 5.5 percent and 6.5 percent, excluding the effects of the scandal. That’s the same target the manufacturer had set before the crisis, and VW said on the call that demand for its diesel cars remains stable.

Still, it remains to be seen how consumers will view VW after the scandal and whether the carmaker will have to lower prices to sell its vehicles. Analyst estimates for the full costs, including recalls, fines and losses in brand value, have ranged from 20 billion euros to as much as 78 billion euros.

“A large degree of uncertainty persists about how customers will react, if they lose trust in the VW brand or not,” said Frank Biller, a Stuttgart-based analyst at LBBW Bank, who put the price tag at roughly 48 billion euros. “The exact fallout just remains difficult to forecast.”

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