BERLIN-Volkswagen AG reported sharply higher profit in the three months to Sept. 30 on Thursday and raised its outlook for the year, but the news was overshadowed by a profit warning from its luxury car maker Audi AG in the face of diesel-related charges.
So far, the emissions cheating scandal has cost Volkswagen ?18.2 billion as the company grapples with the costs of a global recall and a huge settlement with U.S. customers that was approved this week in U.S. federal court, Chief Finance Officer Frank Witter said on a conference call.
Now, it's Audi's turn. The premium car maker announced before European stock markets opened that it would take a charge of ?620 million on third-quarter earnings as a result of costs related to the recall of tainted three-liter diesel vehicles in the U.S. and charges linked to Takata Corp's airbag recall.
Mr. Witter said the third-quarter report showed the company remained strong financially despite the huge financial burdens of the emissions-cheating scandal. But he added that "further significant improvements in productivity and profitability are needed across the whole group."
Volkswagen said operating profit before special items rose to ?3.75 billion in the third quarter from ?3.21 billion a year earlier. Volkswagen swung to net income of ?2.28 billion after a net loss of ?1.73 billion a year ago. Revenue rose 1% to ?51.99 billion.
The company took charges of ?442 million in the third quarter in anticipation of legal costs associated with the recall of three-liter diesel vehicles in the U.S. that weren't covered in the $14.7 billion settlement approved this week.
As a result of the new diesel charges, Volkswagen swung to an operating profit after special items of ?3.3 billion after a loss of ?3.48 billion a year ago. Volkswagen raised its outlook on sales for the full year, saying revenue could match the previous year's level. The company previously expected a decline of as much as 5%. Mr. Witter said they now expect Volkswagen full-year profit margins at the upper end of its target range of 5% to 6%.
Volkswagen is struggling to rein in costs and boost profits at its namesake brand. The division is the company's biggest business by sales but is barely profitable.
During the first nine months of the year, Volkswagen revenue was around ?160 billion, little changed from the previous year. Unadjusted operating profit rose 10.5% to ?11.3 billion, a strong performance
Most of Volkswagen's car brands performed well in the quarter. Porsche achieved a profit margin of nearly 19%, while Audi and Skoda achieved margins of 9% and 8.5% respectively. Audi gave a profit warning on costs for the Takata Corp. air-bag recall.
Many analysts remained cautious, saying Volkswagen's balance sheet was weak, the company was spending too much, and it remained uncertain if management could overcome labor resistance and push through a thorough restructuring of the namesake VW brand.
The Volkswagen brand, which in the first nine months of the year accounted for 70% of group passenger-car revenue but 20% of operating earnings, achieved a profit margin of 1.5% in the third quarter.
Mr. Witter said during a conference call that management was sticking to its goal of boosting Volkswagen brand margins to 6%, but did not say how long it would take.
"We are pushing very hard," he said.
German media have reported that the company plans to set a target to achieve a 4% profit margin by 2020. Arndt Ellinghorst, auto analyst at Evercore ISI, said that goal was far too unambitious, and if confirmed "would jeopardize what we believe could be a credible turnaround story."
Corrections & Amplifications: Volkswagen swung to an operating profit after special items of ?3.3 billion after a loss of ?3.48 billion a year ago. An earlier version of this article incorrectly stated Volkswagen's operating profit after special items fell to ?3.3 billion from ?3.48 billion a year ago. (10/27/2016)
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