VW's New CEO Pledges to Lift Profitability Amid Industry Changes

(Bloomberg) -- Volkswagen AG’s new chief executive officer stressed his commitment to higher profit margins as he pushes to adapt the world’s biggest automaker to accelerating industry change.

“Our goal is to transform the Volkswagen Group into one of the industry’s leading companies in terms of profitability, innovative power and sustainability,” CEO Herbert Diess said Thursday in an emailed statement. “The quarterly results confirm that we are on the right path.”

Diess, 59, will draw on the strength of VW’s business to manage the transition. The German manufacturer benefited from record vehicle deliveries in the first quarter, though it failed to entirely offset headwinds from a stronger euro and new European Union accounting rules that took effect in January. Without the hit resulting from a change in how derivatives are valued, adjusted earnings would have been slightly higher year-on-year.

VW picked Diess for the top job earlier this month in the biggest management shuffle since the company’s diesel-emissions cheating scandal erupted in 2015. He’s pledged to accelerate decisionmaking while tackling the seismic industry shift toward electric cars and digital services that threaten to undermine the industry’s traditional business model.

The shares advanced as much as 4.4 percent, aided by lower cash outlays on diesel-related matters and a Bloomberg News report that China is considering proposals to cut the import duty on passenger cars, a move that will aid VW brands including Porsche and Audi. The stock was up 2.7 percent to 171.52 euros at 10:28 a.m. in Frankfurt.

While Volkswagen’s stock has returned to pre-scandal levels and its profits have recovered, the company is still dealing with the aftershocks. German authorities last week searched offices of the Porsche and Audi luxury-car units, while a U.S. House committee this week sought Diess’s testimony for a new investigation into allegations of cheating outside the U.S.

Diess must also decide on a possible IPO of VW’s heavy-trucks unit, and investors await details of cost savings from a restructuring of the group’s automotive brands. The company, based in Wolfsburg, Germany, remains under threat from technology giants like Alphabet Inc.’s Google and Apple Inc. that are plotting to enter the industry. Like all automakers, VW also needs to make huge investments to comply with tightening emissions regulation across the globe.

Chief Financial Officer Frank Witter reiterated Thursday that costs to adopt the new worldwide test procedure for emissions and fuel consumption, dubbed WLTP, will weigh on earnings in the second half. But VW’s cash reserves remain robust at more than 24 billion euros. "We are confident that we will reach our financial as well as strategic goals,” Witter said.

A large footprint in the dynamic Chinese market continued to bolster results. Volkswagen’s luxury-car brands, which generate the biggest chunk of the group’s profit, stand to benefit from easing restrictions for foreign manufacturers in the world’s largest auto market.

Porsche, which has no production facility in China and imports all cars from Europe, on Wednesday doubled its electric-car delivery target for 2025. It also flagged that in addition to robust demand for sport utility vehicles its Chinese customers are increasingly keen on the brand’s two-seater sportscars like the 911 as well.

1Q Highlights

• Operating profit down 3.6% to 4.21 billion euros ($5.1 billion)
• Revenue rose 3.6 percent to 58.2 billion euros
• Volkswagen still expects to "moderately exceed" last year’s record global deliveries of 10.7 million vehicles
• Confirms 2018 target for operating return on sales between 6.5%-7.5%, versus 7.4% before special items last year
• Net cash flow up 5 billion euros amid considerably lower cash outflows related to the diesel scandal
• Proportionate operating profit from VW’s Chinese joint ventures rose to 1.2 billion euros despite adverse exchange rates

To contact the reporter on this story: Christoph Rauwald in Frankfurt at crauwald@bloomberg.net.

To contact the editors responsible for this story: Anthony Palazzo at apalazzo@bloomberg.net, Tara Patel

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