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Volkswagen profit probably rose on Audi, Skoda sales

Volkswagen AG, Europe's largest carmaker, will probably say Q4 profit rose after a new Audi sport-utility vehicle and Skoda model attracted buyers.

Net income likely gained 43% to €622 million ($817 million) from €435 million a year earlier, according to the median estimate of 13 analysts surveyed by Bloomberg News. Sales likely rose 4.2% to €26.5 billion, the survey showed. Chairman Ferdinand Piech replaced CEO Bernd Pischetsrieder three months ago with Martin Winterkorn, head of Audi, to replicate Audi's success at the group. The luxury division has posted record profit over the last five years while the namesake brand has lost money. The new Audi Q7 SUV and Skoda Roomster all-purpose vehicle boosted Q4 sales. Winterkorn „clearly did a good job at Audi,” Michael Tyndall, an analyst with Nomura Securities in London who has „neutral” rating on the shares, said. „Audi is performing well on the back of an ongoing product offensive.” Shares of Volkswagen rose as much as 55 cents, or 0.6%, to €88.18 and were up 0.3% to €87.92 as of 10:18 a.m. in Frankfurt. The stock has gained 8.2% since November 7, the day Winterkorn was named CEO. That compares with a 13% increase in the Bloomberg Europe Autos Index in the same period. Of the 37 analysts who cover the company, five rate the shares a „buy,” 19 recommend holding the stock and 13 say investors should sell. Wolfsburg, Germany-based Volkswagen has declined to say when it will release 2006 sales and earnings. The carmaker published 2005 earnings on February 10 last year. Winterkorn declined to comment in advance of the results, Christine Ritz, a Volkswagen spokeswoman, said. Winterkorn last month reorganized Volkswagen's management, leading to the departure of Wolfgang Bernhard, head of the namesake brand.

Audi and Skoda posted Q4 sales gains on the strength of the new models. Audi's vehicle sales in the period rose 12% to 220,400 units, while those at Czech Republic-based Skoda increased 13% to 138,948 cars. Bernhard had been working to develop new Volkswagen-brand models, including a compact SUV, a remake of the Scirocco sports hatchback and a minivan with DaimlerChrysler AG, which were scheduled to reach showrooms in 2008. The status of those vehicles is in question as Winterkorn and his team work to redo their design. Winterkorn, who earned €1.79 million in compensation last year as Audi CEO, said February 14 that 2007 would be a difficult year for the Volkswagen brand because it has no major product launches this year. „He faces a whole raft of new challenges at Volkswagen and it's far too early to tell how well he will deal with those,” Tyndall said. Volkswagen is completing a reorganization started by Pischetsrieder and Bernhard that includes eliminating 20,000 factory positions, or 20% of the western German workforce. The carmaker said in December it had severance and early retirement agreements with enough workers to reach its goal. Labor leaders reached a deal with management in September to extend the workweek by 4.2 hours without any extra pay. „They made some very important steps toward improving their cost position,” said Marc-Rene Tonn, an analyst with M.M. Warburg in Hamburg with a „hold” recommendation on the shares. „We have seen them reducing the staff, particularly in Germany.”

CFO Hans Dieter Poetsch has said the carmaker will probably report Q4 costs tied to the job cuts. Volkswagen has sold units, including the Europcar rental division, to help pay for the overhaul. Volkswagen also said in December it will book a gain of €951 million because of a change in German law on corporate tax credits. Many analysts chose not to include the gain in their 2006 earnings estimates. The company will receive the money from the government in 10 annual payments beginning next year. Piech last week strengthened his position after the German state of Lower Saxony, Volkswagen's second-largest shareholder, dropped its opposition to him remaining chairman and agreed that Porsche AG, the largest investor, could increase its supervisory board seats to three from two. Piech, who was on the board because he's a former Volkswagen CEO, will now hold Porsche's third seat. Porsche has steadily increased its holding since originally buying into Volkswagen in September 2005. It currently owns 27.4% of the shares. Porsche won a victory February 13 when an advocate general to the European Union's highest court said in an advisory opinion that the court should strike down a law protecting Volkswagen from a takeover. Porsche opposes the law. The law caps Volkswagen shareholders' voting rights at 20% regardless of the size of their stakes. This means Stuttgart, Germany-based Porsche currently has the same voting rights as Lower Saxony, which has 20.5% of the shares. Eliminating the law would give Porsche more say in decisions. Credit-default swaps based on €10 million of Volkswagen debt have fallen to €22,000 from 27,500 euros at the start of the year. Credit-default swaps are based on corporate bonds and are used to speculate on a company's ability to repay debt. A decrease indicates an improvement in credit quality. (Bloomberg)