Volkswagen’s Crisis Costs Rise as Audi Takes Diesel Hit

  • Audi return on sales will be ‘considerably below’ target range
  • Cost-cutting helps underpin Volkswagen’s 2016 profit forecast

Volkswagen AG suffered a setback in its year-long recovery from the diesel scandal after Audi, its biggest profit contributor, cut its outlook amid rising costs related to the emissions cheating.

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Volkswagen lifted the provisions it set aside to cover fines, legal costs and repairs resulting from the scandal by about 400 million euros to 18.2 billion euros ($19.8 billion). The higher costs can be traced to Audi. The luxury-car unit took an additional charge of 620 million euros in the third quarter for dealing with rigged 3-liter diesel engines and recalling vehicles with Takata Corp. airbags.

While Volkswagen has made strides in overcoming the scandal that erupted after it admitted to cheating on emissions tests, Europe’s largest automaker still faces criminal investigations and hundreds of lawsuits. The company also has yet to reach an agreement with U.S. authorities over 85,000 cars with the tainted 3-liter motors, which were developed by Audi. A hearing is scheduled in a U.S. court next week.

The unresolved issue contributed to Audi saying its return on sales this year will be “considerably below” its target of 8 percent to 10 percent, rather than missing that range only slightly. The distraction comes as Audi, which has so far set aside 885 million euros for the diesel scandal, loses ground to bigger rivals BMW and Mercedes-Benz.

“Audi’s earnings would be under some pressure even without the diesel scandal” amid sluggish demand for the high-volume A4 model, said Juergen Pieper, a Frankfurt-based analyst at Metzler Bank. “The brand currently has an issue with the general attractiveness of its product range.”

‘Conservative’ Outlook

Volkswagen shares fell 0.7 percent to 125.15 euros at 5:08 p.m. in Frankfurt trading, taking the decline since the crisis emerged in September 2015 to 23 percent.

For a quick wrap of the analyst commentary today, click here.

The manufacturer’s namesake VW brand, which was struggling even before the crisis, is heading in reverse. Operating profit at the carmaker’s biggest unit by sales tumbled 55 percent in the third quarter to 363 million euros. The unit faces restructuring and could cut jobs in a renewed push to revive profit margins, which halved to 1.5 percent. Talks with worker representatives are ongoing to lower costs by 3.7 billion euros by the end of 2020, according to people familiar with the matter.

Still, with the crisis prompting tighter control over spending and Porsche and Skoda boosting earnings, Volkswagen’s third-quarter operating profit before special items rose 17 percent to 3.75 billion euros. Savings will help underpin the company’s 2016 earnings, with operating return on sales before special items now set to be at the upper end of its forecast range of 5 percent to 6 percent. Volkswagen also raised its revenue forecast, saying sales will be unchanged from a year earlier, instead of falling as much as 5 percent.

“This looks clearly conservative,” Stuart Pearson, an analyst with Exane BNP Paribas analyst, said in a note to clients. With the company still under investigation, “we believe political factors have prevented VW from raising guidance more aggressively at this stage.” Through September, the margin was 7 percent.

‘Fully Operational’

Even with Volkswagen’s image tarnished by the crisis, customers have continued to buy its vehicles. Deliveries in the third quarter rose 4.2 percent to 2.49 million vehicles, led by gains at Skoda, Audi and Porsche. Through the first nine months of 2016, Volkswagen outsold Toyota Motor Corp., making it the world’s biggest automaker for the period.

“Huge further efforts are required” to overcome the crisis, Chief Financial Officer Frank Witter said in a telephone conference with analysts. “But our balance sheet is solid and robust,” he said. “We keep fighting.”

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