VW's Diesel Damages Approach $24 Billion After Latest Charge (1)

(Bloomberg) -- Volkswagen AG’s provisions for the diesel-cheating scandal rose to 22.6 billion euros ($23.9 billion), as the German carmaker continues to tally damages from the worst crisis in its history.

The company took a charge of 4.4 billion euros in the fourth quarter, more than double the total from the previous nine months, to reflect a settlement related to tainted larger diesel engines and a criminal plea in the U.S. As costs continued to mount, the company’s operating profit before special items rose 14 percent to 14.6 billion euros last year, and sales margin improved to 6.7 percent from 6 percent a year earlier, according to a statement on Friday.

“In spite of the charges and the challenges arising from the diesel crisis, we can be satisfied on the whole with the group’s business development,” Chief Financial Officer Frank Witter said in the statement issued after VW’s supervisory board met in Wolfsburg, Germany. “We must use great discipline to achieve the set targets in all divisions, in order to return to the path of success in the coming years.”

VW is still wrestling with the fallout from admitting in September 2015 that it rigged as many as 11 million diesel cars worldwide to cheat on emissions tests. The bulk of costs are in the U.S., where the company has agreed to a series of settlements, including buying back about half a million vehicles. In Europe, cars will be fixed but customers aren’t being compensated. The automaker still faces hundreds of investor lawsuits and a criminal probe in Germany.

Dividend Plans

Despite the burden of its scandal, VW plans to pay a dividend of 2.06 euros per non-voting preferred share -- the company’s mostly widely held stock -- and 2 euros per common share for 2016. Shareholder approval is effectively a formality as almost 90 percent of the voting stock is held by the Porsche-Piech billionaire clan, its home state of Lower Saxony, and Qatar. Payouts amounted to 17 cents per preferred share and 11 cents per common stock for 2015, when the company posted its highest pre-tax loss ever because of the scandal.

VW overcame the damage to its reputation to still surpass Toyota Motor Corp. last year as the world’s best-selling automaker thanks to growth in China, where the scandal hasn’t been an issue. The owner of 12 auto brands ranging from budget-oriented Seat to sporty Porsche to heavy truck units Scania and MAN delivered a record 10.3 million vehicles in 2016, up 3.7 percent from a year earlier.

Rising demand boosted revenue in 2016 by 1.9 percent to 217.3 billion euros. The company is forecasting sales will climb by as much as 4 percent this year, with return on sales remaining steady between 6 percent and 7 percent.

Cloudy Outlook

VW’s outlook is clouded by a cooling global car market, with demand in the U.S. and Europe set to peak after years of growth. China’s auto purchases also are forecast to slow after the government raised its sales tax on small-engine vehicles.

Car deliveries in 2017 will “moderately exceed” last year’s volume “amid persistently challenging market conditions,” according to the company’s statement.

VW’s biggest challenges, however, stem from its diesel crisis and its long-standing struggle to cut costs and streamline operations. The VW brand faces a renewed labor dispute amid restructuring efforts, while Audi, the largest profit contributor, is battling slumping sales in China amid a spat with dealers.

Chief Executive Officer Matthias Mueller voiced support following the meeting for the head of the VW brand, Herbert Diess, who’s been locked in a dispute with labor leaders. He also endorsed Audi chief Rupert Stadler, who a fired diesel engineer has claimed knew about the engine rigging.

Mueller’s Endorsement

“Both colleagues are doing an excellent job,” Mueller said. While acknowledging “tough situations and talks when you’re dealing with difficult situations like a restructuring,” the CEO said the board was “very confident to continue working with both colleagues to implement our strategy.”

Following sharp criticism from outside investors over excessive management compensation that largely protected or delayed payouts to top brass despite the scandal, VW introduced a new pay structure that caps the annual remuneration for the CEO at 10 million euros, and for other members of the management board at 5.5 million euros.

Adopting the new criteria could reduce total compensation for the CEO by as much as 40 percent. VW’s previous pay system irked investors as it was oriented to earnings over the preceding three years.

VW shares were little changed at 141.25 euros at the close of Frankfurt trading. The stock has gained 6 percent this year, lifting the company’s market value to 73 billion euros.

(Updates with CEO support for executives in 11th paragraph.)

To contact the reporter on this story: Christoph Rauwald in Frankfurt at crauwald@bloomberg.net.

To contact the editors responsible for this story: Chris Reiter at creiter2@bloomberg.net, Anne Riley Moffat

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