FRANKFURT - Volkswagen AG 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 investors took solace in the hope the worst was over.
Europe's biggest carmaker said its pre-tax earnings slumped to 331 million euros ($377 million), down from just less than a billion a year ago and below the 464-million average estimate in a Reuters poll of 22 analysts.
It 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 numbers were perhaps a little disappointing, but there was certainly no disaster here, as I think the market had clearly partly feared," said Smith Barney analyst John Lawson, who has an "outperform, high risk" rating on the stock.
"The outlook statement was a little more robust, because it was built on an actual basis of the first quarter, than might have been given before."
VW said the strength of the euro, which has rallied more than 8 percent since January, adding to a strong gain in 2002, had knocked 400 million euros off pre-tax profit.
Costs from a massive product overhaul -- it is launching an updated model variant somewhere in the world every three weeks this year -- sliced about 300 million euros off the pre-tax result, while it wrote down the value of its equity portfolio, where it invests some of its excess cash, by 143 million euros.
"Although there is a one-off in those figures in terms of the securities writedowns, the assumption must be that most of that one-off has fully reversed itself for the second quarter," Smith Barney's Lawson said.
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 in the past three decades, due out this fall.
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.
Analysts said the strength of the euro in recent days -- it hit a fresh four-year high against the dollar on Tuesday -- gave little cause to hope negative currency effects would end soon.
Europe's second-biggest carmaker PSA Peugeot Citroen, which also has 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 currently 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.