(Adds more analyst comment, detail)
By Nick Tattersall
FRANKFURT, Oct 29 (Reuters) - Volkswagen said on Wednesday its profits would probably more than halve this year after weak demand, a strong euro and the cost of cutting jobs in Brazil hammered its third-quarter earnings.
Europe's biggest car maker earned more in the third quarter from its financial services business than it did from selling cars, with group operating profit falling 57 percent to 510 million euros ($597 million), below market consensus.
It also warned that its full-year results would be hit by a higher than anticipated revaluation of fixed investments and development costs. VW has been launching a new model variant somewhere in the world once every three weeks this year.
"The negative impact of the strong euro, declining sales figures in important markets and upfront expenditures for new models, as well as the restructuring in Brazil, depressed the operating profit in the first nine months," the company said.
VW's share price, which has outperformed European peers by seven percent this year, was down 1.7 percent at 43.36 euros by 1249 GMT compared to a 0.3 percent fall in the DJ Stoxx European sector index .
The stock recovered from earlier lows after VW poured cold water on market talk that it may issue a convertible bond, saying it was not planning any capital measures.
"The third-quarter results were pretty in-line but the forward guidance was quite concerning. It implied a fourth-quarter operating profit of around 600 million euros and we were looking for around 900 million," said Himanshu Patel, an analyst at JP Morgan in London.
Suffering along with rivals as car demand stagnates in a weak economic environment, VW has been hit this year by the high cost of new model launches, including its key Golf V hatchback, Audi A3 and Transporter van.
It said a tighter control on investment spending and increasing sales of the new models would help its operating business to stabilise in the remaining months of the year, although a revaluation of upfront costs would hit the result.
"Taking these measures into account, the operating profit for 2003 will probably be just under half the level of the previous year," the company said.
EURO WEIGHS
VW said it had lifted its hedging to protect against the strength of the euro, with some two-thirds of its U.S. dollar exposure hedged for 2004. It said exchange rate fluctuations had lopped 1.2 billion euros off nine-month pre-tax profit.
"It is clearly not what people were hoping for. The results, especially operating profit, was not exactly encouraging and that is what has hit its shares," Gerald Roessel at Invesco Asset Management said.
French rival PSA Peugeot Citroen last week warned on profits for the second time in three months and said sales had fallen in the third quarter as it too battles a generally rocky market and the impact of a strong euro.
VW confirmed it had taken provisions of 120 million euros for overhauling its business in Brazil, where it is slashing nearly 4,000 jobs amid chronic overcapacity in the worst car market the country has seen for a decade.
The German giant recently lost its title as the number one car seller in Brazil to General Motors Corp. , but is hoping to recover the top spot with its new "Fox" compact car, launched earlier this month. (Additional reporting by Jess Smee and Madeline Chambers)