UPDATE 2-VW operating profit drop raises pressure to cut costs

Thu Jul 31, 2014 8:50am EDT

* Q2 group operating profit falls 3.1 pct to 3.33 bln euros

* VW brand Q2 profit plunges 37 pct to 572 mln euros

* Results highlight need for cost cuts -analyst

* Keeps FY profit, sales guidance (Releads on VW brand profit plunge, adds analyst comment, shares)

By Andreas Cremer

BERLIN, July 31 (Reuters) - Volkswagen posted a 3.1 percent drop in second-quarter operating profit due to a plunge in earnings at its core passenger-car division, reinforcing the pressure on Europe's largest automotive group to cut costs.

Operating profit at VW's namesake brand tumbled by more than one third to 572 million euros ($765.4 million) reflecting falling sales, spending on technology and high fixed costs.

By contrast, premium brand Audi that contributes more than 40 percent to group profit, reported a single-digit gain.

Chief Executive Martin Winterkorn has already called on VW managers to increase cost-cuts to 5 billion euros per year from 2017 in a bid to boost the brand's flagging profitability.

"The pressure to cut costs is definitely up now," said Hanover-based NordLB analyst Frank Schwope. "There's no doubt that VW must work on its margins." NordLB has a "buy" rating on VW shares.

Group operating profit fell to 3.33 billion euros, matching the consensus forecast in a Reuters poll of analysts.

VW has enjoyed a period of unprecedented growth, boosted by emerging market buyers of its upmarket Audis and Porsches. Its sales have risen by more than half to 9.7 million vehicles in 2013 compared with levels before the financial crisis, and it is set to hit a 10 million target in 2014 - four years early.

But the rapid expansion has led to a costly proliferation of models. At the VW brand, for example, while output has risen almost a third over three years, profit margins have languished as the Golf has expanded to 14 different models.

At 2.3 percent in the second quarter, the VW brand's margin is way behind its medium-term goal of at least 6 percent and even further behind auto division margins of 8.8 percent at Japanese rival Toyota and 9.5 percent at South Korea's Hyundai Motor Co.

Wolfsburg-based VW reiterated its February outlook, saying its operating margin could be between 5.5 and 6.5 percent this year, compared with 5.9 percent last year. Revenue may move within a range of 3 percent around last year's record 197 billion euros, VW reiterated.

VW shares were trading 1.7 percent higher at 178.60 euros at of 1245 GMT.

Separately, VW pointed to "significant negative exchange rate effects" from slowing emerging economies where the carmaker makes the bulk of its earnings.

Economic imbalances and currency slides in developing markets are hurting European automakers as demand in their home region revives after a six-year slump.

VW group sales including Audi and volume division Skoda have tumbled in double-digit terms this year in Brazil, Russia and India which, together with fast-growing China, accounted for about half of VW's 9.73 record 2013 deliveries. ($1 = 0.7467 Euros) (Additional reporting by Ilona Wissenbach; Editing by Erica Billingham)

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