Volkswagen ‘back on track’ as cost-cutting slowly lifts profit

Bloomberg

Volkswagen AG sought to draw a line under the diesel scandal that has locked it in crisis mode for more than a year, with sweeping restructu-
ring efforts starting to take hold and profitability improving at the namesake brand.
Still, Chief Executive Officer Matthias Mueller acknowledged lawsuits on emissions case will continue to preoccupy the carmaker for “many years to come.” While the main VW brand’s return to profit in the fourth quarter underscored Mueller’s optimism that the company is “back on track”, declining profitability at the Audi cash-cow unit clouded the outlook.
“There’s no question that the consequences of the diesel crisis hurt us last year, not only in financial terms,” Mueller said at the annual press conference in Wolfsburg, Germany. “But we kept on course and put up one of our best operating performances in spite of it all.”
All told, Volkswagen has set aside 22.6 billion euros ($24 billion) to pay for fines and a massive global recall of tainted engines since the cheating became public in September 2015. The VW nameplate, which is bearing the brunt of the crisis fallout, has been trying to speed its recovery by streamlining operations and reducing jobs. The measures are only slowly feeding through, due to repeated clashes between workers and managers.
Operating profit at the VW brand amounted to 625 million euros in the final three months of 2016, turning around from a loss of 127 million euros a year earlier, Volkswagen said Tuesday. While cost cuts and record sales helped lift the profit margin to 2.2 percent from 1.6 percent earlier in the year, that’s still a far cry from the marque’s goal of a 4 percent margin by 2020.
The gains at the VW brand were overshadowed as Audi’s profitability dipped to 6.1 percent of sales in the fourth quarter from 7.5 percent a year ago.
The automaker’s biggest profit earner was hampered by its role in developing tainted 3-liter diesel engines, leading to a 1.8 billion-euro charge last year. Audi also faces increasing pressure from rival Mercedes-Benz, which has redesigned its lineup with edgier styling.
Volkswagen shares, which have climbed 24 percent over the past
12 months, were little changed at 143.80 euros as of 12:25 p.m. in Frankfurt trading.
VW was one of the industry’s least efficient carmakers even before the scandal hit and has been under pressure to reduce capital expenditures. The division announced a landmark labor deal last year to cut costs by 3.7 billion euros. Acknowledging criticism of not holding managers accountable, Volkswagen slashed compensation of senior executives by 37 percent last year.
Costs from the diesel scandal may rise further as the company still faces investor lawsuits in the US and in Germany, as well as consumer lawsuits and a criminal probe in Germany.