FRANKFURT -- Volkswagen Group's namesake VW brand aims to maintain profitability this year at a stable, albeit low level before charting a course to its longer-term 6 percent target.
Finance chief Frank Witter said the scandal-plagued marque hoped at least to repeat last year’s operating margin of 2 percent in 2016.
"There is a lot of work to be done and we have to deal with the [negative effects] particularly from the foreign exchange side," he said during a conference call on Tuesday to discuss the group’s first-quarter results. "Nevertheless we have everyone at the brand and the group committed to support that minimum target, even though the circumstances are not easy."
The brand's operating profit at the brand collapsed by 86 percent year-on-year to 73 million euros in the first quarter, in part due to higher incentive spending to win customers, according to Volkswagen’s first-quarter report. The brand's operating margin fell almost 1.7 percentage points to 0.3 percent.
The VW brand is taking on the majority of the costs related to the group's emissions scandal, Evercore ISI analyst Arndt Ellinghorst said in an investors note.
VW Group's other volume brands, Skoda and Seat, had higher profit margins than the core brand in the first three months. Skoda's operating profit rose by just over 30 percent to 315 million euros with its margin rising to 9.3 percent from 7.6 percent. Seat's operating profit increased to 54 million euros from 33 million. Its profit margin grew to 2.6 percent from 1.5 percent.
VW Group's automotive operations showed a 2.3-billion-euro revenue drop while its distribution expenses – the costs associated with selling the cars – rose by over 100 million euros.
Witter said the automaker will face continued higher distribution costs, particularly relating to the VW brand and the diesel issue.
Some of the measures taken under VW's "trust and loyalty initiatives" such as free maintenance service, crucially would not harm residual values, he said. "When we talk about incentives, we continue to stay below competition," he said.
Witter declined to provide a rough estimate of where the VW brand’s margin would otherwise be had it not have been for higher incentives and costs related to reimbursing other brands for the scandal, but he said the 16.2-billion-euro provision set aside in last year's accounts overwhelmingly affected the namesake brand.
Witter said VW brand profitability is at a level "we would not deem to be satisfactory" even when adjusting for effects from the diesel scandal.
Swinging back to a profit, even a small one, did mean the brand fulfilled its minimum target for the first goal after posting a loss of 127 million euros in the final three months of last year, according to Witter. VW said that volumes at the start of 2016 were weak in part due to lower order intake from the fourth quarter feeding through.
About two-thirds of the 800 million euros in headwinds stemming from weakening currencies in markets including Brazil, Argentina, South Africa, the UK and Turkey hit the VW brand specifically during the first quarter.
In the longer term, Witter said the VW brand needed to improve its underlying profitability and saw no reason why it should scrap its target for 6 percent return on sales even if it was "unrealistic" to expect it would meet that by its original 2018 deadline.
VW is counting on steps to streamline vehicle development to adapt the VW brand more quickly to market trends, speed up cost cuts and expand modular platforms to boost common parts and production flexibility. "This is an ongoing complex task," Witter said.
Evercore's Ellinghorst said: "We continue to view VW as a huge restructuring opportunity and nothing from Q1 changes that view."
Others are warier, with DZ Bank analysts saying the prospect of further scandal-related costs led them to retain a "skeptical view" on Volkswagen, which did not make any further provisions in the first quarter.
VW reiterated guidance issued in April for sales to fall this year by up to 5 percent and for a group underlying operating margin of 5 percent to 6 percent, versus 6 percent in 2015. Group operating profit was 6.8 percent in the first quarter, as demand for upmarket Audi and Porsche models helped to offset a drop in sales at the VW brand.
Reuters contributed to this report