By Nick Tattersall
FRANKFURT, July 21 (Reuters) - A strong euro, expensive new car launches and slumping demand on both sides of the Atlantic are expected to have slammed profits at Volkswagen down by around a half when it reports second-quarter results on Friday.
Europe's biggest car maker is battling with shrinking auto markets in Europe and the United States, and the company is further saddled by the cost of a massive product overhaul and low currency hedging, which leaves it at the mercy of a weak dollar.
VW , which hedges around 40 percent of its dollar, Japanese yen and British pound exposure -- less than rivals -- saw 400 million euros sliced from its pre-tax profit by currency effects in the first quarter, and analysts expect the same hit again in the second.
A poll of 25 analysts surveyed by Reuters put VW's operating profit in the three months to the end of June at 730 million euros ($824 million), down from 1.4 billion in the period a year ago, while pre-tax profit was also seen halving to 640 million euros.
"Lower-than-expected unit sales excluding China, despite higher incentives in Germany and North America, adverse currency impacts and the strike in mid-June explain this poor performance," Lehman Brothers analysts, who rate the stock "overweight", said in a recent research note.
The upcoming launch of the next generation Golf -- part of a product overhaul which will see an updated model launched somewhere in the world every three weeks this year -- could also have cost some 300 million euros in the quarter, analysts said.
DROOPY DEMAND
Strikes by east German workers last month caused car production in Germany to fall almost a fifth, while new registrations in Europe's biggest car market fell five percent. VW said the strikes cost it 22,000 units of production.
In western Europe as a whole, the company sold five percent fewer cars in the first six months of the year, according to Brussels-based automakers' association ACEA.
Volkswagen has also been suffering in the United States, the world's biggest car market, where it sold 21 percent fewer vehicles in June than in the same month a year earlier.
VW's Mexican unit, which builds some cars for the U.S. market, said at the end of last month it would slash output and could cut up to 2,000 jobs because of slower demand in export markets, while its Brazilian arm said late on Sunday it would slash about 4,000 jobs, around 16 percent of its workforce.
VW has said its operating profit will not match 2002's 4.76 billion euros this year, although it has also said that earnings should improve quarter by quarter as its recently-launched Touran, Touareg and forthcoming Golf V models buoy unit sales.
But many analysts say that even given the group's cautious outlook, expectations for its full-year results may still be too high, and they will be looking for any more hints from management on the forecast for the second half.
"The full-year (market) consensus forecast of 2.7 billion euros pre-tax profit may prove a tall order with the Golf V only likely to go on sale from October and negative currency effects likely to moderate only slightly at the current rate," Commerzbank analysts, who rate the stock "hold", said in a note.
For a Reuters' poll of analysts' forecasts, click on [L21438792]