VW Sticks to 2012 Earnings Targets After 3Q Profit Drop

Volkswagen AG (VOW) stuck to its targets for sales growth and stable profit this year, underscoring its strength compared with European competitors such as PSA Peugeot Citroen (UG), which is seeking state support.

Volkswagen still plans to “match” 2011’s operating income of 11.3 billion euros ($14.6 billion) this year, even after profit slipped 1.6 percent in the first nine months of 2012, the Wolfsburg, Germany-based company said today. It also stood by its target to beat last year’s sales and auto deliveries in 2012. The stock rose as much as 4.9 percent, the biggest increase in more than a month.

VW has largely shrugged off a slump in the European car market, which is poised to suffer its biggest annual decline in 19 years in 2012. The region’s largest automaker has avoided the brunt of a five-year contraction by relying on growth in the U.S. and China and expanding the Audi luxury brand.

“Volkswagen’s performance from a sales perspective is certainly the best worldwide,” said Juergen Pieper, an analyst with Bankhaus Metzler in Frankfurt. “No other carmaker can keep up with its growth level.”

The stock climbed as much as 7.10 euros to 153.60, and was up 4.85 euros as of 4:35 p.m. in Frankfurt. The shares have gained 31 percent this year, valuing VW at 67.2 billion euros.

‘Growing Headwinds’

Third-quarter operating profit declined 19 percent to 2.34 billion euros, its biggest drop since the global recession in 2009. The figure was on par with the 2.39 billion-euro average of six analyst estimates compiled by Bloomberg. Sales rose 27 percent to 48.8 billion euros.

“Although the times aren’t easy, it’s up to us to systematically continue along our chosen path,” Chief Executive Officer Martin Winterkorn said in a statement. “We therefore remain committed to our ambitious goals for 2012, despite growing headwinds.”

Earnings should improve in the fourth quarter helped by new generations of the VW Golf and Audi A3, Chief Financial Officer Hans Dieter Poetsch said on a conference call today. Costs to introduce those and other models based on a new platform peaked in the third quarter, he said.

Porsche Effect

VW’s resilient earnings contrast with Peugeot. Europe’s second-largest carmaker secured 7 billion euros in guarantees from the French government to shore up its ailing finance arm after predicting debt will rise 20 percent more than previously expected. Peugeot has said it has run through 200 million euros a month in cash this year. In the first half, Peugeot’s auto division lost 662 million euros.

“Volkswagen can at the moment play its strength off against European competitors,” said Michael Punzet, an analyst at DZ Bank in Frankfurt. “Next year, VW will benefit from the inclusion of Porsche, improvements in the performance of its truckmaker MAN and cost savings” from the rollout of the platform that underpins the Golf.

Volkswagen’s net income jumped 60 percent to 11.3 billion euros, boosted by gains related to the purchase of the Porsche car brand. Still, writedowns related to the deal will limit the profit contribution of the 911 maker this year, VW said.

With the sovereign-debt crisis spreading beyond Italy, Spain and Portugal, profit-sapping discounts are on the rise. Dealer incentives in Germany, Europe’s biggest market, rose to 12.2 percent off the list price in September, the highest level in at least two years, according to trade publication Autohaus PulsSchlag.

Inventory Control

Pricing pressure in Europe has intensified and will continue, with the market set to remain at low levels for years to come, Christian Klingler, VW’s sales chief, said on the call.

The German manufacturer has recently stepped up efforts to respond to the crisis. In September, the company reduced its internal sales forecast for 2012 by roughly 100,000 vehicles -- more than 1 percent of annual deliveries -- on lower demand for cars like the Polo subcompact, a person familiar with the matter said at the time.

The company is also cutting back parts purchases by as much as 10 percent and demanding lower prices for components, suppliers have said. Poetsch said today that VW is looking to keep stocks of unsold vehicles below its normal target level to be able to react quickly in case demand declines further.

VW plans to halt European production of the mid-sized Passat (PSAT) for five days through the end of the year, and the Audi luxury brand stopped assembling the A6, A7 and A8 sedans for a week in October to adapt slower demand, especially in southern Europe.

The German carmaker has become “more cautious” on the European market for next year, CEO Winterkorn said in Sao Paulo this week. VW plans to export 200,000 cars to China in 2013 to boost utilization rates at European plants and keep inventory under control in the region.

To contact the reporter on this story: Christian Wuestner in Berlin at cwuestner@bloomberg.net

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

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