VW warns of challenges, to redouble efforts to meet targets

By Edward Taylor

FRANKFURT (Reuters) - Volkswagen warned on Friday of a tough year ahead as its preliminary annual results were weighed down by currency effects and supply bottlenecks caused by new emissions testing rules.

The German carmaker suffered from an increase in inventories at its Audi and VW brands after a new emissions testing procedure, known as WLTP, took effect in September and delayed road certification for many of its vehicles.

"The headwinds in key markets are expected to strengthen further in 2019," Chief Executive Herbert Diess said in a statement accompanying the earnings.

"Overall, however, we will have to redouble our efforts to meet our ambitious targets in the new fiscal year."

Volkswagen, which is still battling to recover from a 2015 scandal over emissions test cheating, reiterated it wanted to achieve an operating return on sales of between 6.5 and 7.5 percent for the passenger cars division and the group this year, a step welcomed by analysts.

"The results are pretty solid, and it's positive that they stick to their margin forecast especially when contrasted with rivals like Daimler which was more cautious," Nord LB analyst Frank Schwope, who has a buy rating on the stock, said.

VW shares closed 0.1 percent higher at 146.72 euros a piece, outperforming the Stoxx 600 Automotive Index which was down 0.15 percent and just underperforming Germany's blue-chip DAX index which closed up 0.3 percent.

VW is proposing a dividend of 4.80 euros a share for ordinary stock and 4.86 euros for each preferred share, the company said. In fiscal year 2017 VW paid shareholders 3.90 euros per ordinary share and 3.96 per preferred share.

Vehicle deliveries are expected to rise slightly in 2019, and group revenues are seen up to 5 percent higher, Volkswagen said.

Volkswagen's 2018 operating profit came in at 13.92 billion euros ($15.8 billion), only 0.7 percent higher than the prior year and below 14.53 billion euros forecast in a poll.

VW said it expected positive net cashflow for 2019 thanks to lower penalties and compensation payments related to the company's diesel-cheating scandal even as it faces 80 billion euros in investments to mass produce electric cars.

Analysts said Volkswagen's free cashflow was negative for the full year and down 3.8 billion euros in the fourth quarter, suggesting there was no meaningful reduction in inventories.

Germany's highest civil court on Friday said a dispute between a VW customer and a dealer had been settled out of court.

The customer had demanded compensation for owning a vehicle which contained software that masked illegal levels of pollution. VW had refused, leading to a court battle. Volkswagen said this out of court settlement was not a basis for forecasting the outcome of other potential claims.

The carmaker is due to release more detailed full-year earnings on March 12 and its trucks division Traton will release earnings on Monday.

Separately, Volkswagen's sportscar brand Porsche will offer a fully electric version of its Macan, its best selling vehicle, the Financial Times reported.

(Reporting by Edward Taylor; Editing by Tom Sims and Susan Fenton)