Volkswagen Ag Unsp/Adr

Good morning, everyone, and welcome to Volkswagen Group's nine-month results call. As you know, it's a joint call for both media as well as investors and analysts, which is moderated by Rolf Voller, who is head of Treasury and IR, and myself, Pietro Zolino, I'm head of Corporate Communication. With us today is Arno Antlitz, our CFO and COO. Good morning, Rolf. Good morning, Arno. Let me provide a few remarks before we start. You should have received the press release, the interim financial report, and all other related materials of which have been published this morning. If you do not have them yet, you can find all documents on our website. In case of any issue, give us a call or drop us a mail, and we will send them straight to you. Let me now hand over to Rolf, who will give you a brief run-through of the next about two hours.

Thank you, Petro, and good morning to everyone on the call. Thanks for joining us this morning from wherever you have dialed in. Let's have a look at our agenda today. Arno will first present the highlights of the first nine months and the third quarter. And after that, we will take a closer look at the financial and full year outlook. Following the presentation, we will, as always, host a question-and-answer session for the investors and analysts first, and this one will be moderated by myself. And after this session, we will have a short break and then continue with the media Q&A, which is then moderated by Pietro. With that, and without any further ado, I hand over to Arno, who guides us through the presentation. Arno.

Yeah, thank you, Rolf, and a warm welcome to all of you from my side as well. We published key data for the first nine months and the third quarter and our outlook for 2023. On October the 20th already, I will thus concentrate on the incremental news and will provide additional information and explanation on the current business. Let's dive straight into the presentation and start with the highlights of the first nine months. Starting with the Volkswagen ID.4 and ID.5, which received major product upgrades, a fresh infotainment system with intuitive operation and a new electric drive with power up to 210 kilowatt and up to 556 kilometers of range. We regard this a major step up in terms of product competitiveness. Next, at the occasion of this year's IAA, At Modifair, we gave design a greater overall significance and meaning with the Volkswagen Group brand universe. We redefined design principles, aiming for higher design quality and stronger differentiation of the brands. Both the Volkswagen ID GTI concept and the Cupra Dark Rebel car received great feedback. Further, at the IAA, we announced significant advances in our four industry-leading technology platforms. Most impressive was a preview of our new software generation, eCube 1.2, in our all-electric Audi Q6 e-tron, which we will bring to the market next year. Talking about EVs, the ID.7 just won the prestigious German Car of the Year Award. Further evidence that we are on the right track with top-quality, intuitive operation and efficiency. Last but not least, we finalized the vehicle allocation for plants in Germany until 2028. Reduced production complexity by a platform-based allocation will improve efficiency and will contribute to our performance program significantly. Our global deliveries after nine months reached 6.7 million vehicles, corresponding to an increase of about 11%. Q3 standalone saw deliveries expand by 7% to 2.3 million units. Growth was primarily driven by a strong double-digit performance in Western Europe and North America, while we recorded a slight decline in the Chinese market. The situation in global supply chains continued to improve. However, production in the third quarter was held back by part shortages related to the severe flooding in Slovenia and its impact on the supplier production. The total impact in the quarter amounted to more than 100,000 units, affecting the brand group core in particular. Our order book in Western Europe. is currently standing at about 1.4 million vehicles versus 1.9 million vehicles a year ago. Our intake in the ICE segment continues to be robust, although being slightly below the prior year figure. New orders for BVs recently picked up. In total, our book includes orders for about 150,000 BVs. We gained market share and remained in a market-leading position in this segment in Europe. However, our auto intake is below our ambitious targets due to the lower than expected overall market trend. Deliveries of battery electric vehicles continued their positive momentum as evidenced by a further increase in the BV share. We sold 532,000 BVs in the first nine months of 2023, equalling 7.9% of deliveries In the third quarter standalone, the share of BEVs advanced to even 9%. Importantly, at 61% year-on-year growth, we continued to outgrow the market in Europe, confirming our leading position there. BEV volume growth in the Chinese market was slightly positive after nine months, with double-digit growth in Q3 standalone, and momentum thus remains positive. We currently face a general reluctance in the European market to buy battery-powered vehicles. However, performance in the coming months should be further supported by the launch of the upgraded ID.4 and ID.5, as well as the ramp-up of our all-new ID.7 and with an increasingly competitive product offering. Now let's move to the financials and the operating performance. Vehicle sales For Volkswagen Group came in up 8% at 6.8 million units, including Chinese JV's vehicle sales advanced even stronger by 18% to 4.6 million vehicles year-to-date. We achieved sales revenue of $235 billion, up by 16%. The significant volume improvement was supported by a strong increase of sales both in Europe plus 21% and North America plus 16%. Sales revenues were further supported by a healthy mix and continued favorable pricing. However, Forex had a counteracting effort on revenues growth of about 3 percentage points. Operating result came in at 16.2 billion euro, corresponding to a margin of 6.9%. 1.7 percentage points below the prior year period. What seems underwhelming at the first glance is in fact a robust performance. The first nine months 2022 had benefited from positive valuation effects of commodity hedges outside hedge accounting in the magnitude of 0.8 billion euro. This year we recorded non-cash effective effects of minus 2.5 billion year-to-date, a swing of about 3.3 billion year-on-year. including these valuation effects, our operating result after nine months increased by €2 billion to €18.7 billion, resulting in an underlying operating margin of 8%, almost on par with prior year's level. Coming to the cash flow situation, which has improved since we last spoke at H1 result conference call. Net cash flow generated in the automotive division totaled to 4.9 billion euro after nine months, which includes a solid contribution of 2.5 billion euro in the third quarter standalone. The third quarter cash flow includes an outflow of minus 1.5 billion euro from tax payments for past assessment periods. The cash flow in the reporting period was still held back, in particular by a significant build-up of working capital of minus €4.6 billion, mainly as a result of bottlenecks in vehicle logistics affecting inventories and finished goods levels in Europe and North America. However, following peak headwinds in the second quarter, the situation has been improving since, thanks to the execution of the scientific countermeasures of our committed teams. Working capital movement had a positive effect of €1.4 billion in Q3 2023, and the teams continue to work hard to further improve inventory levels by year end. Nevertheless, the environment remains challenging and volatile. Lean net cash flow totalled €6 billion in the first nine months compared to €9.2 billion in prior year period. Which brings me to our automotive net liquidity, which stood at €36.7 billion as per end of September 2023, a truly solid position within an industry in transition. Compared to year end 2022, net liquidity declined by about 6 billion euro, mainly as a result of dividend payments to Volkswagen shareholders of total amount of 11 billion euro. This is truly a proof that our shareholders are participating in the success of our business. Coming to the divisional performance, Passenger cars delivered 10.3 billion euro operating result corresponding to a margin of 6.5% before special items. These numbers in 23 were negatively impacted by the swing in valuation effects of our hedging portfolio of 3.3 billion euro year on year. Commercial vehicles continued the strong performance. Results came in at 2.7 billion euro, which is almost three times the level recorded in the first nine months 2022. And return on sales To that, a strong 8%, which is broadly confirming the level achieved in H1 already. Financial Services Division recorded an operating result of 3 billion euro, a decline of 28% versus the prior year period. Let's have a look together at the drivers behind our business. Volume price mix contributed a positive around 6.3 billion euro. At plus €4.5 billion, operating results were in particular supported by the strong volume expansion, which continued to be a key driver in the third quarter. Mix was slightly positive, and pricing continued on healthy levels in line with our value-over-volume strategy and contributed plus €1.4 billion to our result. In comparison to the prior year, operating result in the first nine months was held back by a substantial swing of fair value effects outside hedge accounting, in order of 3.3 billion euro. Product costs were higher year over year, at minus 3.4 billion, and continued to limit earnings growth, also in the third quarter, with a negative 1.1 billion in Q3. Fixed costs and other costs increased moderately in the nine-month period, which is attributed to higher R&D costs, the ramp-up of new business, like battery or scout, inflation, and rigorous execution of fixed-cost measures, on the other hand, to compensate for that. Before I move on for a more detailed look at our brand groups and business segments, let's have a look on our financial steering model. Based on our holistic program, we are managing the group systematically, efficiently, and with a strong focus on execution. In the course of the year, we have delivered a continuous flow of proof points for consistent strategy execution and are committed to drive our program. with full force and focus. An important element of our group strategy is to enhance resilience by reducing group overhead costs. By 2022, compared to 2019, we were able to reduce the ratio to automotive revenues by 230 basis points, despite the first-time consolidation of Navistar and significant upfront investments in our battery software and mobility business. And we are making further progress. Year-to-date, the ratio advanced to a level of 15.7%, equivalent to an improvement of an additional 140 basis points versus the prior year period. We believe there's still room for improvement going forward in executing our improvement program in the group. As Volkswagen progresses, we are committed to broadened cost management and continued overhead cost discipline. Moving on to the performance of our groups and platforms, Brand Group Core saw significant uplift in volumes. Sales revenue increased even stronger in Group by 24%. Operating margin at Brand Group level reached 4.9%, 30 basis points up year-on-year. And absolute terms operating result came in at 5 billion euro, up 34% year-on-year. Positive volume and price effects compensated for headwinds from higher product costs and fixed costs. Brand Group Core suffered a substantial impact of more than 100,000 cars on Q3 ICE production from severe flooding in Slovenia and its impact on a key supply in that region. Our brand recorded a margin of 2.4% in the third quarter of 2023 and 3.4% in the first nine months. In absolute terms, 300 million below prior year figure and significantly below our previous expectations and certainly below our ambition. Volkswagen Brand is advancing in designing the performance program as we speak, and everybody is well aware that the current performance as well as the economic environment underscore the importance of achieving significant steps ahead in terms of competitiveness in the coming months. Skoda achieved an improvement margin of 6.4% after nine months, up by 80 basis points year over year. However, this is well below what Skoda, what we think what Skoda could deliver. They at Cupra recorded an operating margin of 4.6% compared to a negative 0.1% in the first nine months 2022. Also, Volkswagen Commercial Vehicle advanced its profitability to 6%, equivalent to an increase of 150 basis points, and our component business delivered an increase of the operating result by more than 450 million year-on-year and a margin of 2.7%. Finally, net cash flow. of Brand Group Core advanced significantly to €3.6 billion. The margin of Brand Group Progressive declined by 500 basis points year-over-year to 9.1%, despite a significant increase in sales volume. This development was heavily impacted by negative valuation effects from raw material price hedging outside hedge accounting in a magnitude of roughly €900 million. The underlying margin after nine months excluding these effects was at a solid level of 10.9%. Nevertheless, some 190 basis points below the strong level recorded in the prior year period. The clients mainly result of higher product cost and upfront investment in R&D. Net cash flow of Brand Group Progressive remained robust overall. and came in at 3.5 billion euro despite increased product-related investments in preparation of upcoming product launches. Bosch AG continued a successful track record and remained strong at 18.8% operating margin despite product launch costs and input cost inflation. Operating results benefited from improved pricing, better product mix, and last but not least, 13% higher volumes. Bosch is falling. its strict pricing policy. Net cash flow increased slightly year-on-year to 3.4 billion euro, driven by strong underlying business. Erit continued to roll out software to a growing group vehicle park as planned, which resulted in a significant increase in contract and license fees of plus 34% year-on-year. Sales revenue rose by 29%. driven by higher license revenues from MAB cars on the 1.1 platform. Losses on operating result level were up on the previous year due to accelerated efforts to secure timing and quality level for upcoming product launches and reported net cash flow was unchanged at minus 1.5 billion euro. However, as already explained in our Q2 call, Carrot benefited from a 1 billion intergroup income tax refund resulting from an intergroup allocation from 2022. The underlying negative net cash flow thus came in at the minus 2.5 billion euro. Our global battery business is making fast-paced progress both in terms of developing the teams and capabilities as well as in the construction of Salzgitter plant as the first of three already decided cell factories. In the period under review, costs associated for the continued ramp-up higher capex as planned lead to a negative operating result of minus 0.2 billion euro as well as a net cash flow of minus 0.7 billion euro. One further milestone in the execution of our battery strategy was the announcement by the PowerCore and Umilcore backed JV Ironway to build its first cathode active material plant in Nysa. From 2025 onwards the joint venture will supply PowerCore's European battery cell factories with key materials for production secured from Umicore's existing capacity in Niger. Trade continued this positive trend. Unit sales increased by 15% year-to-date thanks to robust customer demand as well, filled order book, and easing supply chain constraints. The strong volume expansion combined with positive price and mix effect and continued growth in vehicle services drove sales revenue up By 19%, operating margin came in at a strong 8%, with Q3 largely confirming the stronger profitability level achieved in the first half of the year. Key drivers were better fixed cost absorption resulting from higher volumes, as well as price mix compensating for increased input costs. Mainly driven by the strong improved operating performance, Drayton delivered a net cash flow of 1.7 billion euros, significantly up year on year. Financial services kept the overall contract volume stable. A slightly lower number of financing contracts was compensated for by an increase in the number of both leasing and insurance contracts. The credit loss ratio was largely unchanged versus the prior year level, despite the worsened macroeconomic environment giving a dynamic evolution of the environment. We are all closely monitoring the future development of this ratio. Operating income in the first nine months 2023 fell by about a quarter to €3 billion, corresponding to a margin of 7.5%, still on track towards achieving the full-year forecast of an operating result in the magnitude of €4 billion. The decline reflects the normalization of used car prices, as well as significant increase in interest rates and adverse exchange rate trends. Moving on to automotive investments to R&D in capex, Current R&D spending levels are reflecting the accelerating transformation of the Volkswagen Group and its brands towards electrification and digitalization. At the same time, it is our strategy to keep our ICE cars competitive as they will run in part until the end of the next decade. As a consequence, we are currently investing in both BEVs and ICE technologies in parallel, a situation that we expect to continue over the next two years. In addition, we launched our global footprint in the U.S. with the Scout project and launched an ambitious catch-up program in China. After this transition period, we expect the group to benefit from lower capital expenditure and research and development costs. Looking at spend levels in the first nine months of 2023, R&D expenses amounted to 15.6 billion euro, corresponding to an R&D ratio of 8%. CapEx came in at 8.7 billion and at a ratio to sales of 4.5%. reflecting our CapEx discipline to compensate for higher R&D costs. For the full year, we continue to expect a CapEx ratio of 6 to 6.5% and R&D ratio of 8 to 8.5%, and this results in an overall investment ratio of 40.5% then. Moving on to the performance of our China Chuan Ventures, after a weak start to the year and a stronger second quarter, group delivery figures in the third quarter were up quarter over quarter. Overall, deliveries to customers in the first nine months were 3% lower year on year at about 2.3 million vehicles. We were able to further strengthen our leading position in the I segment, advancing market share there. At the same time, our BV sales experience and accelerating trend volume increased from 22,000 units in Q1 to to 55,000 units in Q3 and a share in the Chinese deliberate advance from 3% to 7%. Thanks to a stronger third quarter performance, a proportionate operating result of our Chinese JVs amounted to 1.88 billion euro after nine months in 2023. Overall, we are approaching our target of up to 3.8 billion proportionate operating result in the full year 2023. Ladies and gentlemen, finally on the full-year outlook. Based on a strong top-line performance in the first nine months of the year, we are well on track to achieve our forecast for deliveries to customers of 9 to 9.5 million vehicles and the target of 10 to 15 percent growth in sales revenues. At the same time, we updated the outlook for the group's operating profit. We no longer assume to compensate for the negative impact of fair value measurements outside hedge accounting totaling 2.5 billion during the first nine months. As a result, we now expect the operating result to be around previous year level before special items of about 22.5 billion euro. This forecast includes the effect of the fair value measurement of the hedging instruments accumulated in the first nine months of the year. As you can see, we are expecting a decent fourth quarter with strong volumes and operating profit. And in this context, it is important to note that this forecast does not include valuation effects other than those recorded to date. On an underlying basis, before valuation effects, the operating return on sales in the full year is thus fully in line with our original margin corridor of 7.5% to 8.5%, and with that demonstrating the robustness of our business model in a challenging environment. For the sake of completeness, we confirmed our forecast for net cash flow in the automotive division at the lower end of the range of 6 to 8 billion euro, assuming that we will be able to deliver all vehicles to our customers as planned and in time. And we continue to expect net liquidity at healthy levels of between 35 and 40 billion euro. Rest assured, net cash flow generation enjoys the highest level of attention of the whole board of management. To sum it up, we continue to deliver a robust performance in a challenging environment, both in terms of top and bottom line, We continue to execute our strategic initiatives along our top 10-point program with full force and focus and delivered important proof points so far. The group is just ahead of a substantial refreshment of its product portfolio, adding to our brand's competitiveness in the market. And next proof point will be the completion of 4Way brand performance program and its launch, and with that, taking important steps towards improving the competitiveness of the Volkswagen group going forward. We rely on a very solid balance sheet and financials, and based on that, we continue to transform our company for electrification and digitalization with full focus on execution, capturing synergies within the group, and delivery on cash flow. Thank you very much so far, and let me now hand back to Rolf.