VW Doubles Provisions for Cheating Scandal to $18.2 Billion

  • Findings of internal inquiry delayed until fourth quarter
  • VW CEO expects to weather the crisis without cutting jobs

VW Slashes Dividend as Diesel Emissions Provisions Double

Volkswagen AG more than doubled provisions to pay for the emissions-cheating scandal, leading to the biggest loss in the German automaker’s history while giving it a path toward assessing the full financial impact of the crisis.

VW set aside 16.2 billion euros ($18.2 billion) to cover the costs of the cheating, up from the previous amount of 6.7 billion euros, Europe’s largest carmaker said in a statement on Friday. The manufacturer cut its annual dividend 97 percent to 0.17 euros per preferred share, the lowest since at least 2000. The stock, which closed down 1.3 percent for its first decline in a week, has surged 45 percent since hitting a post-scandal low in October.

“The current crisis -- as the figures presented today reveal -- is having a huge impact on Volkswagen’s financial position,” Chief Executive Officer Matthias Mueller said in the statement, adding that the “repercussions of the emissions issue are now quantifiable.”

While the latest tally of the financial impact shows the automaker is making progress, Volkswagen is far from resolving the crisis. A report on how the manipulations were carried out and covered up for so many years won’t be concluded until the fourth quarter, more than a year after the scandal became public. Volkswagen has two months to finalize a U.S. agreement on fixing or buying back tainted cars there and still faces fines and a criminal investigation. Meanwhile, a recall of some 8.5 million affected autos in Europe has gotten off to a slow start.

Revenue Drop

For 2016, Volkswagen forecast flat deliveries and a drop in revenue of as much as 5 percent amid what the automaker called a “challenging environment.” Its operating profit is projected to be between 5 percent and 6 percent of sales, compared with 6.3 percent in 2014.

As a consequence of the crisis, the variable compensation of a typical Volkswagen top management will be cut 39 percent to 3.2 million euros, the company said Friday in a statement. The payouts had sparked a heated debate as workers and the German state of Lower Saxony, the company’s second-largest shareholder, balked at generous bonuses. Volkswagen has one of the highest-paid executive ranks in the auto industry.

The scandal erupted in September when the U.S. Environmental Protection Agency announced that the carmaker had used illicit engine-control software to dupe emissions tests. Chief Executive Officer Martin Winterkorn was forced to resign within days as the automaker’s stock lost billions in value. Volkswagen has been battling since then to appease regulators and regain customer trust after ultimately admitting to rigging the exhaust systems of 11 million diesel-powered cars worldwide.

Determining the roots of the manipulation and the people behind it have proved complex due to the use of code words to disguise their wrongdoings, as well as insufficient and outdated computer systems. The company said it was advised by U.S. legal advisers to delay the initial report from an internal investigation.

VW’s credit profile has suffered as all major ratings agencies downgraded the manufacturer in the wake of the scandal. That contrasts with improved ratings for some direct rivals despite the slowdown in emerging markets like Brazil and Russia. Since the beginning of this year Standard & Poor’s lifted ratings on Fiat Chrysler Automobiles, Ford Motor Co., and PSA Group and assigned a positive outlook to Nissan Motor Co. as the manufacturers reap the rewards of cost-cutting measures.

‘Bounce Back’

Still, Volkswagen, which had 24.5 billion euros in net liquidity at the end of December, is insistent that its operations are robust enough to allow it to overcome the crisis without cutting jobs, CEO Mueller said today at a briefing at its Wolfsburg headquarters.

“No question, Volkswagen will bounce back,” said Erich Joachimsthaler, founder and chief executive officer of New York-based brand-strategy firm Vivaldi Partners Group. “Brands are resilient, and research shows that the stronger the brand, the more likely the bounce back even in light of severe transgressions.”

A key factor in that effort will be restoring profit at the VW brand, the company’s largest division by sales volume and revenue. Restructuring efforts have been complicated by a dispute between influential works council chief Bernd Osterloh and Herbert Diess, the new head of the namesake passenger-car brand.

“Management should now be in a position to more actively address the turnaround plan for the VW brand,” said Arndt Ellinghorst, a London-based analyst with Evercore ISI. “It has been too quiet for too long.”

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