FRANKFURT -- Volkswagen slashed its 2004 profit target on Friday following weak first half earnings but shares in Europe's largest carmaker climbed because many investors had feared even worse guidance.
The company now expects to post operating profit before special items of 1.9 billion euros ($2.33 billion) for the year as a whole, compared with its original guidance of more than 2.5 billion. It had operating profit of 2.5 billion euros in 2003.
Before special items, operating profit for the first half fell 19.8 percent to 979 million euros due to sluggish demand in key markets and the impact of the strong euro. Revenues rose 7.3 percent to 45.9 billion euros.
According to the average of a Reuters poll of 24 analysts, first half operating profit was forecast to drop to 821 million euros from 1.22 billion earned in the same period last year.
VW said its ForMotion cost-cutting program, which includes 5,000 job cuts, is expected to contribute well over one billion euros to earnings in 2004, up from 400 million in the first half.
Nevertheless, due to expenditures related in part to ForMotion, the group is now expecting special items of around 400 million euros in 2004.
PREPARED FOR WORSE
Widely expecting a profit warning, many analysts had revised their estimates lower following disappointing car sales in Volkswagen's core domestic market, considerable losses in North America and continuing strength in the euro.
"(The results) are substantially better relative to expectations, but expectations were super low," said CSFB analyst Harald Hendrikse, who rates the stock an "outperform".
He said strong cash flow in the second quarter pointed to an improvement in the quality of results.
"Volkswagen still has major problems like the strong euro, but it's managed to partly stabilize these effects by accelerating its ForMotion program," he said.
The carmaker's bonds also rose, amid speculation that the better-than-expected cash flow would keep rating agencies from immediately downgrading the company further.
Volkswagen's 4.875 percent bond due in May 2012 was trading four basis points tighter at 93 basis points over government bonds, a trader in London said. Many of the company's fixed-rate securities were trading three to four basis points tighter following the results, he said.
Volkswagen shares have been the worst performer in the European sector this year. The company's market capitalization has dropped by more than a quarter in 2004, compared to a three percent drop by the next worst stock, BMW.
CHINA SALES DECLINE
For the first time, VW reported a decline in deliveries in China, its most important foreign market. They fell by 4.2 percent to 310,657 vehicles due to increasing competition and a "massive" rise in sales incentives offered by other rivals.
"We expect that there will be no let-up in competitive pressure in key car markets, such as the USA, Europe and China," VW said in a statement.
By comparison, VW's biggest competitor in China, General Motors, said on Thursday its sales volume there rose by 50 percent in the first half, adding that market share is nearing 10 percent from zero only a couple of years ago.
Volkswagen forecasts growth in group deliveries to customers in the last six months of the year to match the 1.7 percent rise in the first half, when it delivered 2.52 million units.
