FRANKFURT -- Volkswagen AG stuck to its 2004 earnings guidance on Thursday after posting a lower than expected decline in third-quarter operating profit, helped by cost savings and an improved cash flow at its auto business.
Europe's largest carmaker said pricing pressure and currency effects contributed to a 23 percent fall in quarterly operating profit to 487 million euros ($620 million) before one-offs, beating the 468 million average forecast in a Reuters poll.
The company, which also makes the luxury Audi cars, stuck to its guidance for 2004 operating profit of 1.9 billion euros, excluding 400 million in restructuring charges, but said market conditions remained tough.
The fall in earnings could reinforce management's demand for a two-year pay freeze for the 103,000 workers at VW's six western German plants when the company meets with union negotiators on Thursday for a fifth round of crucial wage talks.
VW said its ForMotion efficiency program was on track to deliver well over 1 billion euros in savings, after pitching in more than 850 million in the first three quarters.
The group's finance chief Hans Dieter Poetsch told analysts during a conference call, however, that about a third of some 4 billion euros in targeted ForMotion savings in 2004 and 2005 might have to be passed on to the customer in the form of cheaper prices.
Net cash flow at VW's automotive division improved to a positive 1.08 billion euros by the end of the first nine months, and Poetsch expected this to remain positive for this year and next. This will be helped by VW's aim to keep its capital expenditure at below 7 percent of sales in the medium term after a ratio of 6.4 percent in the first nine months.
"The cash flows are probably the most surprising positive of this quarter," said John Lawson, equity analyst at Citigroup.
Analysts said the report would also relieve bondholders.
"This (improvement) shows the success of the ForMotion program in the automotive cash flow statement and automotive balance sheet and the commitment of the company to keep its A- rating," HVB credit analyst Sven Kreitmair told clients.
CHINA PROFITS TUMBLE
Losses in North America continued to mount but not as much as feared -- to 614 million euros in the nine months from 503 million in the first half.
Poetsch attributed this to one-off causes that wouldn't continue in the near term, reiterating that VW would not only post an operating loss in North America of around 1 billion euros this year, but it would also be difficult to break even there in 2005 due to the continued weakness of the dollar.
Lower deliveries and currency headwinds meant the contribution of its Chinese joint ventures to nine-month profits fell to 268 million euros from 466 million in the year earlier.
The VW brand group, which includes Skoda, Bentley and Bugatti cars, swung to a nine-month loss of 47 million from a profit of 388 million in the previous year due entirely to a deterioration at its core VW brand.
Outside the VW brand group, Volkswagen's Audi brand group also owns Seat and Lamborghini. Its struggling commercial vehicles division widened its nine-month loss by only 7 million to 159 million euros from a year earlier.
Third-quarter group revenues rose 0.8 percent to over 21.4 billion euros, while deliveries to customers slid 0.6 percent to 1.23 million vehicles, due entirely to a drop in its domestic German market. VW expects a slight rise in deliveries this year.
While Volkswagen is threatening its German workers with job losses should they fail to agree on a labor cost-cutting package, mass-market rivals in France are zooming ahead thanks in part to a lack of exposure to the U.S. market.
Far from cutting jobs, Renault plans to add 10,000 new employees next year -- half of them in France. Renault on Wednesday reported better than expected third-quarter revenues, and reaffirmed a strong profit margin goal.
Yet investors have valued Volkswagen at a premium to its European peers, underpinned by the market's belief in resurgent profits next year due to key product renewals and cost savings.
Even though the VW stock has been the worst performer in the European auto index this year, it is still trading at a higher multiple, 9.8 times estimated 2005 earnings, surpassed by only luxury carmaker Porsche, according to Reuters data.