Profit beat wins VW respite after boardroom clash

By Andreas Cremer

BERLIN (Reuters) - Cost cutting and an improving European car market helped Volkswagen post higher-than-expected profit in the first quarter, easing the pressure on management following the shock ouster of long-standing chairman Ferdinand Piech.

Four days after Piech quit in a showdown with his chief executive, Europe's largest automaker reported a 17 percent rise in operating profit and the first quarterly increase in earnings for seven years at Spanish division Seat.

Operating profit reached 3.33 billion euros ($3.65 billion), Volkswagen (VW) said on Wednesday, close to the top end of forecasts in a Reuters poll of analysts and well above the average estimate of 3.12 billion euros.

With Piech raising question marks about CEO Martin Winterkorn's ability to drive through improvements at VW, analysts were particularly relieved by signs of progress with the group's modular production strategy which aims to use a core range of components across a wide variety of models.

"These are good numbers," Bankhaus Metzler's Juergen Pieper said. "The modular production strategy is progressing and tailwinds may grow over the course of the year," he said, citing positive currency effects and cost savings at the core VW brand.

Earnings were boosted by a strengthening economic recovery in Europe -- destination of 40 percent of the group's auto sales -- and by progress in the VW brand's drive to cut costs by 5 billion euros a year by 2017.

Porsche, accounting for almost a quarter of group earnings, on Wednesday raised its profit guidance after posting better-than-expected results, citing favourable currency moves.

The yuan's strength against the euro helped profit to surge 29 percent at VW's two joint ventures in China, its biggest market, even though group sales only edged up 2 percent, finance chief Hans Dieter Poetsch said on a conference call.

CHALLENGING YEAR

However, a slowdown in emerging economies, falling deliveries in the United States and a collapse in Russian demand pose challenges for VW and still leave questions over Winterkorn's strategy.

The underperformance of the VW brand in the United States and Latin America was one factor leading Piech to provoke the two-week confrontation with VW's CEO that ended up forcing the chairman to resign.

The group said cost cuts boosted earnings by "a low triple-digit million-euro" amount at the VW brand between January and March, lifting the brand's operating margin to 2 percent from 1.8 percent -- still far off its 6 percent long-term goal.

"We have always emphasized that 2015 will be a challenging year for the automotive industry as a whole, and also for us," Winterkorn said. "Our key figures show that the VW group remains on course, despite the headwinds."

The German group still expects higher unit sales, revenue and an operating margin between 5.5 and 6.5 percent this year, after it reached 6.3 percent last year.

"The environment is getting better, there's a good chance they'll raise their margin target," Bankhaus Metzler's Pieper said.

VW shares, which initially gained as much as 2.2 percent, traded 3.4 percent lower at 1500 GMT in line with the European stock market.

(Additional reporting by Jan Schwartz.; Editing by Georgina Prodhan and Mark Potter)