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 / Updated  / Source: Reuters
By Reuters

Volkswagen's underlying profit fell less than expected in the first quarter as demand for upmarket Audi and Porsche models helped to offset a hit to VW sales from its emissions test cheating scandal.

Europe's biggest car maker said on Tuesday operating profit before one-off items fell 5.9 percent to 3.1 billion euros ($3.5 billion) on a 3.4 percent drop in sales revenues.

A file picture dated October 8, 2015 shows a Volkswagen Touran with a 2.0l TDI type EA189 diesel engine, in Hanover, Germany.JULIAN STRATENSCHULTE / EPA file

While better than analysts' average profit forecast of 2.8 billion euros, Volkswagen said it was still braced for a tough year as it battles to rebuild following the biggest business crisis in its 79-year history.

Volkswagen plunged to a record loss last year and ditched its long-standing CEO after it admitted in September to cheating diesel emissions tests in the United States.

It has set aside 16.2 billion euros to cover vehicle refits and a settlement with U.S. authorities, but still faces potential U.S. Justice Department fines and questions over who was responsible for the cheating, with investigations ongoing.

The company has been slashing costs, investing in electric vehicles and working on a new business structure aimed at improving accountability and speeding up model development.

First-quarter results showed some signs of improvement at the mass-market VW brand, which was struggling with high costs and weak sales even before the emissions scandal.

It swung to a 73 million euro profit, having made a loss in the previous quarter. But that was still well down on a profit of 514 million in the first quarter of 2015, with sales revenues down 4.6 percent and an operating margin of just 0.3 percent.

Volkswagen shares, which hit an 8-month high heading into the results, were down 2.65 percent at 134.3 euros in morning trading Tuesday.

"The numbers are better than expected, people are taking profit on the positive news," said NordLB analyst Frank Schwope, who has a "hold" rating on the stock.