Volkswagen AG (OTC:VWAGY) said that its second-quarter operating profit rose 30% from the second quarter of 2018, to 5.13 billion euros ($5.71 billion), as strong sales of its SUVs and premium-brand models helped it overcome a decline in overall vehicle deliveries.

VW also reiterated its prior guidance for the full year.

The raw numbers

All financial results are shown in euros. As of July 25, 1 euro = $1.11.

Metric Q2 2019 Change vs. Q2 2018
Revenue 65.19 billion 6.6%
Vehicles delivered (thousands) 2,760 (2.8%)
Operating profit 5.13 billion 29.9%
Operating profit margin 7.9% 1.4 pp
Net income 4.12 billion 24.2%
Operating cash flow, automotive 8.16 billion 71.7%

Data source: Volkswagen AG. "Pp" = percentage points.

How Volkswagen's business has performed in 2019

Here's an anecdote that tells much of the story: Overall sales at the core VW passenger-car brand fell 2.3% year over year in the first half of 2019, to about 1.89 million vehicles, but the brand's operating profit rose 7.3% to 2.29 billion euros. The VW brand's operating margin improved to 5.1% from 4.9% in the first half of 2018.

How did that happen? Simply put, mix improved: Strong sales of the brand's higher-profit SUVs, including the U.S.-made Atlas, generated enough profit to more than offset a larger decline in sales of VW's small cars.

First-half results at VW's other key business units were mixed:

  • Audi generated 2.3 billion euros in operating profit on sales of about 632,000 vehicles. Its operating margin was 8%, much healthier than the 2.9% it managed in the year-ago period. (VW changed the way it counts Audi's sales and revenue in 2019. But it hasn't yet provided adjusted figures for 2018, making year-over-year comparisons complicated.)
  • Porsche earned 2.12 billion in operating profit (up 2.6%) on sales of about 136,000 vehicles (up 10.6%). Its operating margin of 17.3%, while still outstanding, was down a full point from the first half of 2018. Much of the difference was attributable to a one-time charge of about 500 million euros in the first quarter, related to VW's ongoing diesel-emissions issue.
  • VW Commercial Vehicles' operating profit declined 10.8% to 506 million euros, despite a 3.2% year-over-year increase in sales (to about 256,000). VW said that higher product-development costs and a weaker mix of products sold explained the decline.
  • VW Financial Services, the company's captive-financing arm, earned 1.28 billion euros in the first half of 2019, up 4.1% from a year ago. The unit's "penetration rate," or percentage of VW sales captured, rose to 34.1% from 33.7% a year ago. Favorable exchange-rate effects also contributed to the profit increase, VW said.
A 2019 Volkswagen Atlas, a midsize crossover SUV

Good sales of VW's Tennessee-made Atlas SUV helped boost margins in the second quarter. Image source: Volkswagen AG.

Special items and net liquidity

Volkswagen had no one-time charges in the second quarter of 2019. (It had one-time charges totaling 1.64 billion euros in the second quarter of 2018; that partly explains the year-over-year jump in quarterly operating profit.)

As of June 30, VW's automotive division had net liquidity (cash minus debt) of 15.9 billion euros. That was down significantly from 19.4 billion euros at the end of 2018, a drop that VW attributed to a change in accounting requirements (recognizing lease liabilities as financial liabilities).

Looking ahead: VW's guidance for 2019

VW maintained its full-year guidance. It still expects:

  • Deliveries to be "slightly higher" than in 2018 (2018 result: about 10,834,000)
  • Automotive revenue to be "up to 5%" higher than in 2018 (2018 result: 201.07 billion euros)
  • Operating margin before special items between 6.5% and 7.5% for VW's passenger-vehicle brands, and between 6% and 7% for commercial vehicles (2018 results: 6.8% and 6.6%, respectively)
  • Operating profit in Financial Services to be "about the same" as in 2018 (2018 result: 2.79 billion euros)

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