Volkswagen Ag Unsp/Adr

Good morning, ladies and gentlemen. Thank you for standing by. Welcome, and thank you for joining the Volkswagen Group Investor Analyst and Press Call Q1 2023. Throughout today's recorded presentation, all participants will be in a listen-only mode. The floor will be open for questions following the presentation. If you'd like to ask a question, you may press star followed by one on your telephone keypad. Please press the star key followed by zero for operator assistance. Let me now turn the floor over to Rolf Woller, Head of Group Treasury and Investor Relations. Please go ahead.

Thank you very much. A warm welcome to all of you wherever you are. Welcome to our Q1 conference call. Together with us here in Wolfsburg today is our CFO slash COO Arno Antlitz and Pietro Zolino also from the media side. Before we start, the usual housekeeping remarks. This morning we published the press release, our interim report on Q1 and the Q1 presentation. If you have not received them, please grab them from our website, the Volkswagen IR website. And I also wanted to draw your attention to the recently released association climate review. which you also find on our website, which has been asked frequently, in particular by our proxy advisors ahead of the ASM. After the presentation on our Q1 results from Arno, we will host a question-answer session with the investors and analysts first. And after that Q&A session, we will have a short break. And then Arno, together with Pietro, will take over the media side. And we will, as I said, after this short break, then continue with the Q&A session here. Before we kick off with the presentation, I would like to draw your attention, as always, to the disclaimer, which you find on page two. Please read it carefully because I won't read it to you. And with that short intro, I now hand over to Arno and ask him to guide us through the presentation. Arno.

Thank you, Rolf. Good morning and a warm welcome to our combined investor analyst and media call. Earlier today, we released our 2023 first quarter results, and I'm going to give you an overview of our highlights and financials. To make a long story short, we consider our Q1 financial performance a truly solid start into the year 2023, for which we have set ourselves ambitious targets. Let me first touch on just a few highlights of the first quarter. Each single event stands for itself and underlines our progress we relentlessly pursue in order to transform our business and to create sustainable value. Progress in ramping up our platforms. PowerCore SA is taking the next step. to our global battery business. It will start production of the unified cell in the Spanish region of Valencia in 2026. Since its launch in July 2022, PowerCore has decided three sites for cell factories, Salzgitter, Valencia, and St. Thomas in Ontario, Canada. Two of them are already under construction. Progress in North America with decisions for cell production in Canada and a scout site in South Carolina, we are fast-forwarding the execution of our North American strategy. With the iconic brand Scout, we are addressing one of the most promising segments in North America. Ramping up our electric product lineup, the new ID.3 shows a fresh design, higher quality materials, and the latest generation of assist systems. Two and a half years after the launch of the first generation, the all-electric bestseller from Volkswagen is now coming to the market with a comprehensive upgrade. We are not standing still in our ICE business as well with the new Porsche Cheyenne. We will continue our successful and profitable path on the traditional drivetrains as well. The ID.7 is a significant leap forward and underpins the versatility of our MEB platforms. Our efficiency champion ID.7, who had its world premiere just two weeks ago, offering everything you expect from such a beautiful BEV. Range up to 700 kilometers, premium technology and software, and a high-quality interior. It will go on sale in the second half of this year. The feedback we received specifically during the Shanghai Motor Show was more than promising. Let's have a look on our deliveries in Q1. We are stepping up in our deliveries, driven primarily by Western Europe and North America. Deliveries to customers in Q1 2023 reached 2 million vehicles, up 7.5% versus Q1 2022. The supply situation is easing slowly but continuously. We still experience disruptions, mainly in global logistics, hindering us to deliver our vehicles to customers worldwide. in vehicle delivery are also the reason for slightly higher inventory of finished goods. We continue to experience a healthy level of order index specifically in our ICE cars. Our order book stands unchanged at around 1.8 million vehicles in Europe, thereof around 260,000 PVs. Deliveries in China slowly picking up in speed after COVID lockdowns dissipating and the regular seasonality of Chinese New Year in February. The whole market was down in Q1 2023 significantly year over year, but we expect both the region and our own deliveries to recover from April onwards. With 141,000 BEVs sold, equalling 7% of our deliveries, we are on track towards the targeted of around 10% of BEVs deliveries in 2023. Due to pre-buy effect at the end of 2022, the order intake is lower in Q1 2023 versus Q4 2022, but is expected to recover during the remainder of the year. As availability of BVs specifically in H2 is expected to improve and the IT7 is kicking in. And of course, we are proud and excited that the IT4 in the US was confirmed all necessary criteria to benefit from the full IRA tax subsidy. Coming to our financial performance, vehicle sales for Volkswagen Group came in at 2.1 million units in the first quarter, again limited by disruptions in global supply, mainly logistics. We were able to step up in revenues even stronger by 22% to 76.2 billion euros driven by strong vehicle sales outside China and driven by a healthy mix and continued favorable pricing. Operating result came in at 5.7 billion euro and a margin of 7.5%. What looks at first glance underwhelming is in fact a very robust result. Last year's Q1 benefited from valuation effects of our commodity hedging outside hedge accounting by a positive 3.2 billion euro. This quarter in contrast was burdened by minus 1.4 billion euro. In fact, Q1 showed significant progress and a strong underlying operative performance. Profit before valuation effects from commodity hedging increased by more than 30% to €7.1 billion, resulting in an underlying operative margin of 9.3%. Our financial result improved from €588 million to €706 million, particularly driven by a positive interest result and other financial results. The group generated net cash flow in Q1 2023 of 2.2 billion euro, despite the slightly negative effect from working capital. As we grow production and sales, we have more capital tied to inventories and more cars in the pipeline. Clean net cash totaled 2.7 billion euro and was up by more than half a billion year over year. Net liquidity at the end of Q1 stood at a robust 38.4 billion euro. automotive net liquidity position declined from 43 billion at the end of 2022 as expected the decline was however smaller than the cash out from the special dividend in connection with the porsche ipo of 6.5 billion euro coming now to the performance of our divisions passenger cars delivered 3.6 billion euro operating result and a margin of seven percent before special items these numbers were obviously impacted by the valuation effects already mentioned. Our commercial vehicles are back on track and came in at 0.9 billion euro and a margin of 8%. Trajan lifted its margin guidance for full year 2023 from 6.5% to 7.5% to 7% to 8% return on sales. The financial services division continued with their solid performance in Q1 and recorded a profit of 1.2 billion euro. Avid Bridge of our passenger car business is significantly driven by volume price mix and hedging result. Positive impact of volume price mix as seen in Q4 2022 continued with the biggest increase resulting from volume. Pricing continues to be strong and mix was slightly negative as expected due to better availability of our entire product portfolio. Operating result in the first quarter was burdened significantly with negative effects from raw material hedges outside hedge accounting. Negative impact of broader costs totaled to minus €0.9 billion and came in significantly lower compared to Q4 2022. We expect this bucket to moderate further down in Q2 and eventually to turn positive in H2 2023 compared to 2022. PIX costs increased slightly, which is attributable to a higher R&D cost mainly. Overhead cost discipline continues to be very strong. Coming to our group steering model, we steer the Volkswagen Group financially through a transformation as a unique combination of strong brands combined to brand groups. In parallel, we want to build up industry-leading platforms as value drivers. Especially on platform level, we took some significant steps ahead as outlined earlier. Coming now to the brand group and platform performance. Brand group volume showed a decent uplift in volume. Sales revenues increased by 36%, operative margin and brand group level reached 5.3%. Brand group volume contributed a 1.7 billion euro net cash flow to the group. Volkswagen brand yet with a 3% margin, still with a lot of upside potential, but rest assured the teams are working hard to make Volkswagen brand a solid contributor to brand group volume performance in future. Q1 margin of brand group premium went down to 10.8% from 24.8% in 2022. Similar to what we've seen on group level, brand group premium was heavily impacted by valuation effects from raw material price hedging outside hedge accounting. The underlying margin in Q1 2023 before these effects was 13%. Lamborghini, Bentley, and Ducati contributed significantly to the strong performance. Net cash in Q1 was burdened by investments in PPE electrical platform ramp-up and increase in working capital due to the increase in production volume, but still slightly ahead of Q1 2022. At Porsche, performance followed its track record and remained strong, 18.5% operating margin, despite increasing product costs. The operating result benefited from improved pricing, better product mix, and of course, higher volumes by plus 29%. Coming to the performance of our platform that carried, we recorded higher license revenues from our MAB cars on the 1.1 platform and were able to limit the losses to previous year level, and at the same time, continued investments in software platforms. We promise even more transparency on our platforms and with PowerCore, we will follow the quarterly reporting from now on accordingly to carry it and provide KPIs shown on a regular basis. Although the current figures are still rather small, PowerCore and Cellco continues to build the global battery business with cell factories planned for Valencia in Spain and St. Thomas in Canada and the construction of the plant in Salzgitter fully underway. Trayton saw unit sales increase by 25%, with overall sales revenues up 31%, driven by strong volume expansion, positive price mix, and vehicle sales. Operating margin came in at 8%, thanks to better capacity utilization and price mix compensating for higher input costs. Net cash flow saw strong increase, due to enhanced operating performance and proceeds from sales of Scania financed Russia and despite further working capital build-up. At financial service, we saw an increase of sales revenue in comparison to previous year, particularly resulting from additional results from remarketing, the growth in operative lease, and growth of the used car business. However, operating income as well as margin in Q1 2023 are below previous year, impacted by a normalization of used car prices and the change of interest rate environment. Coming to our proportionate operative result of our JVs in China, driven by lower total industry in the first quarter and a slight decrease in market share, the proportionate operating result came in at 625 million euros. FIA Volkswagen performed solid and came in robustly on par this prior year. And for the total year, we currently expect the industry to come in about plus 4% above 2022 and proportionate operating result of up to €2.8 billion at Volkswagen. Coming to our outlook, we can keep it short on this page. We confirm all KPIs. We are aware that our outlook was seen as ambitious when we announced it back in March, but our Q1 performance in the following months gave us a sample of what we are capable of in this environment. and how committed we are to improve our financial performance and also keep our targets firmly in sight with a decent increase in sales revenue and the underlying margin before hedging running even above our ambitious full-year margin corridor. R&D and CapEx spending reflect the continued upfront investment in electrification and digitalization. At the same time, we keep our combustion engine cars competitive with final investments in this technology in the coming two years. The investment also reflects now first significant expenditures for our North American strategy with R&D for Scout, CapEx for the ramp-up of our battery business, as well as regional strategies with Volkswagen Anhui and the Audi Nefco in China. R&D expenses to that €5.1 billion, R&D ratio standards 8.1%, R&D costs increased also due to new model launches and further technologies. CapEx to that €2.2 billion, CapEx ratio stands at 3.4%. Our outlook remains for R&D ratio of around 8% and CapEx ratio of around 6.5%. Ladies and gentlemen, today we sent the invitation for our Capital Markets Day on June 21st at the Hockenheimring. We will provide an update on where Volkswagen Group stands today and where we want to stand in three years from now. The presentation will focus on the new team and the new entrepreneurial spirit, our strong technology platforms and how the brand groups will benefit from it, our regional strategies and our future financial targets. And you will have the opportunity to learn everything about our current BV product lineup. For those of you who attend the Deutsche Bank conference, we will make sure that logistics are seamless and convenient to allow to join our capital markets day. Looking forward to meet you in person in a few weeks from now. And now I really look forward to your questions and the discussion we will have. Thank you very much so far.

Very good. Thank you, Arno, for guiding us through the presentation. And we are now starting the Q&A session. The first one I have here in line is George Calias from Goldman. George, please go ahead.

Good morning and thank you for taking my questions. I had two questions. The first one is just when we look at these results, obviously a strong performance both from the volume brands and the premium brands, particularly when we adjust for the hedge accounting. When you look forward through the rest of the year, do you have similar expectations for both divisions in terms of ability to maintain today's level of profitability? or do you see greater challenges in one part of the business, i.e., the mass market business versus the premium or vice versa? The second question I had was with respect to China. Thank you very much for providing the slide with your expectations for the proportionate income. Obviously, this is a decent fall from where you have been both last year and historically. Should we think about the $2.8 billion as a sort of new normal for Volkswagen in China, or do you expect to be able to improve on that in 2024? And to the extent you can improve next year, what's driving that? Is it industry volume? Is it market share gains? Or is it improvements in your own cost slash variable profit position? Thank you.

Yes, George, thanks for the question. And first and foremost, I must say, If you remember back only some weeks ago, when we published that outlook, it sounded rather ambitious. So now we are really happy that at least if you take out the non-cash valuation effects of our commodity hedges, we run quite significant above our margin guidance. And that's also basically true for Audi and also slightly true for Volkswagen, although we must admit In the brand group Volkswagen, the commodity hedges are not included. These are included on group level. But having said that, we saw really a promising first quarter with nice recovery in Europe and U.S. with strong pricing, strong pricing discipline. And for the outlook, so we are rather confident that on group level, we can achieve that 7.5% to 8.5% margin. Now, you referred to the brand group volume and premium. For the brand premium, as far as I know, I don't know if they have their call today, but tomorrow, but they have an outlook between 9% and 11% for 2023, and I expect that they stick to this guidance. And also for the brand group volume, we make some decent progress, although we must admit we are not happy with the 3% on brand volume. This is clear. We want to achieve more in the next quarters and years to come. But for the time being, we expect basically that Brand Group Premium and also Volume will achieve their outlooks. In terms of drivers, yes, we expect still strong mix and strong pricing mix will a little bit come down with the better availability. in the market. And on the other hand, competition will intensify in the second half of the year when the whole industry will have more chips and more availability. But we are very well prepared. We have great brands, great product substance. We work on the cost side. So at the time being, we are rather confident that we can meet our guidance. China. Yeah, China, we gave you a glimpse of the proportionate operative result. At China, I could talk for half an hour. I just spent like three days in China, in Shanghai, looking at competitor cars, talking to the teams on the ground. Basically, what I can tell you to China is we are extremely strong on ICE business. That's clear. And on the ICE business, we have fantastic cars. We have great product substance. And on the BEVs, we had a slow start, but we are catching up, yeah. What we see on the ground is rather clear. We have to improve basically in three fields. One is driving assistance functions. Second is in-car infotainment and overall in the speed in which we adapt to Chinese customers' needs. But I'm rather confident that we will make progress because on all these three fields we make significant progress already. We teamed up with Horizon Robotics, great company. We will develop together driving assistance functions. We founded joint ventures on in-car infotainment. And we also basically found the tech company on 100% local basis, 2,000 development people will develop in China. For China, this gives us an improvement of development speed of 30%. And last but not least, ID7 will hit the road in the second half of the year. So based on these measures, we are rather confident that we will stay strong in China also in the future. In terms of outlook, proportion, operative result, for the time being, this is the outlook for 2023. It's too early to give you an outlook for 2024 and beyond. But as I said before, we won't give up. We have a very strong position in the ICE cars. We are catching up and accelerating on the BEVs. And we will stay strong in China.

Thank you.

Thank you, George. The next one in line is Tim. Tim from Deutsche Bank.

Yeah, thank you very much, Rolf and Arno. It's Tim from Deutsche. I'd have two questions, please, Arno. The first one is on something that we see in this industry and that we see in the stock market reaction to results. Q1 numbers are generally quite strong, as is yours. Q2 also looks like it's going to be quite good, but the market just doesn't really care about it because we obviously also see that inventories go up. and order intake starts to come down. Can you somehow take people to fear that in the second half, where you also say that competition will intensify, we're going to see margins collapsing? Is the margin on the order intake still unchanged? Is the margin on the order intake for ICE vehicles maybe even stronger than what you have seen previously? Or is there anything else that you can share with that regard? And then secondly, related to this, What we also see as a common pattern in the industry with BMW today and U.S. as well, underspending versus the full year capex numbers. And we're seeing some cost measures being taken by someone like Volvo Cars, for example, this morning. As a CFO and CEO, you are in the ideal position to prepare this company for what is to come in the second half and potentially next year. Is there any flexibility that you see on the cost side or capex side that you can respond to should the market indeed start to become tougher from a competition perspective. Thank you.

Tim, although too complex questions, I try to make it short. How do you think of the second half of the year? If you look at, if you use the EBIT bridge, there will be a significant positive volume effect. The higher the positive volume effect is, we must admit, the slightly more negative is mixed effect, but this is technical. We will have more availability. We will sell some more cars to REC companies. We will increase our volume in Brazil and other regions where we have technically lower margins. But pricing will stay strong. Volume will be a contributor and mixed slightly negative. On the hedging, it's difficult to predict. On the cost side, we even expect a little bit more positive. You saw our EBIT fridge volume price mix and then currency and then the bucket on the raw material costs, on the product costs. This is now negative, minus 900, but we expect this to turn positive in the second half of the year because we compare them to the really high prices of the second half of 2022. And some commodity prices, lithium, steel, aluminium, even came back. And on the cost side, we work hard on the cost side. And so I perhaps can combine your two questions. At least on the overhead cost, we did very well. We almost achieved overhead costs to be stable. And it's not a small bucket. What we sum up in overhead costs is basically a 40 billion bucket. And if you compare basically stable overhead costs with the 20% more turnover, that's not too bad in terms of leverage. Unfortunately, we will spend more on the R&D on the CAPEX side, but this has also reasons we discussed so far. We want to keep our ICE cars competitive. We are investing in battery technology, in new battery electric vehicles, and also a percentage point of the R&D CapEx combined flows into the battery business. So all in all, we expect a higher competition, and we prepare for that on the price side, specifically on the Xcode side and productivity. The brand Volkswagen... is working on an improvement program. It's too early to give you details, but rest assured, they are not happy with the 3% margin. So this will give a boost as well. And last but not least, you talked about flexibility. We have always some flexibilities in the R&D and CapEx area. Specifically, if you look at the on our CapEx plans in the next years, for example, for PowerCore. We have ambitious plans so far, but of course we are flexible in a certain way if total industry doesn't come as planned. So you could also move one of the other plans and one of the other initiatives a little bit. So that gives us flexibility on R&D and CapEx side. Thank you.

Thank you, Tim. And the next question comes from Horst Schneider from Bank of America. Horst.

Yes, thank you and good morning, everyone. Thanks for taking my questions. I've got a few questions. First one, still a little bit follow-up to the one from Tim. So when you talk about guidance for H2 and how holistic everything is, can you be a little bit more specific on the volume outlook? So first of all, the order book, I assume, is still strong. Not sure if you said that in the beginning because I joined a few minutes late. Then maybe you can comment on order intake if this order book is now finally coming down. in Europe. And finally, then if the volumes in H2 going to be weaker versus H1. Then a little bit follow up again on CMD. I know you cannot spoiler here what you say end of June, but maybe you can give us a glimpse on the time horizon you're going to focus on. Will it be more 2025, so three years outlook, or will it be more already a 2030 outlook? And coming back to your China statements, is that all what you're going to announce, that you basically have got strong products in China, or should we expect a more comprehensive realignment there? You said that the full year analyst called that when you meet in Shanghai, that you're going to embark on a new business plan. So therefore, not sure how much you can share on the conclusions that you have taken in Shanghai. Thank you.

Thanks for your questions, Horst. First, let me a little bit on the order bank and order intake situation. As I said, our order intakes are really strong. So basically we ramped up our volume by 20% and still our order banks stand at 1.8 million cars overall, which shows you that, and this was basically the figure back when we talked about at the end of 2022. So we have a really strong order intake, specifically in ICE cars. In BV's cars, order intake is slightly lower compared to November, December 2022. But this has specific reasons. We had a, I would call it pre-buy effect. Specifically in Germany, the subsidy scheme changed. So a lot of, really a lot of cars, a lot of customers ordered the cars So we had a really strong November, December, and our order bank of BEVs came down a little bit from more than 300,000, but still to now 260,000. And this 260,000 will carry us well into the second half of this year in terms of BEV sales. And more cars hitting the road, ID.7, great, great response, 700 kilometers of range, good technology. So there's more to expect. In terms of capital market, I don't want to give you too much content already, but of course, we will look also a little bit further ahead. We not only look at the 2025 figures or 2026 figures, when we said three years ahead, we will give you a glimpse. And it's also too early to announce too much of our discussions we had in China. I gave you a little bit of a feeling where we want to catch up. But we will give you also a comprehensive overview. But rest assured, what we always said for our overall business, that we focus on margin and margin quality rather than on volume and market share. This is also true for China and this is also true for BVs in China. But again, this is too early to give you an overview of our China strategy.

No, that's good. Looking forward to that. All right. See you soon. Thanks, Horst.

Thank you, Horst. And the next one is Patrick from UBS. Patrick, please go ahead.

Yeah, thank you. Good morning, everybody. Arno, two questions also for me. Regarding the EV order bank, now you're at 260,000 units. End of the quarter, you were about 350,000 at the end of Q3, so six months ago. Clearly a negative trend, and I think particularly on the retail side, new business looks currently quite soft. I think the issue is clear, and it's pricing. I just wonder, we'll soon be at a point where you have to make a decision on pricing, otherwise your EV growth is not going to come through anymore in the second half of the year. How do you think about this from today's perspective? We've heard some comments from your legacy competitors that also start thinking about reducing. We saw another round of price cuts by Ford on the Mustang just a couple of days ago. Can you just give us a better feel about how you will master that challenge volume versus pricing and what that means to the contribution margins of your BVs? And then secondly, regarding China and sorry to come back to this. you show satisfaction about the recovery in the ICE business and the strong product lineup. But as you know, of course, the market only cares about EVs. That's where the growth is. And I wonder if you can just give us a bit of hard evidence there that the EV side of the business in China is really, in fact, doing better. Because if we look at the volumes of the ID family, there is not that much reason to be optimistic at this point. Thank you.

Patrick, if you refer to our position in the current pricing environment, I would like to give you a little bit of an overview of where we stand and then perhaps a little bit more specifically. I think or we think we have a rather strong position in the current pricing environment in BVs. Look, we have great brands. We have Porsche, we have Audi, Volkswagen, great product substance and more cars are hitting the road. ID7, I mentioned, great product substance. We still have this auto bank of 260,000 BEVs in Europe, which is still rather long. Still people are waiting for their cars and we're struggling to deliver all the cars in the right time to the customers. And as I said before, our focus is on quality of the business and rather on volume. And this is specifically true for EVs because we discussed that several times. We haven't given up on our target on margin parity, which has a clear priority for us. Yes, the margin parity depends on raw material costs. Raw material costs hiked. Lithium and nickel and other prices now came a little bit down. But we don't want to lose our margin parity target out of sight. And this is also the reason why we currently concentrate on delivering the EVs to the customers. So talking about China, China EVs, yes, we had a slow start there. That's obvious. We want to catch up, and we will catch up. I think last year they had 100 EVs. 55,000, if I remember it right, sales in BEVs. And our target is that we clearly want to be above that, above also 200,000. And we also need that BEV target in China in order to achieve the 10% share overall. But as I said before, and that's also true for China, we focus on the margin of our business. And we have quite an encouraging April to come on the BEV side in China. And in parallel, we work on product improvement, on acceleration, on new products. And so we will see an improvement in China, or we expect an improvement in China, significantly above 200,000 from today's perspective, but it's too early to give you a precise number.

okay thank you arno thank you patrick and the next one in line is jose azumendi from jp malden thank you thank you a lot um i don't know uh your questions please maybe the first one uh with regards to to china and your your guidance in terms of earnings um for 2023 can you give us a little bit the the moving part to to get to that figure uh the sort of the the big buckets in terms of volume, pricing, mix, or any color. I mean, you've been to China, you spent a week over there. Can you give us a little bit, how should we think about SAW and SAFC in terms of the average contribution? Any details to get to that figure, please, for 23. Second, just want to come back to this best profitability. And obviously, you know, we've seen some of the competitors printing very, very large losses on this product. But you have launched your ID family in Europe, and we're not seeing a substantial market dilution. So can you talk a little bit again about what do you think are, again, the moving parts to improve the profitability, whether it's chemistry, economies of scale, raw material costs? Which one do you think is going to be the biggest lever to improve the profitability? And then final one, I guess also for the upcoming Capital Markets Day, but can you talk a little bit about the ID3 or ID family? Which changes have you done on the product in the past months which are going to improve overall the appeal of the product or the pricing power of the product?

Thank you. When we talk about basically target of margin priority, margin of PVs, and you're quite right. I mean, we increased our BEV share, and at the same time, we increased our underlying operating results. But as I always said, today, we have positive contribution margins, but it's still dilutive. That's clear. And because we said we want to achieve margin parity in two to three years. So when we talk about improvement, first and foremost, of course, it's up to the raw material side. lithium, nickel, cobalt, and battery prices as a whole. And here we have a dual strategy. First and foremost, we had just as much as possible. You saw our results specifically last year, for example, on the nickel. And on the other side, we embarked on that strategy where we want to have at least 50% of the demand of our batteries in-house with both very efficient battery plants which produce a unified cell. And then also with more control and better prices on the raw material side. But this will only kick in in 2025 and beyond. That's clear. But raw materials is one side. And then, obviously, material cost and volume. With increased volume, we increase the scale. We are ramping up our plants. ID7 is ramping up now in Empton. We're ramping up the ID4 in Chattanooga. So there will be a significant positive on the scale side. And also, as I said before, we want to be disciplined on pricing. And that discipline on pricing has to be supported by product substance. And this is your second question. A step up is, for example, in range. The ID.4 now offers 700 kilometers of range, which is absolutely competitive in that segment. You get more features on the electronic side to get lane change, updates over the air. In China, we introduced our first avatar in the car, which sounds a small innovation, but it's very important for Chinese customers. And don't forget, when we talk about BVs, we always talk about the MEBs. We're preparing a huge fleet of really great cars on the PPA platform at Audi and Porsche, E-Macan, Q6 e-tron, E6. This will be phenomenal cars. And they are hitting the road at the end of the year. And you have to price in these cars also when we talk about profitability of our EVs. So as said, improvement on hopefully it's now raw materials. Then pricing, discipline, scale, and from a margin mix point of view, a number of great cars at Porsche and Audi to come. Basically, the same story is in China. Same logic. Of course, in China, you have a bit different battery technology. You have basically not NMC. We have iron-based technology, which we will introduce as well. We will work on the cost side in China and we'll improve new products specifically also on the Audi side.

That's great. And to get to that guidance on operating profits for China, any other buckets you can give us on volume price mix, just to get to that figure, to the guidance you're giving us?

We expect significant growth more volume in China, as I said before. China had a slow start, both in terms of overall industry and our market share. I can't give you the exact figure today, but you can expect really an uplift in April. We saw a strong March already with plus 12% in China. April will be even stronger. So volume, both in terms of overall market, we still expect a positive overall market, 3% to 4%. We expect a catch-up on market share. This is the biggest volume. And of course, China has also to work on the cost side and stay disciplined on pricing. Thank you so much. Thank you, Arno.

Thank you, Jose. The next one in line is Henning Kosman from Barclays.

Hi, good morning. Thank you for taking my question as well. really helpful in the appendix with helping us with the derivative results again. I'm just going to try here and ask you if you can help us because you're obviously guiding on the result after derivative. So can you give us any sort of help on what you're assuming in terms of the full year derivative or where you currently see the spot rates and perhaps even what they could imply for the Q2, any sort of color there, because obviously you're guiding after the SEC. That's the first question. And then secondly, thanks again there for giving more granularity on PowerCo, really useful. I'm just thinking in the context of eventually having external investors into this business, could you perhaps discuss a little bit how you feel about the purpose of this company? Is it mainly to provide you very competitive cost on battery cells for the Volkswagen Group, or is the purpose to make money for Powerco in the first place, which is then also an attractive business proposition for future external investors? Thank you.

Yeah, thanks for the question. Obviously, it's rather hard to predict commodity prices in the future. What I can say, in our EBIT bridge, for the full year, we normally take out the positives we have. And so we end up with a negative bucket there on currency and commodities. But this is just a technical effect. This is not that we have the ability to predict these prices. It's just how we work on the EBIT bridge and how we work on the forecast. We just want to be conservative. So it's a negative bucket there. and in terms of power core as I said before power core is an important pillar for us in the way going forward first and foremost to of course supply cell capacity for the Volkswagen group because at the very I would say in the next 3 to 5, 6, 7 years we see that the bottleneck But of course we want to basically set up or PowerCore is set up as a separate company already. It's an SA and it will be a standalone company which in the way we report it will make a significant margin and therefore make it basically attractive also for external at first strategic partners and in the second step also perhaps As I said, we don't rule out an IPO to bring in outside investors. We still think that although PowerCore is making a margin, they will supply our group and our brands with absolutely competitive pricing due to the fact that we have the scale. We have IRR in Canada. We produce a unified sell. You mustn't underestimate IRR. The advantage of having a unified cell in three to four factories versus competition has to have a lot of complexity in there. We have first got results on the upstream topics in terms of raw materials and power core will play a major role. For the first step, we don't plan to significantly sell sales to the third market because we need the whole capacity for ourselves. But we don't rule out that in the second step, years from now, PowerCom might also invest and sell sales to the third party. But this is not part of the business plan today.

Thank you, Arno.

And maybe a word on the raw materials side. I think what is what is of importance to understand is that unfortunately we always talk about the cut-off date for the valuation effects. So it's not the average the auditors are looking at, but it's the value of nickel price at March 31st. And when you look at that, for instance, it was at €23,800 per tonne on the 31st of March. Today it's at €24,500. So implicitly for Q2, there is already a slight positive effect to be observed. Can we predict where the nickel price stands on June 30th? If we could, I promise to you I would not work in here. So that's the difficulty and that is why it's so hard to predict. But in our forecast, we obviously do not include. We basically put this at zero. in order not to fool ourselves. I hope that helps, and if there is any additional need for clarification, please catch up with our team. We are happy to explain this quite tricky accounting method. As you know, we are moving the raw materials over time into hedge accounting, and from first quarter 2024 onwards, these effects should disappear because we are moving then the raw material hedging inside hedge accounting, and they will then start to fade away and move in the OCI and the other comprehensive income in the equity.

Okay, great. I think that will be very welcome for everybody. Thank you, Lars.

Thank you, Henning. So the next one in line is Mike Tindall from HSBC.

Well, gentlemen, thanks for taking my question. Mike Kendall from HSBC. Just, I guess, a couple around investment decisions. When I think about the Canadian investment, I mean, it looks like $4.8 billion for 90 gigawatts is considerably cheaper than what Koreans can achieve for the same sort of capacity. So I'm wondering to what degree you were helped by the Canadian government and if you can disclose that. But also the 90 gigawatt hours looks like it's quite a sizable number of vehicles. Back of the envelope to me is about 1.5 million. Will that be an export base? You said just now that it won't be necessarily selling to third parties. Can I think of that as your ambition for North America or is it more a case of we can use this as an export base? And then switching to China, the one billion investment in new tech, How are you thinking about investing in China at this point? Because it seems in the EV space, it's almost impossible to make money given how many entrants there are and how stiff the competition is. How does that play out in your mindset when you're thinking about putting more money to work in China?

Thanks. Yeah, that's the first question. at least from our benchmarks, if you compare basically investments per gigawatt hour, we think we are rather competitive. In terms of amount, it's a twofold answer. First and foremost, we have quite ambitious plans for the U.S., and let me elaborate a minute on that. We are strong in China, and we are strong in Europe, As discussed before, we want to keep that sense, but we want to move and we want to really develop a strong third pillar, and this third pillar is US. There might be regulatory uncertainties in the future, and we are wise if we basically develop that third pillar. And that third pillar is US. It's a very profitable market, and this market is turning electric. And we have really not only an ambition, but also the chance to significantly grow and positively grow in this market. And so for that market, we took some decisions already, not only on our current products, but also Scout. So this battery factory will also deliver a sales to the Scout project, and there are more projects to come. We haven't announced them so far, but we will soon. because we are 100% committed to that market. So first and foremost, that capacity in Ontario is for the North American market, but of course we do not rule out, because it will be a very competitive factory, we do not rule out that we use the cells, for example, in Europe, but currently it's not planned. It's just that I say we do not rule out. With China... It's the investment in this, I would say, 100% TECO R&D company. You must think of that. It's a localization of R&D work we partly did today anyway in Europe, in Wolfsburg, and partly in addition to really catch up and really accelerate on driving assistance functions, accelerate on in-car infotainment. And the lever is really huge. China will stay a very important market and will stay also overall a profitable market. We have to see how the market will develop in the BV segment. But this 100% TECCO will work for both ICE and BVs and will improve our competitive position. And as I said before, it's not 100% on top. It's rather also localization of what we did before in Europe or elsewhere in the world. So we think this money is spent wisely if you compare what we spend for and what we get for in terms of improvement of product substance, local product substance and speed.

Thank you very much, Mike. And the next one in line is Tom from RBC. Tom, please go ahead.

Oh, yes. Tom Narain, RBC. Thanks for taking the question. The first one's a follow-up on Patrick's question. You know, we've seen Tesla cut its pricing for the Model Y. In the U.S., if you include the $7,500 credit, it's definitely below the pricing of the ID.4. On their earnings call, they said that they would be willing to sacrifice profitability by cutting pricing on the car because they can sell autonomy, which is like level 2 plus, level 3 software, which comes at much higher margins. Just curious, why not take that approach and really focusing on the software side and making money off that? It just seems like the EV landscape is becoming more and more competitive from well-capitalized players like Tesla with compelling products. Second question, another follow-up. On China BEVs, I appreciate the commentary on improving the software. I know you have the ID.7 coming, but on that software push, especially with Horizon Robotics, etc., It feels like that could take some time now to kind of get in the car. I mean, how should we think about the timing of those improvements actually taking effect on a retail basis? Thank you.

Tom, thanks for the questions. Yeah, look at, again, and I know that's on the heart of all of us, the profitability on the BEV side. Of course, I don't want to comment on strategies of our competitors. What I said before is we have strong products and strong brands and even more to come on the premium side. We basically all the time talk MEB, but there will be great products coming from Audi, from Porsche. But also on the MEB side, we made significant progress already. both in Europe and China on 97, at least on 97, you will see the first avatar from us, which is a significant step forward in China. Range is really competitive, 700 kilometers in Europe. So there will be improvements on the MEB and more improvements will come, both in terms of software, in terms of technology, in terms of range. in terms of speed to charge from 10 to 80%, we will make an improvement there. And so that will come over time. In China, when I talked about the improvements in different fields, you're right, it will take some time, but we see the first improvements there already. As I said before, the ID7 will come with an avatar, which is an important feature for the market. We team up with Horizon Robotics. We will launch 2 Plus and then eventually 2 Plus Plus Systems, talk together, work together with other companies. And we teamed up with Thundersoft for the in-car infotainment. We will bring innovations basically on a quarter-by-quarter basis, so we will make progress there. But at the end of the day, it's I can only repeat what I said before. We focus on margins, and we don't want to lose our margin priority target out of sight. This is where we stand today. Thank you.

Thank you, Tom. And the last question for the session comes now from Frank Biller from Landesbank Baden-Württemberg.

Yes, thanks for taking my question. It's a question about Skoda and Seat, the volume brands. So I noticed there's a huge margin increase here, especially for Seat here in the positives with 4%. So what I was wondering is how this will go on in the course of the year, because you mentioned that there's an increased competition, that margins coming down, especially in the mass market because of better availability. Should we think about such a margin volume like in Q1 or should it also come down for Skoda and Seat?

First and foremost, the margin at Seat is mostly driven by Cupra, which is a really good message because there will be more Cupra models and more Cupra volume hitting the road. So this is rather... positive side for SCOTA. It has a great margin already. The margin target for SCOTA in the midterm is even higher. And this is also a good message for us because, I mean, SCOTA is using basically the MAP and the MQB. And you see how competitive these platforms are. A brand like SCOTA, which has not the pricing, Volkswagen can make almost 10% margin out of this technology. So this is This is basically great news for us. So we expect them to stay strong, see it even improve with the volume uplift of CUPRA. Skoda will continue its path. And Brent Volkswagen, I said before, they're working on an improvement, cost improvement, efficiency improvement program to also drive their margins up to eventually achieve an 8% margin for volume group in total.

Thanks a lot.

Thank you, Frank. This concludes now the Q&A session. There is no further participant in the row. Thank you very much for that vivid discussion. I hope we were able to bring across that after what you qualified as being an ambitious guidance for fiscal year 2023, that we really made good progress in Q1. Q2 also looks promising. The next event ahead of us is next week, our annual shareholder meeting in Berlin. We are very much looking forward to meet you there in person if you visit us. And then, of course, the big event on June 21st with the Capital Markets Day at Hockenheim Ring. where you can start now to register. And we are really looking forward to this event and provide you then with more in that detail about how we want to drive this company to a better company, even better company going forward. With that, we are concluding the Q&A session for the investors and analysts and heading into a short break. And we'll start with the media session at 10.10, 10.15 in that range. And Pedro will give you then a heads up. Thank you very much for participating and stay tuned. Thank you.