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Volkswagen sees first quarterly loss in 15 years

Volkswagen posted its first quarterly loss in at least 15 years on Wednesday and said the 6.7 billion euros (£5 billion) set aside to cover the costs of its rigging of diesel emissions tests was likely just a start.

The news came as the carmaker’s new CEO was about to fly out to China with German Chancellor Angela Merkel and other business leaders to promote trade in a major export market and try to limit the damage of a scandal that has rocked the auto industry.

Almost six weeks after it admitted using illegal software to cheat US diesel emissions tests, Europe’s biggest carmaker is under pressure to identify those responsible, fix up to 11 million affected vehicles and convince regulators, investors and customers that it won’t make the same mistakes again.

The biggest business crisis in its 78-year history has wiped more than a quarter off VW’s stock market value, forced out its long-time CEO and tarnished a business held up for generations as a model of German engineering prowess.

VW reported on Wednesday a third-quarter operating loss of 3.48 billion euros, in line with the 3.47 billion-euro loss forecast in a Reuters poll of analysts. It set aside 6.7 billion euros in the July-September period to cover costs related to the scandal, up from the 6.5 billion announced a week after the cheating became public on September 18.

As a result, the German group said it now expected its operating profit to drop “significantly below” last year’s record 12.7 billion euros, even though its auto sales are seen matching last year’s record 10.14 million deliveries.

The costs so far are largely related to the refitting of affected vehicles, and CEO Matthias Mueller has said they are likely to rise because the company is not yet in a position to estimate its potential liabilities from lawsuits.

“It is currently impossible to assess the legal risks connected with the diesel issue due to the early stage of the comprehensive and exhaustive investigations, the complexity of the individual factors and the large number of open questions,” the company said in its quarterly report.

“As a consequence, corresponding provisions have not been recognised in the interim financial statements.”

Some comfort

Analysts took comfort in VW’s robust balance sheet, suggesting the carmaker should be able to cope with the costs from regulatory fines, lawsuits and refits which some have said could total as much as 35 billion euros.

VW’s net cash and liquid assets jumped 29 percent in the quarter to 27.8 billion euros after it sold a 19.9 percent stake in Suzuki Motor Corp.

Reserves may keep growing in the fourth quarter when proceeds from a transaction involving VW’s holding in financing company LeasePlan, valued at 3.7 billion euros, are expected to be booked, analysts said.

“We see it as a positive signal that VW has pretty much kept the provision (of 6.7 billion euros) for the scandal unchanged,” London-based analyst Arndt Ellinghorst at Evercore ISI said.

“Together with the very strong net liquidity, this should reassure both equity and fixed income investors.”

VW shares were trading up 3.2 percent at 108.5 euros as of 1030 GMT, the top performer in Germany’s blue-chip DAX index.

VW may be able to recover from the scandal in two to three years under a new management structure, Mueller said on Oct. 15. The CEO will update investors on the latest findings of VW’s investigation into the scandal as well as its strategy plans in a conference call at 1130 GMT.

Excluding costs of the scandal, VW said it still expected the group operating margin to come in between 5.5 and 6.5 percent this year, after 6.3 percent in 2014.

VW plans to cut investments by 1 billion euros a year at its core namesake division, which accounts for 5 million cars to be recalled. Luxury division Audi, source of about 40 percent of group profit, will also cut planned spending.

VW confirmed the quarterly loss was its first in at least 15 years but, due to accounting changes, was unable to say precisely when the last loss occurred.

VW has said it may also set aside money to help support sales if deliveries are hit by the scandal. Steps could include discounts on new cars if owners turn in old models as well as cheap loans and incentives to dealers to buy back older cars.

Group deliveries, which also include premium brands Audi and Porsche, slid 1.5 percent in September to 885,300 vehicles and fell 3.4 percent in the third quarter to 2.39 million, causing VW to drop behind Toyota in nine-month global auto sales charts after briefly overtaking its Japanese rival to become world No.1 three months earlier.