Volkswagen profit tops forecast, but takes another dieselgate hit

[July 20, 2016]  By Andreas Cremer

FRANKFURT (Reuters) - Volkswagen said cost cutting and rising European car sales helped it to beat first-half underlying profit forecasts, though it set aside another 2.2 billion euros ($2.4 billion) to cover costs related to its "dieselgate" emissions scandal.

Europe's biggest carmaker is battling to restore its reputation after admitting in September to fitting illegal software that could deactivate emissions controls on around 11 million diesel vehicles worldwide.

Some analysts said the stronger-than-expected results for the six months ended June were a sign a recovery might be taking hold, and Volkswagen (VW) shares jumped more than 5 percent after the news on Wednesday.

"Today’s press release is the start of a move in the right direction," said Barclays analysts, who have an "overweight" rating on VW shares.

However, the German company also said it was taking another one-off hit of 2.2 billion euros, "mainly related to further legal risks predominantly arising in North America."

VW has already set aside about $18 billion to cover the cost of its emissions cheating scandal, mainly vehicle refits and a settlement with U.S. authorities, and analysts had expected lawsuits and potential regulatory fines to increase that number.

Three U.S. states announced on Tuesday civil lawsuits against VW claiming senior executives covered up evidence that the carmaker had cheated emissions tests for years.

DZ Bank kept its "sell" rating on VW shares on Wednesday, citing continued uncertainty surrounding the company, despite first-half results which it said signaled the second quarter performance was the company's best on record.

TURNAROUND HOPES

In an unscheduled update ahead of interim results on July 28, VW said its first-half operating profit before one-off items rose 7 percent to 7.5 billion euros.

Evercore ISI analyst Arndt Ellinghorst said that suggested second-quarter operating profit was about 1 billion euros higher than analysts' consensus forecast.

Including one-off items, VW said its first-half operating profit dropped 22 percent to 5.3 billion euros.

A Volkswagen sign is seen on a wheel of a car presented during an auto show in Beijing April 25, 2016. REUTERS/Damir Sagolj/File Photo

It said the improvement in operating performance was driven by its mass-market VW brand, its largest by sales, and helped by rising European car sales, cost cutting and a return of orders from large corporate fleets.

But it added tough economic conditions, particularly in South America and Russia, and volatile exchange rates remained challenges, and kept its forecast for a full-year decline in group revenues of up to 5 percent and an operating return on sales of 5-6 percent.

Evercore ISI's Ellinghorst was particularly encouraged by the improvement at the VW brand, which has long been a weak spot for a group that makes cars ranging from upmarket Audis and Porsches to cheaper Seats and Skodas.

"We continue to believe that the market is complacent with respect to the amount and speed of change that the VW new management team is currently implementing," he said.

VW is in the midst of a cost-cutting drive across the group aimed at making billions of euros of savings, with a particular focus at its namesake brand, whose profit margins have long lagged rivals such as Toyota.

Analysts have said much could depend on ongoing talks between management and unions over the future of German plants, with VW's powerful unions pushing for fixed quotas on production, investment and output that could limit savings.

(Additional reporting by Maria Sheahan; Editing by Mark Potter)

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