Photographer: Patrick T. Fallon/Bloomberg

SUVs Come to the Rescue for VW

Updated on
  • Diesel charge leads to 48% plunge in third-quarter earnings
  • German automaker shows ‘remarkable resilience’ in crisis

Volkswagen AG lifted its 2017 earnings forecast on robust demand for the German automaker’s vehicles like the Tiguan SUV even as the rising costs of the diesel-cheating scandal hit third-quarter profit. 

The operating margin this year is now projected to “moderately” exceed a previous forecast of between 6 percent and 7 percent, Wolfsburg, Germany-based Volkswagen said in a statement. Revenue is still expected to grow by more than 4 percent. The shares rose to their highest since January.

“The company is showing remarkable resilience, and the headwinds from ‘dieselgate’ are slowly starting to ease,” said Juergen Pieper, a Frankfurt-based analyst with Metzler Bank. “VW has more potential to improve profits further in coming quarters.”

Volkswagen’s expansion of its lineup of sport utility vehicles, with models like the VW Atlas, Skoda Karoq and Seat Ateca, has attracted more buyers, helping the company absorb the ballooning costs of the emissions scandal and finance unprecedented spending on a shift to self-driving, electric cars. The company generated 1.85 billion euros ($2.15 billion) in cash in the third quarter.

The carmaker’s shares climbed as much as 4.1 percent to 151.45 euros, the highest intraday price since Jan. 27, and were up 3.4 percent at 3:34 p.m. in Frankfurt trading. That helped push the Stoxx 600 Automobiles & Parts Index of European manufacturers to the highest since July 2015.

Diesel Charge

Operating profit, including costs related to the emissions scandal, dropped 48 percent to 1.72 billion euros in the quarter. Volkswagen announced last month that it would take a surprise charge of about 2.5 billion euros in the period, bringing total damages from the two-year-old crisis to over 25 billion euros.

The latest hit came 15 months after the company reached a settlement with U.S. authorities to either buy back or retrofit around 500,000 tainted vehicles, including Golf, Jetta and Audi A3 models. Volkswagen has said the plans were turning out to take significantly longer than anticipated. The complications amount to additional expenses of about 5,000 euros per car.

VW anticipates another roughly 2.5 billion-euro cash outflow related to the diesel scandal in the fourth quarter, followed by a charge of between 4.5 billion euros and 5 billion euros next year, Chief Financial Officer Frank Witter said on a conference call with analysts. The company will keep a tight lid on capital expenditure to stem the financial fallout and potentially make some progress toward its dividend payout target of 30 percent of profit, he said.

Even as Volkswagen still faces numerous investigations and lawsuits from the crisis, the company is ramping up spending on a 20 billion-euro project to develop electric versions of all vehicles across its lineup by 2030. Additionally, uncertainty over the outcome of Brexit talks poses risks for VW, which owns the British Bentley brand, and Catalonia’s independence drive threatens to disrupt Seat, which is based near Barcelona. 

“What we need is a stable and predictable environment,” Witter said, speaking before the Catalonian parliament voted to set up an independent state, prompting the Spanish senate to give the national government power to oust the regional one. “We hope the situation can be resolved soon.”

All those headaches haven’t been a drag at showrooms. Volkswagen delivered 1.01 million vehicles in September to set a new monthly record, buoyed by recovering demand in China and the U.S. Through the first nine months of 2017, the German manufacturer’s sales improved 2.6 percent to 7.81 million vehicles, keeping it on track to defend its crown as the world’s biggest automaker ahead of Toyota Motor Corp.

‘Success Factor’

Prodded by the diesel crisis, the German industrial behemoth has embarked on an effort to become more nimble by decentralizing decision-making to brands like Audi, Porsche and Scania. Meanwhile, Volkswagen has completed the bundling of its large components manufacturing operations to improve efficiency.

The third-quarter results “underpin the trust of customers worldwide in our brands and products,” Chief Executive Officer Matthias Mueller said in the statement. “If we continue to collaborate closely and make even better use of the synergies available in the group, this will become a critical factor for success in the profound structural transformation our industry is undergoing.”

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