FRANKFURT -- Volkswagen said on Wednesday its core profit tumbled by more than two-thirds in the first quarter of 2003, hammered by a weak dollar and spending on new models, though it soothed investors by suggesting the worst was over.
Europe's biggest carmaker said its pre-tax earnings fell to 331 million euros ($377 million), down from just under a billion a year ago and below the 464-million average estimate in a Reuters poll of 22 analysts.
VW stuck to a pledge to improve operating profit substantially in the course of the year as its new Touran, Touareg and forthcoming Golf V models boost unit sales, although the result would still be below last year's 4.76 billion euros.
"The outlook is what has helped the share recover. Bad expectations were already priced into the shares," one Frankfurt-based trader said. "The outlook signals a brighter future and that is persuading people to revisit this stock."
VW said a drop in the value of its equity portfolio, where it invests some of its excess cash, had led to a writedown of 143 million euros at the pre-tax level, with the strength of the euro also taking a heavy toll.
Costs from its massive product expansion also put pressure on profits. VW plans to launch an updated model variant somewhere in the world every three weeks this year.
"Major factors impacting on operating profit were the model ramp-ups, involving higher start-up costs and upfront expenditures, as well as negative effects from exchange rate movements," the company said in a statement.
VW recently lifted its hedging rate to cover 40 percent of its exposure to the U.S. dollar, Japanese yen and British pound, but it still has a much lower hedging rate than rivals. That leaves it at the mercy of the euro, which has rallied over eight percent since January, adding to a strong gain in 2002.
VW expects to lift unit sales back over five million this year, helped by an updated version of the Golf, the backbone of its success over the past three decades, due out in the autumn.
But investors have expressed concern in recent weeks that the negative effects in the first quarter could run on into the rest of the year, and have questioned how the company will meet its pledge of a significant pick-up in the second half.
"What is surprising is that they are still clinging to their earnings outlook -- at first glance it seems a bit optimistic," said HVB analyst Albrecht Denninghoff.
Europe's second-biggest carmaker PSA Peugeot Citroen, which has also said the strong euro is a tough challenge, aims to match or slightly lift last year's 5 percent operating margin in its key car unit in 2003.
Another key mass-market rival, Renault, which is nearing the zenith of its model cycle, has said it is aiming for a stable operating margin, or operating profit as a percentage of sales.
Although VW's valuation is below historic averages, analysts say that it is still valued higher than both Renault and Peugeot.
VW's overall unit sales in the first quarter rose 3.1 percent, driven largely by sharp gains in China, which overtook Germany to become its highest volume market for the first time.
Operating profit dropped 47 percent to 604 million euros, while net profit fell 68 percent to 202 million euros.