Volkswagen Ag Unsp/Adr

This was the kickoff sign for me. Dear all, thanks for joining us today to our investor and analyst Q&A. Together with me here in Berlin are our CEO, Olli Blume, and our CFO, Arno Antlitz. Before I hand over to Olli and to Arno some housekeeping remarks, you should have all received today our press release, the annual report 2022, and the investor and analyst presentation. If not so, please visit our website, www.volkswagenag.com. The session will be opened by a brief summary from Olli and from Arno, focusing on the most relevant topics for fiscal year 2022 and our outlook for 2023. Before we start, I would like to draw your attention to the disclaimer, which you will see now. Very good. Please read it carefully because I'm not going to read it to you. After the intro, we will host the Q&A and would ask all of you to stay disciplined on the Q&A, limiting yourself to, let's say, two questions per person in order to give everybody a chance to raise his or her question upon due time. If anything is left unanswered, the IR team will be happy to take your questions afterwards. With that, I hand it over to Olli and Arno for the opening remarks. Odi, the floor is yours.

Thank you very much for your introduction, dear ladies and gentlemen. Thanks for joining our investors and analysts Q&A session today after our annual media conference. Last year's success was a great team effort. Each of our brands has also contributed to our success, and that in all four brand groups. Let me start with the volume group. And I'm particularly very proud of the IDBus. Its success shows that the combination of tradition and state-of-the-art technology is extremely well received by our customers. The premium brand group, Bentley, sold more than 15,000 vehicles in one year for the first time in 2022. And looking to the results, an operating profit over 700 million euros with a profitability over 20%. This is a great team effort of which we can particularly proud of. Lamborghini continue to build on its impressive growth, delivering over 9,000 vehicles worldwide last year, a 10% increase over the previous sales record set in 21, and that with an operating profit over 600 million euros and a profitability over 25%. And in sports and luxury, my personal highlight was the Porsche IPO, which a lot of you joined during the last year. The IPO marked a historic day. Porsche is more independent and agile after the IPO. The newly gained independence makes it possible to develop even more speed. And yesterday we were able to present it on the annual media conference of Porsche. The IPO has shown that we can be successful on the capital market. We are now using this experience to sustainably increase the value of the group. And last but not least, coming to Trayton, also with a positive development. For the first time in history, we achieved over 300,000 units. And that's also driven by Navy Star and everything with an operating profit of 1.6 billion euros. We are confident that we have a successful fiscal year ahead of us. To turn this confidence into reality, we will continue to systematically implement our 10-point plan. Let me touch on some highlights here. Our top priority remains financial robustness. We will use our capital more efficiently and focus more on our financial income and net cash flow. At the same time, controlling our costs and the proceeds generated by the Porsche IPO in September 22 have provided additional headroom. On products, our customers buy brands and our brands are iconic. We will continue to focus on product strategy, design, quality and future oriented technology profile of our products and we'll release a series of new models. Coming to China and I had the opportunity to visit China four weeks ago and I was very impressed because of the speed you can see there in the market in terms of technology. The Chinese market is changing very quickly, and we need the right strategy and the right speed to safeguard our leadership position there. We are naming our approach in China for China, which will center local partnerships, including Horizon Robotics and Carriot, what we announced last year. Coming to Carriot, one of our most pressing issues last year was a reorganization of our software activities. Now we continue to develop Carriot with exciting projects and a new realistic software roadmap. Coming to PowerCo, a stable supply of competitive battery cells is necessary for the ramp-up of e-mobility. That is why we established PowerCo in July. PowerCo is responsible for all activities along the entire battery value chain. Our plant in Salzgitter, which is scheduled to start production in 2025, is the blueprint for our global battery offensive. And as you have mentioned, we already announced a battery plant in Canada as well. Sustainability. Last year, we tightened our CO2 targets in production and received an award from the renowned science-based targets initiative. Instead of the previous 30% reduction, We are now aiming for 50% reduction in production-related CO2 emissions from our passenger cars and light commercial vehicles by 2030. By the end of the year, our European production sites will already be supplied with 100% renewable energy. And important capital markets, our strategic investment planning up to 2027, proves that the Volkswagen Group is looking to the future. for all our brands. We are therefore further fine-tuning virtual equity stories for our brand groups and value drivers in the group. The results will be presented at the Capital Markets Day on June 21st. Strong, robust, resilient, digital and sustainable. This is how we will continue to play a leading role in the era of electric and digital mobility. And at the end of my words, I would like to comment something about our Capital Markets Day we have announced for the 21st of June this year, which will take place in Hockenheim, and what you can expect from the Capital Markets Day. First of all, we thought that it will be very useful for you to experience our great products at the Capital Markets Day during a driving event at the Hockenring racetrack. Content-wise, the Capital Markets Day will provide an update of key focus areas and the new steering approach at Volkswagen. We plan to detail the strategy of our brand groups, including the planned EV ramp-up, give an update of status and key milestones for our technology business, provide an overview of our strategy in key regions, explain our new steering model, share the group financial targets and framework, and we target that U.S. investors will have better transparency on where we currently stand and how the new team will turn the company into a better one. The Capital Markets Day is planned as the start of a series of events, string of pools over the coming years, more to be revealed at the Capital Markets Day. So thank you very much for listening. And now I would like to turn over to Arno. I think this is where the financials come into play. Can you give us a short overview on the results and an overview for the upcoming year?

Thank you, Oliver, and I promise I'll make it short. The Volkswagen Group generated solid financial results in the year 2022 in a challenging environment. At the same time, we made for the progress in key areas of our corporate strategy and thus vigorously advance our transformation. This again proves the robustness of our business model and the commitment of our team to drive change. Volkswagen Group is well positioned, operates from a strong financial position, and has the will to continue to transform toward electrification and digitalization, also in challenging times. We now look at our financial figures just briefly. I'm sure by now everyone of you had the chance to have a look at them in detail. Our sales volume were at the weak level of the previous year due to various restrictions and distortions in the supply chain and the continued shortage of semiconductors. Our sales revenue increased by 12% to $279 billion as the trend of higher mixed and better equipped vehicles from the previous year continued. This increased Our operating profit before special items to 22.5 billion euro, the operating margin increased slightly to 8.1%. This strong result benefited from non-cash valuation effects of around 1.8 billion on our raw material hedges. On the other hand, we had to absorb write-downs in connection with the closer of our business in Russia in the order of 2 billion euro, and the cost associated with the very successful IPO of Porsche amounted to around half a billion euro. Earnings adjusted for these effects would have even exceeded the reported 22.5 billion. Our passenger car business came in at 15 billion euro, a strong performance given the challenges in supply chains and the burden from our Russian business. Trucks came in at 1.6 billion euro corresponding to a 4% margin and really strong results again in our financial services business with an operating result of 5.7 billion euro. Coming to our EBIT bridge, performing in the passenger car division was driven by a convincing product substance across all brands, enabling us once again able to compensate for the negative effects of the slightly lower sales volume through strong mix and better pricing discipline. However, raw material costs for steel, aluminum, or battery raw materials have become considerably more expensive compared to 2021. For the year as a whole, the resulting increase in product costs had a negative impact of almost $8 billion on the operating profit. Despite the continued high discipline, we were unable to completely avoid an increase in fixed costs due to sales growth and upfront expenditures for new products. Nevertheless, our fixed cost reduction initiative contributed significantly to the good result and to an improved competitive position. We will spend a short moment on net liquidity as well as net cash flow. We cannot be satisfied with the reported net cash flow generated of around €5 billion in fiscal year 2022. also reflecting an unstable supply situation throughout 2022 and disruptions in the logistics chains, particularly at the end of the year. As a result, working capital and in particular inventories of finished goods, raw materials were at the end of the year significantly higher than expected. In addition, CapEx as well as R&D increased versus fiscal year 2022 as we continue to invest in our future. The liquidity of the automotive division end of 2022 increased to 43 billion, including proceeds of 16.1 billion euro from the successful Porsche IPO in September 2022. For the payout of the net dividend in January, the net liquidity for the automotive business stands to around 36.5 billion at the end of the beginning of 2023. Two words on China. Our proportionate operative result of our JVs in China came in at 3.3 billion euro, well above the 2021 figure, but still under the respective result of 2020. Last but not least, you are aware that we proposed a regular dividend of 8.70 euro per ordinary share. This is around 16% above previous year and adds to the special dividend of 19.06 euro per ordinary share. This clearly underpins our conviction that our shareholders benefit from the robust financial performance of the Volkswagen Group. Coming to our outlook, important core economic indicators such as growth prospects in individual regions or expected inflation rates remain challenging. On the other hand, we expect that in 2023, the structural shortage of semiconductors will improve and the supply with raw materials and logistics will gradually stabilize. The latter one is within our clear focus. We have fascinating brands with convincing product offerings in all major segments and an order backlog of almost 2 million vehicles in Western Europe alone. On this basis, we assume that deliveries to customers of the Volkswagen Group in 2023 will amount to around 9.5 million vehicles. For the Volkswagen Group, we expect sales revenue in 2023 to exceed the prior year figure by 10 to 15% and the operating return on sales to remain between a solid 7.5 and 8.5%. Volkswagen Group expects reported net cash flow in the region of 6 to 8 billion Euro in 2023. This implies the reversal of the negative effect in working capital at the end of 2022 mentioned earlier. On the other hand, this guidance takes into account the provision for additional cash-effective expenses for the development of our battery business in power core of around $5 billion on top of our current core business. These upfront expenditures for our battery activity are an important prerequisite for the successful ramp-up of electric vehicle production and, in our opinion, represent a key success factor in the future. So far to our financial figures, and now let's kick off So the Q&A.

Thank you, Arno. And thank you, Olli. Who wants to raise a question, please press 9 on your telephone keypad, followed by star. And we can already see first questions actually queuing up here. And I would like to take as first question here, Tim Rocasa from Deutsche Bank. Tim.

Yeah, thank you, Rolf. And thank you, Olli and Arno, for taking our questions. Not sure who to address my two questions to because they are clearly of financial nature, but at the same time, it's very much about the strategic direction of the company. So when I think about my two questions, I think about your outlook short and midterm. In the short term, your outlook sent quite a few shockwaves through the automotive industry last week, many wondering in particular about the bullishness for the volume, but also how you want to keep pricing while you're growing so strongly. Can you explain why you feel a need to grow as much instead of clearly prioritizing profit after we've all learned that the industry can be much more profitable at lower selling levels? And if Q1 already supports this guidance, or if this is something that you have to chase into H2. And secondly, when we think about the midterm, many investors look at your investment plans today and they wonder if it will ever stop to go up or if you will always find something new to spend money on. Now you say the peak is in 2025 now. it feels a lot of these investments are done just to, frankly, maintain your ability to actually still sell cars, battery availability, Euro 7, and so on and so forth, rather than really generating any incremental profits from where you are today. Post the investment peak in 2025, should we expect free cash flow to increase materially from here, or is the ROI that you are generating with these investments rather in the range of what we are used to from you guys today? Thank you.

Hi, Tim. We used the time here to align. The first answer will come from Olli. It's on the bullishness of the volume. The second then will be taken by Arno and the third is a mix of the two. So, Olli, please start.

Hi, Tim. Thanks for your questions. About our volume planning, we still have a very strong order bank and a strong order intake. And on the other side, We implemented a program to stabilize our supply chain, which is paying off. So we are getting positive results from our supply network. And when you look back to 22, you have to take in mind that we had to close a lot of our factories because of the Ukraine war. And the wire harnesses we are getting from the Ukraine, we were not able to catch up all the units over the year. And therefore, it's very logical for us that we have a strong increase in deliveries in 23, calculating with 9.5. And that's feasible because of our market condition. we won't push the product into the market in terms of pricing situation. And that is my position, that we drive the company more market-driven than production-driven. And then I hand over to Arno for the second question.

Yeah, I'll try to answer this combination of questions. you referred to our outlook and also the volume planning, as Oliver said. The volume planning is a combination of great products we have. We sit on an order bank of 1.8 million cars alone in Europe. And we want to deliver these cars to the customers. And last but not least, if you compare to 2022, there were like some technical improvement plan since we had specifically the wiring harness topic in April, June. So all in all, we think we can achieve that without sacrificing margin discipline and state discipline there. So our outlook, as you mentioned, it's a confident outlook. But if you look on our business model, we think we have all the ingredients on hand that we can achieve this outlook, Tim. First and foremost, Yes, there will be a positive volume price mix, of course, due to the volume planning we have and due to the factors I just mentioned. Also, product costs, I think you saw that specifically in Q4, we were hit with a huge amount of, a huge magnitude of product costs. Some of them will basically also be relevant for 2023, but overall, that the bucket product cost in our EBIT bridge should turn to a significant positive. And lastly, not least on the fixed cost side, we want to stay very disciplined on the fixed cost. So taking all these things into account, we think, yes, it's an outlook which is ambitious, but we are pretty much sure that we can achieve that outlook in terms of margin. So and then our midterm planning, I'm sure you refer to the 180 billion for the five-year planning round. Let me give you a little bit more light into or more details onto that. Basically, technically, if you take the 159 from last planning round, we basically added 15 billion for the battery um capacity increase and our battery strategy not only in in terms of battery capacity but also in terms of raw materials and the significant increase was was was caught um in terms of um yeah which the the r d cabex combined over time we expect the peak in 2025 yeah 2024 2025 and from there on a significant like reduction a year over year so why is that the case look currently We are really in a situation where we want to ramp up or we need to ramp up our battery electric strategy, both in terms of products and in terms of basically transforming our factories to electric. At the same time, we expect the last expenditures, last in inverted commas, for keeping our combustion cars competitive. And it's a unique situation for us to grow in relevant regions. specifically in the U.S. with the Inflation Reduction Act. So this is basically kind of a double burden we see in the next two to three years. And based on what you said, then based on our long-term EBIT planning, cash flow should then significantly improve after 2025 and beyond.

Arno, a word on first quarter start?

First quarter start? We had a decent start into the first quarter in terms of sales, specifically in Europe and the rest of the world. China was weak, but in China also the overall market was weak. It was not only Volkswagen situation. We want to and we will be disciplined on pricing and incentives. I talked about a burden from raw materials that might be still a significant factor in the first quarter. In a total year, as said, it should turn to a positive. Of course, we cannot predict our hedging results, fixed cost, disciplined. So all in all, we expect also the first quarter to be within a bandwidth of 7.5% to 8.5%. Thanks, Arno.

Very good.

Tim? Thank you. Yeah, that's very clear. Can I follow up with one question on the short-term statement? Come the second half, you realize China does not bounce back very strongly. Europe is actually weaker than you expect. You have worked through your order backlog. Do you prioritize the unit sales targets or the margin target?

Tim, I said we want to stay disciplined, and we will stay disciplined. But on the other hand, look, we have this order backlog of 1.8 to almost 2 million cars, so we really want to deliver these cars to the customers. So our ambitious volume planning is not taking into account the significant increase in incentives, but really the customers are waiting. Some electrical cars, customers are even waiting for more than a year, and also the combustion engine cars have really a long lead time. And we have a strong order intake based on the current pricing, specifically on the non-BV cars. So the order bank is even moving towards 1.9 billion and towards 2 million cars. So we really want to deliver these cars to the customer.

So executing on the order book and staying disciplined on the margin. George, the next question comes from you, from George Kadias from Goldman Sachs.

Thank you. Thank you for taking my questions. So the first question I had was just around the incremental investment in the battery business of 15 billion euros. Could you just confirm how many incremental plants you're adding to the plan today versus what was included in planning round 70? And with the 15 billion euros, you've identified... Is that sufficient to cover this investment by Volkswagen as a whole, or will you still need or potentially need funding support from external partners, either potentially battery pure plays, or in the past you've mentioned potential battery IPO as a means of funding the battery plants? The second question I had was also around the incremental investments, and this is specifically on Scout. Obviously, Scout sounds like an exciting venture with a very good history to the brand. But when I look at your portfolio today, it looks like you have in excess of 12 brands, more than 80 different models, which obviously adds a huge amount of complexity to your business. When I compare that to the most valuable car company in the world operating with one brand and four models, clearly they don't have the same complexity. If you think about Volkswagen strategically, do you need to have the complexity you had in the old world in the new world to achieve sales volumes of roughly 10 million units, which you've achieved in the past? Thank you.

Thanks, George. The first part will be taken by Olli on the 15 billion battery invest and the second, Scout. We have a passionate speaker here for the Scout brand that will be taken by Arno.

George, let me start with your question about the battery business. For us, it is on the one hand side important that we see the battery technologies as a co-competence for the future and therefore we decided also to build our own development and production. On the other side, we always have to leverage what we want to do by our own and where we want to work together with partners. And that depends a lot on the cost positioning we would and will be able to achieve in the different regions of the world. And so it's a make-make-or-buy process behind. What is important that from our planning, what we need only in Europe, by our own are 240 kilowatt hours per year. And we kicked off two battery plants in Europe, Skita and Valencia. And for the upcoming years, we will decide where we want to build new battery plants. And that depends a lot on the industrial framework we are getting in the regions. which support we are getting on the financial level. And what plays a big role is the energy pricing. And turning to North America, the decision we have taken for the Canada plant provides all these aspects. Very positive industrial framework, a guarantee for energy pricing, And beside of this, the opportunity for cooperation and value chain and energy and raw materials. And that makes this decision so attractive. And in Europe, we will take it step by step and always leveraging what we do by our own and what we will do with partners, but also focusing on our core competence.

George, I will answer the question, as I said, and I will base on what Oliver said on the strategy on the battery, a little bit more technical background. In the planning round 70, there was basically only the Salzgitter plant included. We always said including one plant. And now with the planning round 71, we included basically the 15 billion on top. for basically the finalization of Salzgitter. And then basically Valencia, the plant in Canada, we just communicated a small proportion of money if there would be an additional investment. And the remaining $15 billion are basically reserved for investment along the value chain upstream in raw material and then also in GVs, for example, for the cathode material. So this is basically the 15 billion. We do not rule out that the figure over time will increase, but for the time being, this is included in our 71 figure. Yeah, let me talk a little bit about Scout. I'm really excited since, I mean, look, I would do it a little bit more from a strategic perspective. Given the regulatory uncertainty in the current environment, it's really important that we are strategically more resilient. We are strong in Europe and we are strong in China, and we really want to keep that strength, but we have the chance and we need to basically strengthen our third pillar in the U.S. This is very clear with more localization and scout and electrification also of the of the sea pickup segment. By the way, one of the most profitable and promising segments in the world gives us the opportunity to enter this very profitable segment with an own brand, with Scout. We have the technology. We basically now have also the battery cells there. And that would really enlarge our footprint and also would give us the opportunity to grow in the US market and to grow profitable. Just for a reminder, For years, we made losses, which is basically not a secret. We achieved a turnaround in 2021, and in 2022, we were already highly profitable there, and we want to continue that profitable growth. That doesn't mean that we see also the necessity and the possibility of reduction of our model lineup, specifically in the combustion engine. You will see a significant first reduction towards Euro 7 or after Euro 7. And in total, we want to achieve a significant higher sales volume in 2030 with significantly less models overall. So if you take the number of models today, ice and combustion engine on the one hand and PVs on the other hand, the model lineup in 2030 will be significantly lower than today.

Great, thank you.

Thanks, George. The next question comes from Harald from Morgan Stanley. Please go ahead.

Yeah, thank you so much, Harald, for taking my questions. Two questions, really. Firstly, I mean, I'm sorry to have to go back to this, but I mean, all the clients are wondering, and we unfortunately have a lot of experience of car companies guiding ambitiously on volumes. And as you well know, that hasn't historically ended incredibly well. So I'm just wondering, The strategy, why guide to 9.5? Why not guide a little bit lower? And then, you know, I know you've got the order bank and the order book. I'm listening to you. But if you guide lower and then you end up higher, tends to have a much, much better result. It now seems like three or four of the big OEMs are overguiding. And historically, that's led to more pricing. And maybe you can give us a bit of color on the overall market share assumptions you're making, because on our and even IHS global sales growth of 3%, it looks like you're aiming to take a million units of market share in 2023, which seems quite ambitious. Second question, strategically, given the increase in the investment plan, and again, I fully understand your ambitions in batteries and it makes sense, but if you're an investor and your company is currently very profitable, over 20 billion of EBIT, which is historically peak profitability, You're now spending €180 billion, €360 per share in the next five years on transitioning the company. What happens to that strategy if suddenly we do have a much more difficult market? You saw what happened to the banking system this week. If banks suddenly pull back from lending and the overall car demand starts to fall, what happens to €180 billion worth of investment, which you must understand is the most enormous number we've ever seen, if your profitability and your cash flow starts to fall? You understand that's strategically very difficult, but it's very difficult for investors as well. How would you answer that question, please?

Harald, Olli is taking the 9.5 and then also happy to elaborate on the 180, and Arno is adding then additional color. Thank you, Ralf.

Harald, about the volume, it's more a consequence about the situation we do have from the order side. the more stable situation in our supply chain network and the expectations we do have in the markets. But once again, for us, the volume at the end is not a driving key figure. More important is our profit margin. And at the end, over the year, we will leverage how the market situation is developing. Um, for example, um, and, um, um, already, um, we are, we're able to see it, um, in, in Europe, um, that, um, the, um, situation for, for folks on group is, is better than, than last year and logical because, um, of the Ukraine wall last, last year. And now we, we see, um, a strong signal from the market and, um, in China, um, the, the whole market, uh, now, um, is, um, increasing. And especially in China, we are expecting a very strong second, second half year. And that is the logic behind we have seen already in Europe and North America after corona. A lot of people there were waiting, were watching what happens in the community, what decisions will be taken by the government in March. and so that's the expectations we do have and at the end if we see difficult market conditions we always leverage and prioritize our margin and situation okay okay thank you so so you would agree that so you're not actually looking to take a million units you're more bullish on the overall market volumes than we are is that the right conclusion from what you're saying

We expect a plus 8% for the overall market, and that compares to the plus 15. Right, right. We would take a slightly higher share, as I said, both on broad substance and order bank. But also, technically, if you look at how we performed in the last year, specifically from the wiring harness topic, following the Ukraine war, so it's plausible comparison. how we planned overall market. Okay, thank you. On the investment, we have very solid financials. We always said the Porsche IPO would give us more flexibility to finance the transformation. And the proceeds were always earmarked basically for the battery strategy. And in terms of profitability of the battery business, we think it's also justified. In terms of risk and robustness, of course, if there were signs that our overall plan doesn't work out, the overall industry is not growing as we expect, we are flexible to also react on the 180 billion. There are flexibilities built in. One flexibility is obvious. If the market would come different, if the battery electric vehicle overall market would be different in Europe. We had flexibility in postponing or shifting some of the investments in the battery business. And so rest assured, the overall target is having at all times solid financials and robust financials. And we will look at this figure planning round by planning round and look at our volumes we achieve, on our margin we achieve, and if necessary, we would adjust accordingly.

Okay, thank you very much.

Thanks, Harald. The next question comes from Daniel Reska from Sanford Bernstein.

Hey, thanks for taking my questions. My first question relates to the speed of innovation in the industry and at Volkswagen. You referenced your China trip several times, highlighting the speed in the market, and in some areas you highlighted kind of where you wanted to catch up. If you're behind today, how can you increase your speed sufficiently to kind of out-innovate the competitors ahead of you? And what are some of the changes that give you confidence kind of to significantly increase Volkswagen's innovation speed in the years to come? And then my second question relates to e-fuels, where I seem to have a disconnect. You summarized earlier that ships, aircraft, possibly other regions would greatly benefit from e-fuels. No argument there. But how does that create a need for e-fuels in Europe, where by 2035, zero tailpipe emissions, you know, 100% should be feasible? Or is this kind of a vote of non-confidence for that 100% target by 35? And on a sector level, are you not worried that, you know, more delays and more discussions about regulations in Europe and 35 targets may drive investments away from Europe and in aggregate actually work against the, let's say, the COP and the Paris targets? Thanks.

a clear winner for these two questions, Daniel. Olli.

Daniel, thanks for your questions. First, speed of innovation. And that is so important for us, having on the one hand side focus and on the other side speed. And therefore, we have taken many, many very important decisions on group level. And let me start with our platforms. We ordained very clearly our platforms for the future now to lead engineers. We have the smaller platforms, S0 and A, in the lead development of Volkswagen, the B and C segment for Audi, and the D segment in Porsche. And that brings us in the position benefit from our scale effects in the group with a very clear focus. And what we are doing currently, we already started with the first platform, the SSP Sports platform, to define a clear technology profile which defines where we want to be in five or ten years. And also watching the competition in the market in order to jump far enough with our platforms. And that's driving innovation. And therefore, we are very confident now with the shape of our platforms that we will be competitive for our intermediate platforms. For example, the MEB and the PPE, we already decided important upgrades, which will come very, very soon. um on the level of innovations but also on the quality of our cars and then as a important point it's not about innovation but about attractiveness of our products is a very big design approach to improve design features for for the future and so we have a complete program very focused on products and There we are very confident all the products sold from the customers that we will hit the market and speed up the platforms. Talking about e-fuels and there the discussion is often that there is a conflict in between electromobility and e-fuels and there isn't a conflict. is when you think about climate protection, you have to think in all measures which are possible. And we are strongly committed on our ramp-up curve on electromobility and on the other side. And that's only an initiative we are doing in the group with Porsche. All the other brands don't invest into e-fuels. That's only Porsche. because we see it more as a responsibility to think about options to reduce CO2 for existing combustion engine cars on the road and ships or in the aviation industry. And there, I don't know any other option than to go for E-fuels, and every percentage counts. And that might be a big market. And we should come out from the German or the European perspective that climate change is a worldwide responsibility. And when you look to South America, to Africa, to India, for example, we will have combustion engine cars over decades. And so they say market. And therefore, from our understanding of sustainability, We fight for it, but it's focused on Porsche. Porsche has a share of the biggest e-fuels company of the world. That's it. And from the argumentation, I hope it will be possible to separate the strong electric ramp-up and the synthetic fuels. For the electric ramp-up in Europe, 35 is ambitious. That is clear. And therefore, we have to provide with exciting products. That's our job. Then we need the charging infrastructure that we will support. We have the plan worldwide to achieve around about 45,000 fast charging points around the world. But it's also a public issue. And on the other side, to build new renewable energy resources. is also a condition for the ramp up. And so in Europe, let's go for it. It's ambitious, but we also have to watch all the other regions of the world. Our investment profile is prepared for this, but we also have to take in mind a bit of flexibility in terms of the different speed of the regions, how they are moving towards the transformation.

Super, thank you. Thank you, Daniel. So, the next question is from Horst Schneider from Bank of America. Horst.

Yeah, good morning, everyone. Thanks for taking also my questions. I want to ask them, please, one by one. I want to come back again, sorry, on the top line guidance, but I want to phrase the question a little bit more different. So, Arno, you have said this morning, I think in an interview, that the mass market is getting more competitive. So maybe you can elaborate what you mean by that. Where do you see that? How is the order and price situation developing at the moment?

Actually, this was not only this morning in the interview. I said that already several times and just repeating it. Looking a little bit ahead, what happened in our industry? The industry was basically supply-side products. driven for two or three years. We had not enough semi-supply. We're still restricted with the semi-supply, but that semi-supply will improve throughout the year. And on the other hand, we have the macroeconomic situation, interest rates, inflation. And so what I expected at, let's say, Q3, that demand is slowing down and the supply is improving. So I expect Q3, where demand and supply will meet and that better supply, that will be true for all of the companies. So there will be more competition. And this is what I said, we're preparing for that. We see high raw material prices, we see other price increase, and it will be more difficult to pass on these price increases to the customer. This is what I'm preparing or we are preparing our teams for. So we have to refocus on productivity. We have to have a refocus on fixed cost discipline, on pricing and on cost work. That doesn't mean that we want to lose the basically discipline on pricing and incentives, but it will be more competition throughout this year. And as I said before, we really prepare our company and our teams for this increased competition.

But that does not mean that 2023 is a kind of one-off event where you catch up with all the shortages and then we see the true weakness in 2024. So ultimate ambition is still you have got now maybe a gap in the model launches. You will have a firework of new models in 2024. and that means that 2024 can be even better than 2023. You don't have to give your guidance for 2024, of course, but just that we are clear about the path that you are aiming for.

Absolutely, I can't give you a guidance day for 2024. We will do that on the capital market day, perhaps not in detail in 2024, but our strategic outlook and our strategic outlook is very sound. We had our strategic plans discussed before. And it will be not a situation that you will see one additional good year for us in 2023 and not delivering then from there. It will be a positive path.

That's great to hear. And the second question that I have, I still have got problems to understand then the link between the revenue guidance and the EBIT guidance. I mean, if you guide for 10 to 15 billion euro revenue guidance, growth and then at the same time I assume kind of 20% leverage that should basically take the EBIT should increase the EBIT by something like 6 billion euros should take the operating margin to 9% and you are guiding on 10 to 15% higher revenues for at the low end of for kind of stable margin so therefore maybe you can elaborate again what are now exactly the drivers. They seem to be either there's a safety cushion built into the guidance or there are some other compensating factors, let it be on the cost side, which could be 1% of sales burden, which you can compensate by pricing. So maybe you can explain that in some more detail. Thank you.

This is now a very precise discussion we are doing. Sorry, I'm an analyst. No, no, no. You're quite right, and your figures are not so far away from how we expect them. In the volume, you're right, there will be a volume price mix effect. We will see a slightly negative mix effect, both in terms of region and both in terms of channels and both also in terms of the cars we saw. Of course, in the period where we were very much restricted by semis, we didn't ship all the cars and the semis to the less promising regions in terms of margin, for example, Brazil and others. the people or customers ordered better equipped cars, so we didn't offer the entry cars and also different channels. So there will be a slightly negative effect from there, but we want to continue on pricing and incentives discipline. Broker costs, as said before, will be even a small positive year over year. Fixed costs, We want to be disciplined, but there will be also on the fixed cost side. You saw R&D in Quebec's guidance. There will be a small burden, and yes, as always, as a good CFO, there is a small safety cushion in that whole bridge, which leads us then to the guidance.

Okay. That's excellent. That's a clear statement. Thank you, and good luck.

Thank you, Horst. Thank you, Horst. So the next one is Patrick Hummel from UBS. Patrick.

Yes, thanks. Good morning, everybody. Patrick from UBS. Two questions also from my end, please. First one, I want to understand how you think about your BEV profitability longer term. Volkswagen is in the market with an ID3, which is a, say, €40,000 vehicle and an EBIT that's maybe slightly above breakeven levels. Tesla's in the market with a product today for the same price tag, more or less, that's way bigger and is coming with a compact car, whatever it's exactly going to look like in a couple of years with 50% lower cost than Model Y or Model 3 today. I really struggle to see how VW is going to have an affordable EV that's profitable to you in a couple of years time. Can you just update us about price points you're trying to achieve, about cost reduction targets you're going to achieve? What can you tell us today that makes us confident that Volkswagen is going to be able against such competitors to have a profitable, affordable EV offering? And that brings me to my second question. We do hear you on, you know, fixed cost discipline, etc. But it feels to me other OEMs, especially mass market OEMs, have been much more vocal about the need to take out further costs. They're launching new cost-cutting programs. be it in Europe or be it in North America. And they're preparing for a market that's more competitive and where we'll see more pricing pressure. And, you know, costs, you talk about it, but on that slide about your 10 priorities for 2023, it's not even a single item. So I just wonder, are you not too relaxed on the need to, you know, aggressively take out more costs of the business? Thank you.

Patrick, may I start and then I hand over to Arno to add some information. I will touch both of the questions quickly. First of the best profitability. On the one hand side, we count on our platform strategy and the scale effects. And there, especially when we look to the SSP shape, we have decided during the last months, I'm very confident that it will bring us in very positive scale. Invest once and using the platform for different brands. And on the other side, we established cost-cost programs for our current business, but also already for the future business. with cost initiatives because there we have the main levers already in this period for the new platforms. That is one comment on this and maybe Arno can dive a bit deeper and about our cost programs or profitability improvement programs. We host a target summit with all our brands and units in January. And there we agreed strategic targets for profitability and also being cash flow focused. And that's not only an agreement we did there. Behind of this, we have very, very clear programs. what we have to do. One example we presented yesterday in the Porsche annual media conference and the call we had together is a road to 20. And for all the other units, we are currently implementing the same. And open spoken, it is to take the current planning round, then to watch what's still the delta to get there in the case of porsche to get to the road and road to 20 then we defined very clearly what is missing in terms of operating profit what is missing of profitability and then we defined clear programs behind in measurable steps year by year how to get there And that's a very clear systematic how to drive and to improve the profitability in each of our units. And may I hand over to Arno to add some comments.

Thanks, Oliver. I'll add a little bit more on the detail side. Look, first and foremost, Patrick, from my point of view, we have been quite successful in fixed cost discipline. uh we we had this program of reducing fixed cost by 10 percent um 2019 until 2023 and we achieved that program almost in already in 2021 in 2022 we had a slight increase in fixed cost but this is an all-in summary it's we acquired navistar we we built up power core we built up carrier then all all of these additional activities are included in that overhead cost initiative, and still we are below 2019 figure. And if you take the relative burden of the fixed cost, we decreased that by two percentage points, which is, yeah, okay, could it have been more? But we are operating in an industry that makes an eight percentage point margin, and two percentage points come from that overhead cost program. So it is working. And quite honestly, for 2023, at least in terms of relative burden, basically overhead costs divided by automotive sales revenue will deliver an additional positive. And going forward, we are very well aware that competition will become tougher. So we try to stay as fixed as possible on the overhead cost side, giving all the inflation, giving all the additional activities in the group on the one hand. And the second lever is productivity. Look, for I would say two to three years, we were happy that we could build the cars we got savings from, which led to a lot of the distortion in the factory. So also in an internal interview, I said, 2023 has to become the year of productivity. And last but not least, we founded the brand group volume, which will deliver a significant positive level in terms of working together, not on the sales on the customer side. Here we want to differentiate the cost even stronger, but on the back office side, on production, on development, on after sales. So there will be significant positives a brand group volume wants to achieve. Last but not least, as Oliver said already, in that planning, there's also a new KPI we included in our brand group ceiling, and that's the break-even. So it's not only cash flow we have a strong focus on, but there will be also a clear break-even target for each brand and brand group.

And just to confirm, thank you, Arno and Oliver, for that. Just to confirm, so we are, or you are, on track for a 2025 ish launch of an affordable EV that will be profitable to the group. That's still the plan.

But a little bit more detail on that. I think we haven't called it so far ID2, but look, it's easier to call it that way. It will be a car below the ID3, will be a car from today's perspective below 25,000 euros, although it's too early to give you specific pricing. And there are a lot of measures. First and foremost, we will have significant scale by then. It's based on the MEB, but it's kind of a second generation MEB platform with a lot of cost improvements already. And that will be also then based on our Valencia plant cell factory, which gives us an additional improvement on the cell side. By then, hopefully, we also made significant progress in attaining and assuring sufficient supply of battery raw materials for Volkswagen. So there are a lot of building blocks, scale, technology, more product integration on the electric engine and converter and cheaper cell supply.

and coming um or adding um ano about the scale effects we do have talking about this this platform um we also have the opportunity um to add models from from other brands um like um from skoda and and also from from cooperana we already announced that we are considering a um cupra urban rebel and um with cupra um we are increasing step by step also the profit margins and so um that brings us in a very positive scale effect situation with our platform strategy.

Appreciate all the color. Thank you.

Thank you, Patrick. We have to watch a little bit the time, so maybe we can take another two questionnaires before we have to round it up. As I said, if there are any questions unanswered, DRR team is happy to take it. We continue with Jose Azamendi from JP Morgan.

A couple of questions, please. Arno, when looking at the guidance and the share price reaction when you released it, it looks to me like consensus expectations clearly underestimates the level of disruption you went through last year. So can you just give us a bit more color? It's the start of the year on the upper end of the sales and EBIT margin corridor that you have provided. And then, please, on product, I think it's very important to improve the competitiveness in China. Can you comment, please, on the Volkswagen ID.3, the refresh you're going to do with a bigger display and improved software? When should we expect this car to be launched, and how quickly can you roll out these improvements across the remaining family, especially across China? Thank you.

Jose, may I start with the China question? First of all, for the ID.3, we are planning different steps for updates. This year, we will come to the market with an update in terms of interior, improving quality, improving material, and in the exterior, especially in design, the front and the rear. And then we decided in the last months an important update for the MEB platform to improve performance, to improve range, to improve charging time. And that will affect also very clearly the Chinese market. But not enough with this. We have to improve our platforms, especially from the smart car approach. in China and that is what I mentioned when I had the opportunity to visit China four weeks ago to be closer to the Chinese customers to develop in China for China solutions and therefore we are aiming for partnerships also with Chinese tech companies and What we will do there, that we will have a clear product program ahead, which we will decide in April, beside of the Shanghai Motor Show. We call the plan, it's our China target for 2030. but very accelerated for all the brands and the approach for Volkswagen, for Audi is a bit different than Porsche is totally different positioned. And that's what we are doing. And I think with this approach, we will be able to catch up in the electric era while we are still very strong in the ICE. But what counts in the future, that's very clear, is the performance on EVs. And that's what we are preparing currently. And we have clear ideas and a clear plan to do it.

Jose, I tried to answer the question. I'm not 100% sure whether I understood it right. Look, when we give a guidance, we expect, from today's perspective, to be at the midpoint. Knowing, yes, in the past, there were several where we said, look, Volkswagen is a little bit more conservative. But I think we should have an ambitious guidance to also challenge ourselves. Ambitious means reachable and feasible, and we are confident that we can achieve it. But from today's perspective, you should expect us to be in the midpoint of the guidance.

Thank you. Thank you, Jose. So we are coming to the last question for today's session. Henning, the floor is yours.

Yeah, thanks a lot for squeezing me in. I was hoping to understand the structural free cash flow a little bit better is my first question. You're guiding for the six to eight. I think we understand now that we sort of should be adding back five billion for M&A and diesel, I guess, and three billion separate for power calls. So I guess if you add that back, you get to the like-for-like number that would have otherwise been, you know, your adjusted free cash flow number in the past, I guess, 14 to 16. So, you know, but at the same time, there's a working capital reversal in that. So if you could just help us understand a bit more, what's the free cash flow, the structural free cash flow going forward? Should we always now keep expecting an envelope for M&A so the reported number will not go back to a double digit figure for a while, if you could just give us a bit more color there. And then secondly, it also relates to China. On the ID model, I understand that you now start offering the ID3 from 175 RMB, which in Euro terms, I think works out to about half the entry point for what you're selling the car in Germany. So I would just like to understand quite how bad that is in terms of how much money you might be losing on the vehicle in China and what the path to improvement is there. Olli already talked about the improvements that are coming with the next update. But if you could also sort of roll in the profitability element into that, is it getting quite a bit better in the near term? Thank you.

These are both questions for Arno.

I start with the cash flow. Look, yeah, of course it's the free cash flow there's M&A and a small outflow of diesel in it. But if you want to like look at it from a more global perspective, the typical cash flow we could expect in the current situation and giving the EBIT guidance and the upfront investment for electrification and digitalization would be 8 to 9 billion. You theoretically should add the reversal of the situation we had last year on the inventory side. So that basically leads to 12 to 13 adjusted. But in that 12 to 13 or from that 12 to 13, we basically deduct an additional five, which is reserved for PowerCore, which comes on top to our current core business. And that leads us then to the guidance of $6 to $8 billion. There are certain allowances for M&A, of course, but not in the magnitude that we saw like two or three years ago. Taking out PowerCo, of course.

Sorry, so this is beyond 2023. Are you saying the envelope for M&A, we should think of that as a little bit less so that the number will get closer to a 10 billion level?

I don't want to do a guidance from today's perspective on free cash flow for 2024 and beyond. But our ambition is, of course, to increase that. We called it clean cash flow in the past and from the clean cash flow we deduct M&A and diesel and perhaps Rolf would expect perhaps we give at least at the capital market day also guidance for the clean cash flow. Then it becomes more transparent.

Thank you. We'd appreciate that.

We thought we'd make it a little bit less stringent and more complex and we took that KPI from our from our guidance, but if it's helpful for you, we will re-include it.

The question on China and the profitability of the ID3.

Yeah, in China, I mean, so there's a lot of discussion around whether we are still disciplined in terms of pricing or not. For all we can say, we are still disciplined. The incentives we are just giving now in terms of cash incentives, they have been given before, but they were like virtual incentives that could change like in the ID3 stores, in the virtual ID3 stores. So from a pricing point of view, nothing has changed. But the thing is clear, we have to work on profitability and on the cost side on ID3, ID4, ID6 in China, both in terms of material costs, in terms of battery, in terms of production costs. in order to increase competitiveness there.

Okay, thank you.

Thank you, Henning. And we are now, unfortunately, have to come to a close. I would like to thank all of you for the very vivid discussion. Thank Olli and Arno actually for being with us. We meet the one or the other now at the next virtual equity, virtual roadshows, yeah, we will have, becoming now a running gag with virtual equity stories. And Q1 will be due on May 4th. And then what we are very much looking forward to is the capital markets day on June 21st. Until then, please stay healthy. And whenever there is anything unanswered, please call us in Wolfsburg. And we are very happy to take your questions. Thank you very much for joining us today. Bye.

Thanks very much also from my side. Great discussion. Thank you.

Thank you to all of you for joining. All the best.