VW Group profit bucks trend as SUV push pays off

FRANKFURT -- Volkswagen Group's second-quarter operating profit rose 30 percent despite a drop in vehicle sales, helped by VW brand's higher-margin SUVs and rising volumes at Porsche and Skoda.

Operating profit rose to 5.13 billion euros ($5.71 billion), up from 3.94 billion in the second quarter last year, the automaker said in a statement on Thursday. Vehicle sales fell 1.8 percent.

The operating profit jump was magnified by the absence of a diesel charge that VW booked in the year-earlier period.

VW has been so far more resilient to industry turmoil that has hit automakers and their suppliers. Both BMW and Daimler scaled down their outlook this year as softening sales compounded a squeeze on profits from record spending to develop electric and self-driving cars.

The 12-brand group, whose marques include Porsche, Audi and Bentley, is getting a boost from sharing components across nameplates. Its MQB architecture saves costs across its vast lineup of small and mid-size vehicles, Credit Suisse said in a note this week.

VW reiterated it expects vehicle deliveries in 2019 to exceed a prior-year figure and for revenues in the passenger cars and commercial vehicles divisions to grow at least 5 percent. The automaker said it continues to expect an operating return on sales in the passenger cars area between 6.5 percent and 7.5 percent.

Models such as the VW T-Roc crossover and Skoda Karoq account for some 35 percent of deliveries this year compared with 25 percent last year, a turnaround after VW lagged rivals’ SUV lineups for years.

VW expects the proportion of SUV sales to rise to 40 percent by 2020.

"Our model mix is improving and we’ve been successful with our pricing," Chief Financial Officer Frank Witter told Bloomberg TV in an interview.

The second half will be "potentially difficult" in a “weaker market environment,” he said.

VW remains on track to generate at least 9 billion euros in cash this year after first-half results offer "a stable basis," Witter said.

To counter declining demand, VW has scaled down production plans by some 450,000 cars for this year and will lower output further if necessary, Witter said.

VW’s cut roughly equals the annual output of one its 122 factories worldwide.

"VW may see fresh records on sales, revenue and operating results this year,” NordLB analyst Frank Schwope said in a note. “However, worsening trade conflicts and ongoing high investments in future technology for electric and self-driving cars will make for a volatile environment."

Evercore ISI analyst Arndt Ellinghorst said free cash flow of 6.9 billion euros in the first half is "almost double of what Daimler and BMW together will generate in all of 2019."

VW last month listed its heavy trucks business Traton, a significant move toward its goal of greater focus on the main car business. Investors expect an update on the next steps to streamline VW’s conglomerate structure, which might include selling industrial machinery units Renk and MAN Energy Solutions.

Witter said VW’s management is "pushing hard" to lift the automaker's low valuation, with the company exploring strategic options for Renk and MAN Energy Solutions.

Analysts have urged VW to consider deeper changes including an initial public offering of the high-margin Porsche sports-car business to unlock value.

A Porsche IPO "isn’t a priority" and there are currently no plans to sell the Ducati motorbike brand, Witter said, reiterating previous comments. But he left the door open to explore options at some point "down the road."

In the first half, VW Group's operating return on sales rose to 7.2 percent, up from 6.8 percent in the year-earlier period. By contrast rival PSA Group on Wednesday said it had delivered an operating margin of 8.7 percent in the first half.

Among VW Group brands, Bentley swung to a profit in the first half, while Audi saw its profit decline.

• VW brand's first-half operating profit before special items rose to 2.3 billion euros from 2.1 billion in the year earlier period, boosted by product mix improvements and price positioning.
• Audi's operating profit fell to 2.3 billion euros from 2.8 billion, hit by model ramp-ups and phase-outs, and WLTP-related lower sales volumes. Profit was also impacted by higher upfront expenditure for new products and technologies, cost increases and exchange rate effects. Audi's deliveriesshould pick up in the second half of the year, helped by an updated version of the popular A4 sedan, Witter said. Audi, VW’s biggest profit contributor, is currently is talks with labor unions over future production plans including on where to manufacture electric cars.
• Skoda's rose by 3 million euros to 824 million. Higher vehicle sales compensated for negative exchange rate effects and cost increases.
• Seat boosted operating profit by 1.9 percent to 216 million euros, helped by volume and mix improvements, which more than offset the negative impact of cost increases.
• Bentley swung to a 57 million operating profit from an 80 million loss a year earlier, boosted by high vehicles sales, cost savings as well as mix effects and positive exchange rate trends.
• Porsche's operating profit before special items rose by 2.5 percent to 2.1 billion euros, primarily due to volume effects.

Bloomberg and Automotive News Europe contributed to this report