WOLFSBURG, Germany -- Hopes for a quick turnaround at Volkswagen faded on Tuesday as Europe's biggest carmaker forecast a weak first quarter but higher 2005 operating earnings.
The company is pinning its hopes on the success of a restructuring program and rejuvenated model line to help it counter sluggish markets, a strong euro, high raw material prices and dwindling profits in China.
But the outlook for the first quarter sent VW's shares down nearly 4 percent and robbed the stock of its upward momentum this year as one of Europe's car-sector turnaround stories.
"Operating profit after special items will improve year-on-year in 2005, although the extent of this improvement depends on external factors that cannot be predicted at present," the German group said.
Nevertheless, first-quarter operating profit as in the previous year "will not be satisfactory", VW said.
Michael Raab, analyst at Sal Oppenheim, said: "The wording they have used is almost tantamount to a profit warning for Q1 and there were obviously a couple of people out there who were playing Volkswagen as a restructuring story."
In a note to clients, Morgan Stanley said tough conditions in the sector warranted a wary outlook. "We also believe a cautious outlook is necessary for VW to firmly grasp a sense of 'crisis' in order to execute a meaningful (and necessary) restructuring of its industrial operations..." it added.
Chief Executive Bernd Pischetsrieder told a news conference he was confident that the group would reach its 2005 savings target of 3.1 billion euros ($4.11 billion) under its "ForMotion" programme.
"In the face of growing price pressure, continuing unfavorable exchange rates and uncertainty about developments in the costs of raw materials, especially steel, the competitive situation in our industry will be further exacerbated," he said.
Analysts expect pricing pressure and currency headwinds to eat away a big chunk of the savings.
Deliveries to customers declined 0.5 percent to roughly 687,000 vehicles in the first two months of the year, dragged down by a drop in China, VW's most important foreign market, where competition from rivals has been growing.
The company said it expects an improvement in sales later in the year thanks in part to this month's launch of its popular Jetta compact saloon in the United States and the latest Passat mid-sized sedan in Europe.
Investor hopes for a turnaround have also been boosted by the arrival of former Chrysler manager Wolfgang Bernhard, who will take over responsibility for the VW Brand Group "long before" January 2006, Pischetsrieder said.
This cannot come too soon, as the division swung to a 2004 operating loss of 44 million euro from a 486 million euro profit in 2003.
Early in January, VW Chief Financial Officer Hans Dieter Poetsch had forecast an improved operating profit for 2005 and a clear rise the following year, when he said earnings should improve by a few billion euros.
Pro rata operating profit at the China joint ventures declined by 60 percent to just 222 million euros last year, while the group's North American operating loss widened to 907 million euros from 168 million in 2003.
"We are working intensively to reorient the Volkswagen Group in China, to maintain our market leadership and to profit more clearly from the growing demand in China," the VW CEO said.