Volkswagen 1st-qtr profit falls 24% on lower sales

May 6, 2002

Wolfsburg, Germany -- Bloomberg News is reporting that "Volkswagen AG's first-quarter profit fell 24 percent as demand for its two best-selling models declined. The shares rose as much as 4.7 percent as the carmaker reiterated it expects to match 2001's earnings.

Europe's largest carmaker's net income fell to 627 million euros ($566 million), or 1.61 euros a share, from 830 million euros, or 2.15 euros a share, a year ago. Sales declined 5.4 percent to 21.3 billion euros, the company said on its Web site.

Chief Executive Officer Bernd Pischetsrieder has pledged to equal last year's pretax profit of 4.4 billion euros as demand picks up in the second half. VW's 5-year-old Golf model lost market share to rival PSA Peugeot Citroen's 307 model, while Ford Motor Co.'s Mondeo has grabbed sales from the 6-year-old Passat.

"Pischetsrieder is taking a risk by giving such a bullish forecast," said Juergen Pieper, an analyst at Bankhaus Metzler, who rates the company "buy." "It will be difficult to achieve with the weak car markets."

The Wolfsburg, Germany-based automaker's shares rose as much as 2.50 euros to 56.30 euros, and traded recently at 55.25 euros. They are up 6 percent this year compared with Peugeot's, which have risen 21 percent. Analysts had forecast profit would fall 29 percent to 590 million euros.

Volkswagen's first-quarter share of the Western European market declined to 17.4 percent from 18.4 percent a year ago, while Peugeot's market share rose to 15.1 percent from 13.9 percent. First-quarter vehicle sales fell 13 percent to 1.18 million.

Aging Golf

"We know the Golf is getting older," said Chief Financial Officer Bruno Adelt on a conference call with analysts. He said the company expects the A-MPV, a compact van based on the Golf that will be introduced later this year, to pick up demand.

Separately, the company said it asked six banks to arrange a 15 billion euro credit line to support the sale of commercial paper and to fund its business. ABN Amro Holding NV, Barclays Plc, BNP Paribas SA, Citigroup Inc., Deutsche Bank AG and J.P. Morgan Chase & Co. will arrange the credit, which some of which replaces existing financings.

The company said that without the cost of a reorganization in Argentina, pretax profit would have been 1.05 billion euros instead of 997 million euros. It did not say whether it had finished writing down the value of operations in Argentina. Volkswagen's vehicle sales in South America fell 17 percent to 118,943 in the first quarter.

The Argentinean economy is in the fourth year of recession. The country defaulted on $95 billion in debt last year and devalued its currency in January. Volkswagen has written down the value of some of assets there.

"I expected the costs in Argentina to be higher," said Albrecht Denninghoff, an analyst at HypoVereinsbank in Munich, who rates the shares "underperform." He had predicted the costs for the reorganization to be about 105 million euros.

'Record Results'

At the company's earnings press conference in March, Pischetsrieder promised to match last year's "record results." The company said today it will meet last year's pretax profit this year.

"To meet our earnings target, we will continue to cut costs and expand our product offering," Volkswagen said.

To meet the goal of matching last year's pretax profit of 4.4 billion euros, the carmaker will have to increase earnings by 7.8 percent over the next three quarters to 3.41 billion euros from last year's 3.16 billion euros. The company said it had reduced its material costs by between 200 million euros and 250 million euros.

Discounts and incentives for selling cars in the U.S. increased marketing costs by 83 million euros to 1.74 billion euros. Competitors such as Ford and General Motors Corp. have lowered prices on their cars to win customers.

"The company has to convince the market that it can meet its earnings target through higher sales and not accounting," said Arndt Ellinghorst, an analyst at WestLB Panmure, who rates the shares "underperform."