Volkswagen Profit Falls on Scandal Effects, Lower Sales

Volkswagen's core autos division posted lower profitability in the second quarter as costs for its diesel emissions scandal and falling sales outweighed gains from cost cuts.

First-half operating profit at the VW brand, the group's largest division by sales, plunged more than a third to 900 million euros ($998 million), leading its second-quarter operating margin to ease to 2.9 percent from 3.3 percent a year ago, VW said on Thursday.

VW's preference shares were trading 2.2 percent lower at 124.7 euros as of 0737 GMT.

Europe's largest automaker is under pressure to save more to shore up funds for the billions of dollars of costs following its admission in September that it installed illegal software to mask emissions on about 11 million diesel vehicles worldwide.

At 1.5 billion euros, the VW brand bore the brunt of 2.2 billion euros of additional provisions made by the German group in the January-to-June period to cover the costs of the scandal, VW said.

"We will work hard on our earnings power to manage the future investments needed to transform our core automotive business and build an innovative business unit for mobility services," Chief Executive Matthias Mueller said.

To revive the brand, which lags rivals Toyota and PSA Peugeot Citroen on profitability, VW is speeding up model development, accelerating cost cuts and ceding more power to regional operations to target markets more effectively.

VW has pledged greater investment in electric cars and on-demand transport services as it reshapes its business to overcome the diesel emissions scandal that will inflict billions of costs and has shattered the carmaker's reputation.

The group stuck to its 2016 guidance, predicting revenues would fall by as much as 5 percent due to weak demand in South America and Russia as well as volatile exchange rates.

It forecast a group operating margin of 5 to 6 percent, versus 6 percent in 2015, adjusted for special items.

(Reporting by Andreas Cremer; Editing by Arno Schuetze and Maria Sheahan)