LDN - Business

Fall in Volkswagen brand profit shows long road to recovery

[March 14, 2017] By Andreas Cremer

WOLFSBURG, Germany (Reuters) - Operating profit at Volkswagen's biggest car brand fell last year, showing the challenges still facing the world's largest automaker 18 months on from its emissions scandal.

The German company said last month it made a record group operating profit in 2016, excluding one-off items, helped by a strong performance from its Porsche sports cars and a turnaround at its Scania trucks business.

But, providing details on its individual brands on Tuesday, the company said underlying operating profit at its VW brand fell 10 percent to 1.9 billion euros ($2 billion), with the profit margin slipping to 1.8 percent from 2 percent in 2015.

The group said a dip in revenues and higher marketing costs as a result of the September 2015 admission that it cheated U.S. emissions tests on diesel engines were factors in the declines.

Although the group as a whole has bounced back from the scandal, and overtook Japan's Toyota <7203.T> last year to become the world's biggest selling carmaker, analysts view a turnaround at the VW brand as key to its prospects.

The brand accounted for almost half of group revenue in 2016, but only just over 10 percent of underlying operating profit.

The brand struck a deal with unions in November to cut jobs and target 3.7 billion euros of annual savings by 2020 in an effort to lift the profit margin to 4 percent that year - still below many major rivals.

But squabbles over implementation have sowed doubts among some analysts about whether the targets will be achieved.

"In times where most other car companies are improving efficiency and shaping the industry, VW needs to be very mindful not to waste any more time with internal power struggles," Evercore ISI analysts said in a research note to clients.

At 1135 GMT, VW shares were down 0.2 percent at 143.8 euros, up sharply from their post-scandal lows below 90 euros, but still below pre-September 2015 levels of around 160 euros.

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German carmaker Volkswagen CEO Matthias Mueller arrives for the company's annual news conference in Wolfsburg, Germany, March 14, 2017. REUTERS/Fabian Bimmer

NEVER SAY NEVER

Competition for VW is about to get tougher in Europe, after Peugeot maker PSA Group agreed earlier this month to buy General Motors' Opel business to create the region's second-biggest automaker behind VW.

Fiat Chrysler boss Sergio Marchionne said last week that the deal might eventually persuade VW to seek a tie-up with his own company, a suggestion that was swiftly rejected by the German company..

Asked on Tuesday whether acquisitions were on the agenda, VW CEO Matthias Mueller said: "We would be no good (as a) company if we didn't occupy ourselves with strategic considerations for the future. I never said that a liaison with any other partner is ruled out once and for all, but I only said that there is no contact at the moment between myself and Mr Marchionne."

Mueller said VW was "back on track" after agreeing to spend up to $25 billion in the United States to address claims from owners, environmental regulators, states and dealers over its emissions scandal.

"You can rest assured that we will do everything in our power to make 2017 an even better year than 2016," he said at the 12-brand group's annual news conference.

He reiterated forecasts for a rise of up to 4 percent in sales revenues this year and a group profit margin of 6-7 percent versus 6.7 percent in 2016, and said the group was capable of shouldering its emissions scandal costs.

The company's annual report showed VW brand boss Herbert Diess saw his total remuneration for 2016 drop to 3.93 million euros from 7.13 million in 2015.

(Reporting by Andreas Cremer; Writing by Mark Potter; Editing by Maria Sheahan/Keith Weir)

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