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Audi's Profit Drops As Volkswagen Confronts Diesel Scandal

By John Rosevear – Mar 6, 2016 at 9:20AM

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VW subsidiary Audi reported that its operating profit dropped 6.1% in 2015, in part because of the costs of the diesel scandal engulfing majority owner Volkswagen.

Audi's 3.0-liter diesel V6 engine is implicated in the massive emissions cheating scandal that has engulfed Volkswagen. Image source: Audi AG.

German luxury-car maker Audi (AUDVF) said on Thursday that its full-year 2015 operating profit fell 6.1% to 4.84 billion euros ($5.3 billion), after a substantial increase in costs related to a diesel emissions scandal.

That's important for a few reasons, starting with this one: It gives us a small clue as to how giant Volkswagen (VWAGY 1.14%), which owns most of Audi, will handle the scandal's costs when it reports its own 2015 earnings sometime next month. 

Why Audi's report is a clue to Volkswagen's 
We still don't know for sure how much Volkswagen made (or lost) in the fourth quarter of 2015, and we won't for at least a few more weeks. The company has postponed its fourth-quarter and full-year 2015 report while it grapples with the costs of its massive emissions cheating scandal.

But Audi's report might give us a clue. Volkswagen owns over 99% of the luxury-car maker, but it doesn't quite own the whole company. It has full control of Audi: Audi is organized as a subsidiary of VW, its vehicles share platforms, parts, and engineering with other brands in the VW group, and its financial results are rolled up into VW's own quarterly reports. And Audi's Supervisory Board (roughly akin to a U.S. company's board of directors) is chaired by VW CEO Matthias Mueller.

In other words, it's for all intents and purposes part of VW. And it's a huge contributor to VW's bottom line: Audi's earnings accounted for just over 40% of VW's 2014 operating profit of 12.7 billion euros. 

But because Audi is still technically a public company, it also issues its own annual report. That report also includes results for Lamborghini and the Ducati motorcycle brand, which are organized as part of Audi.

Let's take a look.

Audi earnings: The key numbers

All financial results are in millions of euros. 

  2015 2014 Change
Revenue 58,420 53,787 8.6%
Vehicles delivered: autos 2,024,881  1,933,517  4.7%
Vehicles delivered: motorcycles  54,809  45,117  21.5%
Operating profit (before special items) 5,134 5,150 (0.3%)
Operating profit (including special items) 4,836 5,150 (6.1%)
Operating profit margin 8.3% 9.6% 1.3 points 
Special items 298  0  
Net profit 4,297 4,428  (3%)

What Audi said about its 2015 report
Notwithstanding the scandal, it was a fairly good year for Audi. Revenue rose 8.6% to a new record for the company. Sales growth of 3.6% may appear modest, but it's also a record that follows a record 2014. Audi said its sales grew in more than 60 global markets last year. Its operating margin of 8.3% after special items falls short of the 10% margin posted by rival Mercedes-Benz, but it's within the company's stated long-term target range of 8% to 10%.

Looking ahead to 2016, Audi plans to launch "more than 20 new or revised models" including important vehicles like the compact A4 sedan. It's also planning to invest more than 3 billion euros in electric vehicles and advanced technologies this year. 

"We successfully mastered a year of challenges," Audi CEO Rupert Stadler said in a statement. "We will now invest in 2016 alone more than 3 billion euros for the mobility of tomorrow, and we will push forward with the electrification and digitization of our products."

What Audi said about the diesel emissions scandal
"We regret what happened," Stadler said, referring to the diesel emissions cheating scandal. "We will ensure full transparency and assure you that we will put things right."

Audi said that "emissions-related costs" accounted for 228 million euros of its 298 million euros in special items in 2015. (Much of the rest was accounted for by costs related to the Takata airbag recalls.)

Audi has admitted that it used illegal "defeat-device" software in about 85,000 vehicles equipped with 3.0-liter V6 diesel engines. That's a small proportion of the roughly 11 million VW Group vehicles said to be equipped with the software worldwide. 

(Some Audis also used the four-cylinder Volkswagen "TDI" diesels that are at the center of the scandal, but Audi said that the costs related to those engines will be borne by Volkswagen, not Audi.)

Stadler said on Thursday that he expects the cost of repairing the affected vehicles in the U.S. to be in the "mid-double-digit" range (in millions of euros). He promised full transparency in the repair process. Audi submitted its recall and repair plan to U.S. regulators for approval last month.

The takeaway: The impact to VW will be far worse
Volkswagen already took a charge of 6.7 billion euros in the third quarter for costs related to the scandal. Given the much larger scale of VW's exposure -- and given the ire it's facing from officials in the U.S. and elsewhere after disclosures that VW stalled for months before admitting responsibility -- it's likely that the company will be hit with a much bigger charge.

It's likely that Mueller is working behind the scenes to get to a settlement with U.S. regulators before releasing VW's earnings report. That makes sense from a public relations perspective. 

Audi's annual report gives us a hint as to how VW will proceed. So far, the scandal's impact on Audi finances and reputation hasn't been major. But it's likely to be a different story when VW reports next month.

John Rosevear has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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