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UPDATE 3-VW profits slip, cashflow raises questions

(Adds fresh analyst comment, detail, updates shares)

By Nick Tattersall

FRANKFURT, Feb 19 (Reuters) - Europe's largest carmaker Volkswagen AG said on Wednesday its profits slipped 10 percent last year despite a stronger fourth quarter, but left investors clamouring for details on its outlook for this year.

The group, suffering from an ageing product range as it battles weak demand and unfavourable exchange rates, posted pre-tax profit of 3.986 billion euros ($4.26 billion) for 2002, in line with market consensus and just meeting its own target.

Volkswagen said in October it still aimed to post pre-tax earnings of around four billion euros for last year, although it cautioned that a further deterioration in stock markets could affect its financial result.

The company gave no outlook for 2003, unlike French rivals Renault and PSA Peugeot which both reported a rise in operating profit last week, but said it would propose an unchanged ordinary dividend of 1.3 euros per share.

"If a company is ready to pay an attractive dividend like this, it is a confidence building signal," said Rolf Drees of Union Investment fund managers, which rates VW "neutral".

Group revenues slipped 1.8 percent to 86.948 billion euros.

Volkswagen stock, which has outperformed the European sector by around five percent so far this year, was down 2.1 percent at 35.65 euros by 1640 GMT, tracking the DJ European autos index .

ACCOUNTING ENIGMA

Volkswagen did not break out fourth-quarter results, but the full-year numbers imply a jump in pre-tax profit in the fourth quarter of close to 50 percent to 1.012 billion euros, according to Reuters calculations, slightly above expectations.

"The substantial fourth quarter earnings improvement year-on-year should be assigned to VW's annual accounting enigma," WestLB analysts said in a research note.

The company posted very weak results in the fourth quarter of 2001, hit partly by the financial crisis in Argentina as well as one-off costs associated with provisions required under European Union rules for the disposal of old cars.

West LB analyst Arndt Ellinghorst said the strong performance of the group's two joint ventures in China -- its second-largest market after Germany where sales rose over 40 percent last year -- had likely also boosted the result.

"I assume that the consolidation of the group's Chinese operations had a positive impact of roughly 400 million euros on the pre-tax level. I believe most of that kicks in in the fourth quarter," he said.

MORE DETAIL NEEDED ON CASHFLOW

In a statement detailing figures but providing no comment or explanation, VW said cashflow from operating activities at its automotive division rose just 0.4 percent to 8.065 billion euros year-on-year, suggesting a deterioration in the fourth quarter.

"In the absence of any comment at this stage people might worry that the quality of the earnings in the fourth quarter was low. There could be a very logical explanation but nevertheless it begs a question," Lehman Brothers analyst Chris Will said.

Cashflow from investment activity rose 17.5 percent to 9.121 billion euros, which analysts said suggested a negative free cash flow for the year at the automobile unit.

"I have found no explanation for the increase in investment spending. The automobile unit's free cash flow is negative, and having no explanation of this is a little bit unsatisfactory," said Sal Oppenheim analyst Patrick Juchemich.

A VW spokesman declined to make any comment on the numbers, saying the group would provide more details next month when it holds its annual press conference.

Some analysts were also frustrated at the lack of outlook, especially after PSA Peugeot pleased the market last week with an upbeat forecast.

"PSA is the benchmark in terms of disclosure -- the limitations of (VW's) release and the fact that there is no outlook is very much in 'VW style'," one German analyst said.

Chief Executive Bernd Pischetsrieder said in January he was confident about earnings and sales this year.

The group is depending on its recently-launched Touran minivan to boost sales this year as its top-selling Golf and Passat models start to look long in the tooth.

Volkswagen sold 4.98 million vehicles in 2002, a 1.9 percent drop from the previous year, and has said it aims to lift sales to over five million this year.

The group's net profit fell 11.3 percent to 2.597 billion euros last year, above market expectations and implying a rise of almost a third in net profit in the fourth quarter, helped by a lower tax rate. (Additional reporting by Madeline Chambers)