Photographer: Akos Stiller/Bloomberg

VW Brand Was Less Profitable as Cuts Fail to Stem Crisis Fallout

  • First-half VW brand profit margin drops to 1.7% of sales
  • VW set aside $1.8 billion for scandal in second quarter

Volkswagen AG’s efforts to make its biggest division more competitive fell short as the namesake VW brand’s profit margin dropped further behind those of rival European carmakers in the first half.

The marque’s margin shrunk to 1.7 percent from 2.7 percent a year ago, according to Bloomberg calculations based on a statement from the Wolfsburg, Germany-based company Thursday. That widened the gap between VW and its European mass-market competitors, as Peugeot maker PSA Group reported a 6.8 first-half margin from carmaking, while Renault SA achieved 4.7 percent.

Volkswagen has been trying to revamp its biggest division since even before the emissions-cheating crisis came to light last year, with success vital to ensure future growth as the price tag of the emissions crisis climbs. Complicating the effort to lift margins, the brand has had to spend more money to lure customers in the wake of the scandal. Chief Executive Officer Matthias Mueller is pushing the carmaker to pivot toward mobility services and electric vehicles, even as it streamlines its model lineup and tries to cut development costs.

“The second-quarter results are pretty good, but if you compare the VW brand margin to direct competitors, there’s still quite a gap,” said Sascha Gommel, a Frankfurt-based analyst with Commerzbank AG.

VW’s results came as competitors cut costs and introduced new models to become more profitable than investors had expected so far this year. Elsewhere at the Volkswagen group, the mass-market Skoda brand managed a 9.6 percent return on sales in the first half, on par with that of high-margin luxury carmakers such as Mercedes-Benz and BMW.

Volkswagen fell as much as 3.5 percent and traded down 1.9 percent to 125.25 euros at 11:50 a.m. in Frankfurt. The stock has lost 23 percent since the diesel scandal emerged in September, compared with a 4 percent increase in Germany’s benchmark DAX Index.

Though the carmaker got court approval Tuesday for a $15.3 billion settlement to get the cars it rigged off roads in the U.S., its legal troubles are far from over. Volkswagen set aside about 1.6 billion euros ($1.8 billion) linked to the diesel scandal in the second quarter, increasing the estimated cost to about 17.8 billion euros.

Operating profit at the VW passenger-car nameplate dropped to 808 million euros from 914 million euros in the prior-year period, with a 2.9 percent margin in the second quarter. The result was an improvement over the first quarter, when the brand’s profit was 73 million euros.

“Management needs to show more progress on the turnaround,” said Arndt Ellinghorst, a London-based analyst for Evercore ISI. It would have been good to see more cuts in capital expenditures, he said.

Volkswagen lifted its forecast for global vehicle sales this year, predicting a slight increase compared with 2015. It had previously expected sales to be stable. The company confirmed its target for a 5 percent revenue increase and said the operating profit margin excluding special items will be in a range of 5 percent to 6 percent of revenue, after reaching 6 percent last year.

Europe’s biggest automaker reported preliminary first-half results last week. Second-quarter group operating profit before special items rose to 4.39 billion euros from 3.66 billion euros a year earlier.

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