Volkswagen Reports 9 Percent Drop in 2Q Net Profit, Issues Profit Warning for Year

FRANKFURT, Germany July 25, 2004; David Mchugh writing for the AP reported that automaker Volkswagen AG cut its 2004 profit forecast Friday after taking a second-quarter beating in the key North American market even though its overall earnings beat stock market expectations.

Net profit fell 9 percent to 357 million euros ($443 million) during the second quarter from 394 million euros in the year-earlier quarter. That was still a sharp improvement over the first quarter's profit of 26 million euros ($32 million) and beat the average estimate for a second-quarter profit of 163 million euros ($202 million) by nine analysts surveyed by Dow Jones Newswires.

Sales rose 8.4 percent to 23.99 billion euros ($29.74 billion) from 22.13 billion euros in the same quarter a year ago.

But stiff price competition from competitors General Motors Corp., Ford Motor Co. and DaimlerChrysler AG helped push Volkswagen to an operating loss of 503 million euros ($623 million) in North America where sales dropped.

VW has been reluctant to match competitors' profit-draining incentives such as interest-free financing and rebates totaling several thousand dollars per vehicle, saying it undermines resale value for consumers. Sales in the region fell to 6.56 billion euros ($8.13 billion) from 7.03 billion euros a year ago, in part because the stronger euro shrinks U.S. earnings when translated from dollars to euros.

Like Ford and GM, Volkswagen earned more from its auto financing arm than from making and selling cars, with operating profit of 279 million euros ($346 million) from financial services compared to 243 million euros ($301 million) from its automobile division.

In its profit warning, Volkswagen cited lagging demand in important markets, high oil prices and the stronger euro as reasons for cutting its 2004 forecast for operating profit before special items to 1.9 billion euros ($2.4 billion) from 2.5 billion euros ($3.1 billion).

"Despite these difficult conditions, we will continue to pursue our global model initiative in order to establish a leadership position in the key vehicle segments," the company said.

Operating earnings give an incomplete view of a company's finances because they exclude financial items such as interest and taxes, but Volkswagen and many other companies use them as their yardstick.

The euro's rise over the past two years has squeezed profit margins for European products by making them more expensive abroad.

Volkswagen's other woes include increasing competition from Japanese automakers in Europe and an aging product line in the United States, where the new version of its mainstay Golf hatchback won't go on sale until next year.

The company is pursuing a cost-cutting program, dubbed "ForMotion," to eliminate some 4 billion euros ($5 billion) in costs.

VW added that it expects "no letup in competitive pressure in key car markets, such as the USA, Europe, and China." In addition to price wars in the United States, Volkswagen had to cut prices in China to match General Motors.

For the first half of the year, net profit fell 36 percent to 383 million euros ($475 million) from 596 million euros in the same period a year ago. First-half sales rose 7.3 percent to 45.94 billion euros ($56.96 billion) from 42.83 billion euros a year ago.