Volkswagen's 2006 profit beats expectations

FRANKFURT (Reuters) - Volkswagen AG (VOWG.DE), the world's fourth-largest carmaker, reported a better-than-expected full-year operating profit on Tuesday and forecast a further improvement this year, sending its shares sharply higher.

Excluding a net one-off charge of 2.37 billion euros, group operating profit before special items rose 52 percent to 4.38 billion euros ($5.8 billion), better than the average estimate of 4.18 billion in a Reuters poll of 14 analysts.

The results served as a late vindication for the restructuring course plotted by dismissed Chief Executive Bernd Pischetsrieder and his top lieutenant, former VW brand chief Wolfgang Bernhard.

"The operating profit for 2007 is expected to be above the 2006 operating profit before special items," the company said in a statement, adding revenue would also grow this year due to a slight increase in vehicle sales to customers.

Strong demand for new models such as the Audi Q7 offroader as well as cost cuts boosted earnings and provided a "good basis" for Volkswagen to achieve its medium term target of a pretax profit of 5.1 billion euros next year, it said.

VW shares rose to a record high, trading up 6.9 percent at 94.00 euros by 1405 GMT.

"The results are very good: operating profit and net income were above our expectations (and) the dividend was in line with our estimate," said Marc-Rene Tonn, analyst at M.M. Warburg.

"Particularly positive was the development in the free cash flow at Automotive," he added, referring to the 5.63 billion euros in net cash generated at VW's core business -- more than double last year's figure.

NordLB wrote in a research note that the 2007 outlook was a positive surprise, "since one would tend to expect a transitional year following the record vehicle sales in 2006."

HEAVY RESTRUCTURING COSTS

Volkswagen pledged to continue improving efficiency under its new management led by former Audi boss Martin Winterkorn.

"We will continue to vigorously drive forward the activities to improve cost structures and processes in 2007. This, along with the steps we undertook in 2006, will lead to a sustainable improvement in our competitiveness," Volkswagen said.

Group profit before tax from continuing activities, which includes the contribution from VW's two key Chinese joint ventures, rose 10.6 percent to 1.79 billion euros.

Revenue grew 11.6 percent to 104.9 billion euros.

Due to an estimated 2.67 billion euro charge to fund thousands of German job cuts, however, the group's operating margin after items of 1.9 percent fell short of troubled French rivals Renault (RENA.PA) and PSA (PEUP.PA), which posted returns on sales of 2.6 percent and 2.0 percent last year, respectively.

After VW's net profit more than doubled to 2.75 billion euros, in part due to a corporate tax gain in the final quarter, Volkswagen proposed raising its dividend by 10 euro cents to 1.25 euros per ordinary share for 2006.

VW Chairman Ferdinand Piech, who is part owner of major VW shareholder Porsche AG (PSHG_p.DE), forced Pischetsrieder to resign early in November in a surprise boardroom coup abetted by senior labor leaders who opposed the CEO's job and wage cuts.

Under Pischetsrieder, the company had forecast a 4 billion euro absolute improvement in pretax profit to 5.1 billion in 2008 over the course of four years on the way to even better results that would target a return on investment of 9 percent for the group.