By William Boston 

BERLIN -- Volkswagen AG swung to a profit in the first three months of the year, but earnings plunged at its Volkswagen-brand unit and in China, its biggest single market, demonstrating the German car maker has far to go in recovering from its diesel-emissions scandal.

The world's largest car maker by sales is struggling with the costs of resolving the emissions-cheating affair. The pressure comes as Volkswagen prepares to unveil in June a strategy review that is expected to involve restructuring its global brands, overhauling corporate governance and pushing into electric vehicles and mobility services.

Volkswagen reported net profit for the quarter through March 31 fell 20%, to EUR2.3 billion ($2.56 billion), compared with the same quarter a year earlier. The drop was steeper than predicted by analysts. Unit sales fell 1.2%, to 2.6 million vehicles, and sales revenue dropped 3.4%, to EUR51 billion.

"We are satisfied overall with the start we have made to what will undoubtedly be a demanding fiscal year 2016," Chief Executive Matthias Müller said. "We once again managed to limit the economic effects of the diesel issue and achieve respectable results under difficult conditions."

Volkswagen faced a continued sales declines in the U.S. and a massive sales erosion in Brazil and Russia, but the auto maker said those markets may be hitting bottom.

In China, its Chinese joint ventures generated an operating profit of EUR1.2 billion, down 27% from a year ago. Volkswagen has suffered in China because of a lack of budget models now in high demand by Chinese consumers.

Overall, the company's operating profit before special items, which is Volkswagen's main performance metric, fell 6%, to EUR3.1 billion for the first three months of the year. The change represented a slight decline in the company's operating return on sales, to 6.1%.

Exchange rates provided some relief. Adjustments to diesel-related provisions because of changes in the exchange rate of the dollar against the euro provided a one-time gain of EUR309 million. As a result, Volkswagen's operating profit after special items rose 3.4% to EUR3.4 billion, a return of 6.8%, beating analyst forecasts.

Volkswagen reported a record loss of EUR1.6 billion in 2015 after it had to take a charge of EUR16.2 billion against 2015 earnings to cover technical repairs and legal costs related to the disclosure in September that the company rigged nearly 11 million diesel engines to cheat on emissions tests. The company didn't take any new diesel-related provisions in the first three months of 2016.

The company continues to negotiate a final settlement with U.S. authorities and plaintiffs' attorneys in diesel-related class action lawsuits representing Volkswagen customers in the U.S. Last week, the federal judge overseeing the case said the talks were on track to reach a settlement by June 21.

The diesel-testing scandal has battered Volkswagen's namesake brand, which has lost market share in major regions of the world and has had to spend heavily on incentives and loyalty programs to win back customers.

Operating profit at the Volkswagen brand, which accounts for half of the company's total revenue, plunged 86%, to EUR73 million, from the same period a year ago, resulting in a return on sales of 0.3%. That is well below the company's target of a 6% return by 2018.

By comparison, Audi, Volkswagen's luxury car maker, and sports car brand Porsche continued to hold up Volkswagen profits, accounting for 70% of the car maker's operating earnings but just 39% of its revenue.

Chronic underperformance of the Volkswagen brand has sparked a revolt by investors, who have been putting pressure on management to take drastic action to boost earnings at the division. Investors say the division is overstaffed and inefficient and needs to cut jobs in Germany, a move fiercely opposed by labor representatives.

Frank Witter, Volkswagen's chief finance officer, told investors on an earnings call that management is well aware that they cannot blame the diesel crisis for all of the division's troubles.

"It's not just diesel," Mr. Witter said. "The situation is on our radar and is one of the highest priorities in the organization."

Write to William Boston at william.boston@wsj.com

(END) Dow Jones Newswires

May 31, 2016 11:58 ET (15:58 GMT)