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Volkswagen Group: Earnings Fall as China Sales Slip

By John Rosevear - Jul 29, 2015 at 3:20PM

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Favorable exchange rates helped boost revenue, but a drop in China sales and headwinds in other key markets trimmed after-tax results.

As usual, luxury vehicles like the Porsche Cayenne made outsized contributions to VW's global bottom line in the first half of 2015. Source: Volkswagen Group.

Volkswagen Group (VWAGY -0.25%) reported its second-quarter earnings on July 29. Here's what you need to know.

The quick summary
VW's revenue rose 9.9%, to 56 billion euros ($61.72 billion). But after-tax profits fell 16%, to 2.73 billion euros ($3.01 billion), as restructuring costs in VW's MAN truck division and sales headwinds weighed.  

Analysts had expected a net profit of 3 billion euros, according to the Wall Street Journal. Volkswagen also cut its full-year sales forecast on weakness in several key markets. 

The stock fell about 2% on the news.

Revenue grew, but VW's sales are slipping
Volkswagen's revenue increase was driven by exchange-rate effects that favored the euro, as well as improvements in "mix," meaning that the company sold a higher percentage of more expensive (and more profitable) vehicles. 

That's key at VW, where luxury vehicles make outsized contributions to the company's bottom line. The premium Audi and Porsche brands contributed just 18.7% of the Group's passenger-car sales in the first half -- but about two-thirds of its operating profits. But while the Volkswagen Group did manage to beat Toyota in global first-half sales, VW's sales growth hasn't been as strong as the company would like.

The good news for Volkswagen is that conditions in Europe are finally improving after years of challenging economic conditions that kept consumers away from new-car dealers. But while the Volkswagen Group's brands have gained ground against competitors in Eastern Europe, the company's gains have trailed the overall industry's rise in the more lucrative Western European markets.

VW has also managed to gain some ground in North America after years of struggling, with sales up 6%. But VW's U.S. sales increased by just 2.4% in the first half of 2015, trailing the overall market's 4.4% gain.

The news was less good in the world's largest car market. The Group's deliveries in China, where VW is the market leader, dropped for the first time in a decade in the first half of 2015. VW's equity income from its Chinese joint ventures dropped to about 1.1 billion euros in the second quarter from roughly 1.4 billion euros in the year-ago period. The Group's overall operating profit margin of 6.6% was roughly in line with rivals'.

A subdued outlook for the second half of 2015
VW cut its full-year sales guidance, saying that 2015 deliveries will be about the same as 2014's. Its earlier forecast called for a moderate increase. In remarks reported by Reuters, VW sales chief Christian Klingler said that the Group's full-year sales in China were unlikely to grow year over year, and could even decline a bit from last year's 3.68 million total deliveries.

CEO Martin Winterkorn said that he expects full-year revenue to rise "up to four percent" over 2014 totals, and full-year operating margin to come in between 5.5% and 6.5%. 

But he hedged that prediction with concerns about economic conditions in Latin America and eastern Europe. Coupled with the expected slowdown in China, the outlook for VW looks decidedly subdued over the next few quarters.

John Rosevear has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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