VW keeps 2008 goals as profit rises on China

Volkswagen AG, Europe's biggest carmaker, stuck to 2008 earnings targets after third-quarter profit rose 27 percent because of sales increases in China and Russia and truckmaker Scania AB's takeover.

Net income jumped to 1.21 billion euros ($1.56 billion), or 3.02 euros a share, from 947 million euros, or 2.38 euros, a year earlier, Wolfsburg, Germany-based Volkswagen said today on its Web site. Sales rose 11 percent to 28.9 billion euros. Volkswagen reiterated that revenue and operating profit this year will grow.

Volkswagen Chief Financial Officer Hans Dieter Poetsch said on a conference call that new models and a focus on emerging markets will protect the carmaker from the worst of a "very tough'' global sales environment in 2009. Volkswagen, whose stock has more than doubled in the past week after investor Porsche SE increased its stake, was the only one of Europe's top 10 carmakers to report delivery growth in the region last month.

"VW naturally benefits from its relatively strong presence in emerging economies,'' said Marc-Rene Tonn, a Hamburg-based analyst with M.M. Warburg. "Conversely, it's not overly exposed to slumping North American markets. But what happens if South America, China, Russia and Asia turn to the worse next year? That would certainly hit VW.''

Stock Rises

Volkswagen fell 17 euros, or 3.3 percent, to 500 euros in Frankfurt trading. The stock has tripled this year, with gains accelerating since Porsche, the maker of the 911 sports car, said on Oct. 26 that it raised its stake to 42.6 percent from 35 percent and is targeting a 75 percent holding in the coming year.

BaFin, Germany's financial-market regulator, is investigating the shares' movements, including an almost five- fold jump in the two trading sessions through Oct. 28. Porsche's announcement spurred short-sellers in Volkswagen stock to buy from a shrinking pool of shares to close their positions.

Tonn at M.M. Warburg isn't providing a recommendation on Volkswagen stock because of its volatility. Volkswagen's 39.71 price-earnings ratio compares with 4.76 and 4.89 respectively at Bayerische Motoren Werke AG and Daimler AG, the world's two biggest manufacturers of luxury cars.

Scania's Contribution

Nine-month net income surged 28 percent to 3.78 billion euros while sales increased 5.5 percent to 85.4 billion euros. Operating profit from vehicle and component manufacturing rose 18 percent to 4.17 billion euros, including 227 million euros from Scania, which Volkswagen consolidated into its accounts as of July 22. Financial-services operating profit increased 0.5 percent to 751 million euros.

Group nine-month deliveries increased 0.8 percent to 2.84 million vehicles, led by jumps of 68 percent in Russia, 21 percent in Brazil and 13 percent in China, Volkswagen said, reiterating figures released Oct. 24. Sales in North America fell 3.3 percent as Mexican deliveries dropped 9.7 percent and U.S. figures declined 1.3 percent. The company estimated its share of the world market at the end of September was 10.5 percent.

"We can't remain detached from the downtrend, our sales development is slowing,'' Poetsch said, predicting the "weak trend'' of the previous quarter will extend into 2009. "We, too, are feeling the pressure from declining overall demand.''

Industry Production Cuts

Carmakers in Europe that have responded to sales declines by cutting production include BMW, Daimler, PSA Peugeot Citroen, Renault SA and the regional units of General Motors Corp. and Ford Motor Co. GM's Opel brand in Germany has staged plant closures of two to three weeks starting this month while Daimler doubled its year-end Christmas holiday shutdown to four weeks ending in mid-January.

Volkswagen hasn't decided whether to prolong workers' Christmas holiday, and any extension would last four days at the most, Poetsch said. Instead of reducing its permanent workforce, Volkswagen would tackle overtime or drop temporary workers to cut costs, he said, adding the company would do as much as possible to protect jobs.

The Volkswagen brand's nine-month revenue rose 2 percent to 55.8 billion euros as deliveries increased 2.3 percent, while operating profit surged 37 percent to 1.89 billion euros. Earnings also rose at the Audi luxury division, while declining at the Skoda mass-market and Bentley luxury units. The Seat brand's loss widened as its local Spanish market shrank.

Chinese Growth Slows

China's carmakers association said Sept. 17 that vehicle sales in the country may fall short of a 10 million-unit forecast because of slowing economic growth that led to the first monthly decline in deliveries in three years in August. Sales last year totaled 8.79 million vehicles. Foreign-brand car sales in Russia rose 40 percent in the first nine months of this year, though September delivery growth was slower at 22 percent.

"Volkswagen had more breathing room, because they were strong in Russia and China and weaker in the U.S., where the weakness started,'' said Ferdinand Dudenhoeffer, director of the Center for Automotive Research at the University of Gelsenkirchen, Germany. "Next year, it'll be different. The downturn will hit VW, and perhaps faster than one might expect.''

Brazil's market, Volkswagen's biggest in South America, is weakening, while emerging economies as a whole are facing a "standstill on high levels,'' said Detlef Wittig, the company's sales chief. Even so, the market is expanding this year and at worst may shrink "slightly'' in 2009.