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Volkswagen Warns of Increasing Costs After Profit Trails Analyst Estimates

Volkswagen AG (VOW), Europe’s largest automaker, said rising commodity prices and a strengthening euro will damp earnings gains this year after reporting lower-than- expected profit.

VW’s second-quarter earnings before interest and taxes of 3.17 billion euros ($4.55 billion) missed the 3.26 billion-euro average estimate of 14 analysts surveyed by Bloomberg. Sales rose 22 percent to 40.3 billion euros. The shares dropped the most in more than five months.

“We expect the group’s sales revenue and operating profit in 2011 to be significantly higher than the previous year,” the Wolfsburg, Germany-based company said in a statement today. “However, the continuing volatility in interest and exchange rates and commodities prices will weaken the volume effect.”

VW is being squeezed by rising production costs and lower profit on cars sold outside Europe. Oil prices have climbed 19 percent in the past 12 months, while steel prices have gained 7 percent. The euro has advanced 10 percent against the dollar in the past year, meaning VW earns less on cars sold outside its home region.

“Up until today, the market has gotten used to VW beating expectations,” saidDaniel Schwarz, a Frankfurt-based analyst at Commerzbank AG who recommends buying the shares. “VW simply failed today to deliver the good news people were looking for.”

Photographer: Jochen Eckel/Bloomberg

An employee carries the radiator grille of a VW Touareg sport-utility vehicle. The company has forecast a 5 percent increase in global deliveries this year after selling a record 7.2 million cars, SUVs and vans in 2010. Close

An employee carries the radiator grille of a VW Touareg sport-utility vehicle. The... Read More

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Photographer: Jochen Eckel/Bloomberg

An employee carries the radiator grille of a VW Touareg sport-utility vehicle. The company has forecast a 5 percent increase in global deliveries this year after selling a record 7.2 million cars, SUVs and vans in 2010.

Shares Drop

VW fell as much as 10.90 euros, or 7.8 percent, to 133.15 euros, the biggest drop since March 15, and was down 4.7 percent to 137.35 euros as 4:42 p.m. in Frankfurt trading. The stock has gained 13 percent this year, valuing the German carmaker at 60.9 billion euros.

Volkswagen is expanding in the U.S. and emerging markets including China and Russia in a bid to surpass Toyota Motor Corp. as the world’s biggest carmaker by 2018. The maker of the Golf hatchback is also growing in Europe, where it boosted market share in the first half to 22.8 percent from 21.1 percent at the expense of Ford Motor Co. (F) and PSA Peugeot Citroen.

The second-quarter operating margin rose to 7.9 percent from 6 percent. Net income in the period more than tripled to 4.67 billion euros.

“The coming months will be challenging for us and will require us to work hard to maintain this high level,” Chief Executive Officer Martin Winterkorn said in the statement.

The company has forecast a 5 percent increase in global deliveries this year after selling a record 7.2 million cars, SUVs and vans in 2010. The German manufacturer sold more than 4 million vehicles between January and June for the first time.

Ford Profit

Ford’s second-quarter pre-tax operating profit slipped 2.2 percent to $2.88 billion because of weaker demand in Europe and North America. Peugeot, Europe’s second-largest carmaker, dropped its target of lifting 2011 automotive profits after being hit by supply disruptions stemming from the March earthquake in Japan and rising raw material costs.

Renault SA (RNO), France’s second-largest carmaker, said today that first-half operating profit slumped 19 percent to 630 million euros, burdened by sluggish demand for aging models such as the Clio compact.

Strong orders for the Golf and Tiguan as well as Audi’s A6 sedan and SUVs, prompted VW to expand production in the third quarter. VW will run reduced shifts during a traditional three- week summer vacation at German plants in Wolfsburg and Emden and add Saturday shifts between Aug. 20 and Sept. 24.

Production Boost

Audi, the biggest contributor to VW group profit, suspended summer holidays at its main factory in Ingolstadt to maintain output of the Q5 SUV and has extended around-the-clock production of the Q7 SUV at a factory in Bratislava, Slovakia, until year’s end.

VW plans to invest 51.6 billion euros in its automotive business over the next five years, with an additional 10.6 billion euros to be spent through its two joint ventures in China, the world’s largest auto market and VW’s top sales region. The company plans to hire more than 50,000 workers through 2018 as it targets deliveries of more than 10 million vehicles per year.

Future growth may also stem from pending mergers. VW secured a majority stake in MAN SE (MAN) after a takeover offer and aims to combine the Munich-based truckmaker with Scania AB (SCVB), the Swedish competitor that’s 71 percent-owned by VW. A planned tie- up with Porsche SE is designed to double output by the sports- car maker to about 200,000 units by 2018.

Porsche Merger

VW is doing “everything” to support efforts to complete the Porsche merger by the end of the year, Chief Financial Officer Hans Dieter Poetsch said today on a conference call.

Legal and tax-related obstacles remain unsolved, threatening to delay the merger, Poetsch said, putting the likelihood of the merger happening in the remainder of 2011 at 50 percent.

VW is reviewing its partnership with Suzuki Motor Corp. (7269) as cooperation with the Japanese carmaker has been developing “more slowly than expected,” Poetsch said, without being more specific. Cooperation between the two manufacturers is not being pursued “with the desired level of intensity,” the CFO said.

To contact the reporter on this story: Andreas Cremer in Berlin at acremer@bloomberg.net

To contact the editor responsible for this story: Chad Thomas at cthomas16@bloomberg.net

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