By William Boston
BERLIN -- Volkswagen AG on Tuesday reported higher than expected pretax profit as first-quarter earnings at the namesake VW brand beat expectations on the back of strong sales of new models and cost-cutting.
The world's biggest auto maker by sales released a few preliminary figures that show the results of a massive restructuring at the VW brand, the company's biggest business by sales, and revamping of models to tap global demand for SUVs are beginning to generate higher earnings in its core business.
In the three months ended March, operating profit for the entire Volkswagen company was EUR4.4 billion ($4.71 billion), up 29% from the previous year and beating analysts' forecasts. Volkswagen shares rose nearly 4% in Frankfurt trading after the release.
The outperformance comes on the heels of one of the biggest and costliest corporate scandals. Volkswagen acknowledged in Sept. 2015 that millions of its diesel engines contained so-called cheat devices allowing them to evade emissions testing. It took some $25 billion in charges to cover penalties, fines, compensation for consumers and legal fees. In the wake of the scandal, Volkswagen posted a record loss in 2015, but has since swung back strong, generating huge profits and last year surpassed Toyota Motor Co. as the world's best-selling auto maker.
Volkswagen said the company's namesake VW brand was the main driver for the sharp increase in profits in the first quarter. The Volkswagen passenger car division reported operating profit of EUR900 million, up from EUR73 million a year ago when the division's earnings were hit hard by the diesel emissions scandal.
The German car maker maintained its conservative forecast for the full year, estimating operating profit margin of 6% to 7%.
But analysts said Volkswagen had achieved a margin of 8.4% in the first quarter, suggesting the company could lift its earnings outlook later this year.
"We think this bodes well as the margin of the VW brand is likely to remain investors' key point of focus and where the company is under most pressure to demonstrate improvement," analysts at Barclays said in a note after the release.
Volkswagen attributed the strong performance in the first quarter to the introduction of new products, especially the new Tiguan, a midsize crossover that starts at around $25,000 in the U.S. and has been one of the company's best-selling models this year.
Restructuring and stronger pricing has led to improved earnings on models sold in Western Europe, Volkswagen said, contributing the strong performance in the quarter. The company has also been able to lower fixed costs.
Volkswagen's other brands that include luxury car maker Audi, sports car maker Porsche and Czech passenger car brand Skoda. Spanish car maker SEAT also contributed to the earnings boost, Volkswagen said.
Despite the strong quarter, Volkswagen still has a long way to go to turn around its namesake brand. Arndt Ellinghorst, an auto analyst at Evercore ISI, said the Volkswagen earnings report suggested a VW brand profit margin of 3.5% in the quarter. That is a full point higher than analysts' expectations, but still a long way from Volkswagen's target of 6%.
Volkswagen brand chief Herbert Diess has clashed with Volkswagen's workforce as he has pushed to lower costs by streamlining models and cutting jobs. But the company's top management continues to back Mr. Diess, who has said that the Volkswagen brand cannot survive in its current form.
The restructuring at the VW brand is part of a larger overhaul of the company that aims to improve profits and aims to cut the workforce by 30,000 employees by 2020, with 23,000 of the cuts coming from the German workforce. Volkswagen employed nearly 627,000 people world-wide in 2016.
Write to William Boston at [email protected]