(Updates with CFO comment on 2004, capex, 2003 costs, Brazil)
By Nick Tattersall
FRANKFURT, Oct 29 (Reuters) - Germany's Volkswagen said on Wednesday its profits would more than halve this year after weak demand for its cars, a strong euro and the cost of cutting jobs in Brazil hammered its third-quarter earnings.
Europe's biggest auto maker earned more in the three month period from its financial services arm than it did from selling cars and, although it expects demand to pick up next year, it said it would be 2005 before business was back at full throttle.
"2004 should be a much better year, but certainly still a year which does not show the full potential of the Volkswagen group," VW Chief Financial Officer Hans Dieter Poetsch told a conference call.
He said VW would take a hit of a "couple of hundred million" euros this year after revaluing some fixed assets and development costs, which would knock operating profit down to just under half last year's 4.76 billion euros ($5.6 billion).
Suffering with rivals as car demand stagnates in a weak economic environment, VW has also had to bear the cost of a raft of new models, including its key Golf V hatchback, the Audi A3 and Transporter van. It is launching a new model variant somewhere in the world every three weeks this year.
Operating profit fell 57 percent to 510 million euros in the third quarter, below market consensus, but it was the outlook for the remainder of the year, which investors are hoping will benefit from the new Golf, that jangled nerves.
"The third-quarter results were pretty in line, but the forward guidance was quite concerning," said London-based JP Morgan analyst Himanshu Patel.
"It implied a fourth-quarter operating profit of around 600 million euros, and we were looking for around 900 million."
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 rocky market and the impact of a strong euro.
VW stock, which has outperformed European peers by seven percent this year, was down 2.5 percent at 43.00 euros by 1510 GMT, although it was off earlier lows after the company poured cold water on market talk of an imminent convertible bond, saying it was planning no capital measures.
INCREASE HEDGING, DECREASE SPENDING
VW 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.
Sales should be boosted by the availability of its fifth generation Golf, an updated version of its best selling car which went on sale in Germany earlier this month. Board member Detlef Wittig said extra shifts may mean it would end up making more than the 135,000 Golf Vs it aims to build this year.
Poetsch said VW, renowned for its high levels of spending, was aiming to keep capital expenditure flat both this year and next, after investing 6.73 billion euros in 2002.
The group had also lifted its hedging to protect against the strength of the euro, with around 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.
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.
"Full provisions (for Brazil) were made in the third quarter. There could be some associated costs in the fourth quarter, but they will be of a smaller dimension," Poetsch said.
Brazil's powerful ABC Metalworkers union said on Tuesday up to 32,000 workers would take part in strikes at Volkswagen, Ford and other vehicle plants after rejecting a pay deal.
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 Marius Bosch and Madeline Chambers)