Volkswagen’s Q1 Profit Falls As Namesake Brand Continues To Struggle

Volkswagen AG (OTCMKTS:VLKAY) reported its Q1 results on May 31, and as expected, lower volume sales, unfavorable currency impact, and lower profit from its joint ventures in China — its single largest market — ate into the German company’s profit.

Deliveries to customers rose just 0.8% year-over-year in Q1, while overall revenue fell. This decline trickled down to the operating profit, and further compressed Volkswagen’s already narrow operating margin. For comparison, Toyota operates at over a 10% operating margin. The namesake passenger car brand remained the main reason why Volkswagen’s overall margin remained low. Only after the one-time addition of special items, associated with adjustments related to the dieselgate scandal, did the operating margin grow to 6.8% for the quarter.

Revenue for Volkswagen Passenger Cars dropped 4.6% in Q1, on 4.3% fewer vehicles sales (excluding the Chinese JVs). Lower sales, higher marketing costs as a consequence of the emissions scandal, and unfavorable exchange rates kept the brand’s operational return on sales extremely low. In view of the consistent weak operating performance of its namesake brand, Volkswagen is expected to announce plans of cost cuts and implementation of efficiency programs at its namesake brand, in addition to restructuring its global brands, this month, when it announces its Strategy 2025.

In addition, Volkswagen’s proportionate operating profit of the Chinese joint ventures fell 26.5% to $1.31 billion in the first quarter, although deliveries rose by over 6% in the country. The group has struggled in the country where demand for budget vehicles, especially SUVs and Crossovers, continues to rise. Sales of passenger cars rose 6.7% year-over-year in China through April, with SUV sales up by more than 45%. Volkswagen is also continuing to invest heavily in the country, irrespective of its cost-cutting plans. Volkswagen will invest over 4 billion euros ($4.5 billion) in China in 2016, spending on its new SUVs and plug-in models in the country. The group plans to introduce 10 SUV models to be manufactured locally within four years.

2016 is going to be a challenging year for Volkswagen, which is battling with the aftermath of the emissions issues and is continuing to negotiate a settlement with U.S. authorities and plaintiffs’ attorneys in class-action lawsuits representing customers affected by the emissions scandal in the U.S.

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