Volkswagen Q2 profit grows on Europe, cost cuts

But lowers sales guidance as demand in China slows

Volkswagen posted higher quarterly profit on a strengthening European autos recovery and cost cuts but lowered its sales guidance as demand in China slows.

Operating profit at Europe's largest carmaker rose to 3.49 billion euros ($3.85 billion), VW said, in line with the average etimate of 3.48 billion in a Reuters poll of analysts.

Full-year deliveries may be flat on last year's record 10.1 million sales, VW said on Wednesday, after previously guiding for a "moderate" increase.

Six-month sales eased 0.5% to 5.04 million cars, reflecting an accelerating decline in China though that was just enough to overtake Toyota as the world's largest carmaker.

"The difficult market environment and fierce competition, as well as interest rate and exchange rate volatility and fluctuations in raw materials prices all pose challenges," finance chief Hans Dieter Poetsch said.

VW stuck to its outlook for profit and revenue, saying the operating margin may come in 5.5 to 6.5% this year, after 6.3% last year.

Annual revenue may rise as much as 4% from 202.5 billion euros in 2014, VW said. Its second-quarter revenue rose by a bigger-than-expected 10% to 56 billion euros, benefiting from a weaker euro and other seasonal tailwind

VW's second set of upbeat quarterly earnings since a leadership wrangle in April forced the ouster of patriarch Ferdinand Piech contrasts with a power vacuum at the top of the group which is looking for a new chairman and revamping the company's structure.

($1 = 0.9056 euros)