Regaining momentum: VW delivers a strong, first-half profit despite the costs of its diesel scandal.
Volkswagen AG beat its earnings forecast for the first half of 2016, delivering “significantly higher” profits even while setting aside another 2.2 billion euros, or $2.4 billion, to cover the growing cost of its diesel emissions scandal.
The news comes a day after New York and two other states filed suit against the embattled German maker, claiming senior executives had helped cover up the diesel emissions subterfuge. Last month, VW agreed to a $14.7 billion settlement covering its 2.0-liter diesel, a deal that includes $10 billion to buy back nearly 500,000 vehicles. Most of the funds VW has so far committed to settle what it calls the “diesel issue” came out of 2015 earnings, however.
For the first half of 2016, VW said it had an operating profit of 7.5 billion euros, or $8.25 billion. That would drop to 5.3 billion euros after factoring in the latest charges for the emissions scandal, money largely related to legal costs in North America.
(For more on the VW’s $14.7 billion diesel settlement, Click Here.)
The numbers were about 1 billion euros higher than industry analysts had been expecting.
“Despite Dieselgate VW reported the best quarterly operating profit ever,” wrote Michael Punzet, an automotive analyst at DZ Bank AG. Nonetheless, Punzet said he maintains a “skeptical view on VW,” as do a number of other analysts.
VW CEO Matthias Mueller will have to continue delivering the cost-cutting promised to shareholders.
VW itself warned that company is dealing with a highly competitive global car market, with uncertain commodity prices, as well as fluctuating interest and exchange rates, “all pos(ing) challenges.”
There are plenty of uncertainties about the next stages in the diesel scandal. The $14.7 billion settlement VW agreed to last month far from settles the scandal. For one thing, it only covers the 2.0-liter diesel. The maker must yet come up with a deal involving a 3.0-liter engine. VW hopes to avoid another buyback, but a proposed fix meant to bring the bigger engine into compliance with U.S. emissions laws was rejected by the California Air Resources Board last week.
Then there’s the new lawsuit filed by New York, Maryland and Massachusetts that could add hundreds of millions of dollars more in diesel-related legal costs. VW has also said it plans to offer compensation to U.S. dealers for business lost due to the scandal. Diesel models accounted for a quarter of its American business before the subterfuge was revealed last September. Despite coughing up lucrative incentives, sales are down by double-digits.
(For more on the new 3-state lawsuits, Click Here.)
And there is also the ongoing criminal investigation by the U.S. Justice Department which, officials stressed last month, will not end despite the $14.7 billion settlement.
Nonetheless, the first-half earnings report is “the start of a move in the right direction,” said a statement from Barclays’ automotive analysts.
A real test for VW, other observers said, will come in the next few quarters. As VW’s legal exposure to the diesel scandal winds down, the focus will shift to operations at the German giant’s dozen automotive brands – which range from economy minded Seat to the ultra-luxurious Bentley, Lamborghini and Bugatti brands.
Even before the ouster of CEO Martin Winterkorn last autumn, VWAG had promised to boost its bottom line by shaving billions of euros out of operating costs.
The first half earnings report sent the maker’s stock surging upward in European trading. Near the end of the day in its home market, VW shares were running at over 123 euros, a nearly 6% increase for the day. Nonetheless, that’s well short of the 167.80 euro figure the day before the U.S. Environmental Protection Agency accused VW of cheating on diesel emissions, and exactly a year ago, VW stock was trading at 198.35 euros.
(GM has its own, mounting legal problems. Click Here for the report.)