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March 11, 2003

GERMANY: VW needs market rebound to match ’02 operating profit in ’03 – report

Volkswagen AG warned on Tuesday that it won't be able to match its 2002 operating profit in 2003, unless the western European and US car markets rebound, Dow Jones reported. Dow Jones said VW chairman Bernd Pischetsrieder told reporters at the carmaker's annual press conference that unfavourable exchange rates will probably also hamper profits this year. VW's operating profit in 2002 was EUR4.76 billion.

By bcusack

Volkswagen AG warned on Tuesday that it won’t be able to match its 2002 operating profit in 2003, unless the western European and US car markets rebound, Dow Jones reported.

Dow Jones said VW chairman Bernd Pischetsrieder told reporters at the carmaker’s annual press conference that unfavourable exchange rates will probably also hamper profits this year. VW’s operating profit in 2002 was EUR4.76 billion.

According to Dow Jones, Pischetsrieder said the year would be off to a rocky start, despite an increase in two-month vehicle deliveries.

“Due to profound changes and considerable uncertainty in the economic and political framework, the result for the first quarter of 2003 will be significantly lower than the previous year,” he said.

Pischetsrieder said cost cutting and new models should reverse the downward trend in results in 2004, Dow Jones reported.

In 2003, Pischetsrieder said vehicle deliveries in January and February climbed 4.5% on the year to about 732,000 vehicles but most of the increase was in the booming Chinese market, with sales down in the rest of the world, the news agency said.

Dow Jones noted that some analysts question whether sales in China are as profitable as in North America and western Europe.

According to Dow Jones, in its annual report, VW forecast another year of declining car sales in western Europe and weaker demand in the US. Global sales should increase only slightly in 2003, VW said.

Nonetheless, Dow Jones said, VW reiterated its forecast to again deliver more than 5 million vehicles in 2003, after sales fell 2.2% to just under that level last year.

Looking at the impact of foreign exchange, which VW cited as one of the risks to 2003 earnings, chief financial officer Bruno Adelt explained that all told, foreign exchange rates burdened 2002 results by some 500 million euros, Dow Jones said.

He noted that VW profited in the past from a strong US dollar and didn’t foresee the fall in the dollar’s and other currencies’ value since mid-2002, Dow Jones said.

“We have since responded to those developments, gradually increasing our hedging rate, but retaining the opportunity to benefit from a rise in the U.S. dollar as and when it occurs,” he said.

According to Dow Jones, VW said in its annual report that it posted losses from foreign exchange of EUR972 million in 2002, more than 2001’s loss of EUR821 million, calculated as an operating expense. This is balanced somewhat by gains from foreign exchange, counted as operating income.

VW said further that total provisions climbed to EUR22.3 billion as of Dec. 31 from EUR21.8 billion a year earlier. This includes a 13% increase in warranty provisions to EUR4.4 billion, Adelt said, according to Dow Jones.

Dow Jones noted that warranty costs generally cover service to new cars, which may include recalls, and said the increase follows some recent high-profile recalls, which focused attention on VW’s mediocre showing in some industry quality studies.

Dow Jones said the overall provision hike also included higher pension-related warranties, which account for EUR10.3 billion of the provisions, but Adelt stressed that VW can cover its pension obligations. Some companies’ pension funding has been left with a big gap due to declining equities markets.

“Unlike other major corporations, we have no problems in this regard,” Adelt said, according to Dow Jones.

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