VW rides out impact of new pollution rules on car sales

By Edward Taylor

FRANKFURT (Reuters) - Volkswagen posted forecast-beating third quarter profit, weathering a storm of lower car sales, higher spending and new pollution rules which dented earnings at rivals Daimler and BMW .

Carmakers across the globe are struggling to lift investment spending on electric and self-driving vehicles while shouldering heavy investments to overhaul combustion engines to meet more stringent emissions standards.

With an eye on costs, VW also signaled it was open to alliances in the areas of batteries and autonomous driving including with specialist rivals such as Waymo (NASDAQ: GOOGL).

Adjusted operating profit totaled 3.51 billion euros ($4 billion) in the three months to the end of September, down 18.6 percent but better than the 3.21 billion euros predicted in a Reuters poll of banks and brokerages.

VW shares surged more than 4 percent as cost savings helped to offset reduced vehicle sales.

Weaker sales at Audi and the core VW brand, caused by problems adapting the carmaker's model range to new anti-pollution rules, and quality problems at Bentley, were also partially offset by higher earnings at Porsche.

"VW delivered a solid quarter despite the sector and self-inflicted disruptions," analysts at Evercore ISI said on Tuesday.

VW has struggled to adjust to the worldwide harmonized light vehicle test procedure, known as WLTP which took effect last month, resulting in a 3.6 percent decline in deliveries during the quarter as some car models remained unavailable for sale.

The company has been at the center of turmoil in the industry since it admitted to cheating diesel emissions tests three years ago.

The ensuing scandal has cost the leading German carmaker more than 27 billion euros and has seen rules rewritten to try to force companies to produce cleaner vehicles.

TARGETS MAINTAINED

VW affirmed its target for 2018 operating return on sales before special items at both the group and its passenger cars business area of 6.5 to 7.5 percent.

Including special items, such as an 800 million euros fine against VW's premium brand Audi, the adjusted operating margin will fall moderately short of the expected range.

"The fact that VW does not have to change its forecast makes it look more robust than most of its competitors, namely Daimler and BMW , it demonstrates VW’s talents in both the product and the cost side," Metzler analyst Juergen Pieper said.

Despite the new WLTP rules, VW said it expects new vehicle sales to rise moderately this year, after delivering 10.74 million vehicles to customers in 2017.

COST SAVINGS, ALLIANCES

VW will seek to cut investment spending and increase efficiency measures by integrating its brands more closely, such as giving Bentley access to electric vehicle technology developed by Audi and Porsche.

VW has wanted to develop autonomous cars in-house, but the carmaker signaled a new openness toward developing the technology with an outside partner to avoid research and development costs spiraling.

"We want to have access to a self-driving system and we are speaking with relevant players. It is very expensive to develop and others are already well advanced. Waymo is one of them,"

Chief Financial Officer Frank Witter said in a conference call with journalists.

VW is also open to cooperating with outside companies on manufacturing battery cells and could be open to sharing its electric vehicles platform MEB with rival Ford (NYSE: F), Witter said, adding that no formal decision has been taken.

"We want to open up much more to cooperations," he explained, adding that currently the main priority on electric cars technology was to roll it out across VW Group, which includes Skoda and Seat.

This year the group will spend 19.8 billion euros on developing conventional vehicles and engines, while investing only 6.6 billion euros on electric cars, digital services and autonomous driving.

($1 = 0.8794 euros)

(Reporting by Edward Taylor and Jan Schwartz; Editing by Maria Sheahan/Keith Weir)

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