Volkswagen's Profit Falls as Diesel Emissions Scandal Continues to Weigh

Fallout from the ongoing diesel-emissions cheating scandal continued to hurt VW's results in the first quarter. Image source: Volkswagen

Embattled German auto giant Volkswagen (VWAGY) reported its first-quarter 2016 earnings on Tuesday. Here's what investors need to know.

The key numbers

All financial results are shown in billions of euros. (1 euro = $1.11 as of May 31.)

What happened at Volkswagen during the quarter

While VW's operating profit rose slightly year over year, thanks in large part to an accounting-related special item, its revenue, sales, and net income all fell. 

VW is continuing to feel the effects from its widespread diesel emissions fraud. That's clear from the results at the brand level: Operating profit at its mass-market Volkswagen brand fell to just 73 million euros from 514 million euros a year ago. Why? Because sales have slumped in the wake of the scandal. That's partly due to damage to the brand, and partly due to the fact that sales of diesel-powered VWs have been restricted in some markets (including the U.S.). Both issues will take time to overcome. 

While its Audi unit's operating income fell 8.5% to 1.3 billion euros, most of VW's other automotive units fared better. Porsche's operating income of 895 million euros was up 17% from a good 2015 result, and VW's Skoda and SEAT brands also posted good year-over-year increases.

VW held its ground in China, where it sells very few diesel-powered vehicles and the scandal hasn't had a big impact -- and where low-cost products from local producers have put global brands' prices under pressure. Equity income from VW's China joint-ventures rose to 980 million euros from 963 million euros a year ago. 

VW's automotive division ended the quarter with "net liquidity," cash and available credit lines, of 26 billion euros, up about 1.4 billion euros from the end of 2015.

What VW said about the quarter

"In light of the wide range of challenges we are currently facing, we are satisfied overall with the start we have made to what will undoubtedly be a demanding fiscal year 2016," CEO Matthias Mueller said in a statement. "In the first quarter, we once again managed to limit the economic effects of the diesel issue and achieve respectable results under difficult conditions. This shows that, with its portfolio of strong brands and its good position in many global automotive markets, the Volkswagen Group sits on very robust foundations. We can build on these when we now work toward modernizing our Group and positioning it for the new world of mobility."

"Safeguarding the Volkswagen Group's robust financial strength for the long term remains a top priority in light of the expected effects of the diesel issue," CFO Frank Witter said in a statement. "The higher net liquidity gives us the financial stability and flexibility we need to be able to manage the challenges still to come and to grow profitably. Nevertheless, we will continue to give top priority to disciplined cost management and to focusing our investments consistently on forward-looking topics."

What's ahead for Volkswagen: Guidance and outlook

VW reiterated its full-year guidance. It expects sales revenue to drop by as much as 5% from 2015, and its overall operating margin to come in between 5% and 6%. 

"2016 will be a transitional year for Volkswagen that will see us fundamentally realign the Group," Mueller said. "Nevertheless, we remain confident that our operating business will again record solid growth this year. The Group's robust financial strength and earnings power are key to our ability to take the necessary decisions calmly and diligently, and to resolve the strategic policies that will shape our future with the necessary determination."