Volkswagen Ag Unsp/Adr

Ladies and gentlemen, welcome to the Volkswagen AG Investor Analyst and Media Call Q1 2024. I am Shari, the car's call operator. I would like to remind you that all participants will be in listen-only mode and the conference is being recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing star and 1 on your telephone. For operator assistance, please press star and 0. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Pietro Zolino, head of corporate communications. Please go ahead.

Good morning, everyone, and a warm welcome to the first quarter results call of Volkswagen Group. It's a joint call for both media as well as investors and analysts, which is moderated by Rolf Voller, our head of treasury and AR, and myself, Pietro Zolino. I'm heading corporate communications. With us today is Arno Antlitz, our CFO and COO. Let me provide a few remarks before we start. You should have received the press release, the interim financial report, and all the other related materials, all of which were published this morning. If you do not have them yet, you can find them, all the documents, you can find all the documents on our group website. In case of any issue, give us a call or drop us an email, and we will send them straight to you. Before I hand over to Rolf, I would like to inform you about a change in our reporting. Volkswagen Group has decided to change the reporting frequency for deliveries from a monthly to a quarterly rhythm, starting from Q2 2024. The main reason is that comparisons of monthly figures are often distorted due to, for example, differing numbers of working days. With that, let me now hand over to Rolf, who will give you a brief run-through of the next one and a half hours.

Thank you, Pietro, and a very good morning to everyone on the call, also from my side. Thanks for joining us today at this beautiful morning here in Wolfsburg. Let us have a look at the agenda. Arno will first present the key highlights of the first quarter, and after that we will take a closer look at the underlying financials of quarter one. and thereafter to the full year outlook 2024. Following the presentation, we will first host a Q&A session for the investor and analyst community, moderated by myself. And after the session, we will have a short break before we continue with the media Q&A, which will be hosted by Pietro. As a reminder, and as always, the safe-haver language and other cautionary statements on page two of our presentation will govern today's presentation. I would like to encourage you to read the disclaimer carefully since all forward-looking statements are qualified by this language. As you know, I won't read it to you. With that, I hand over to Arno. Arno, please go ahead.

Thank you, Rolf. And a good morning to all of you from my side as well. Let's dive straight into the presentation with the highlights of the first three months Starting with an icon that is celebrating its fifth birthday, the eighth generation of the Golf was just launched and the full lineup from entry level to GTI will hit the markets this year. Tiguan is our global bestseller. 7.5 million customers have opted for the compact SUV since its debut in 2007 and it is currently in the rollout with new model variants to be added over the course of the year. Same holds true for the all-new Passat, an important model for our fleet customers. All three models, Passat, Tiguan and the Golf, will also come with a PHEV option offering up to 120 km fully electrical range. For all these models, we see an encouraging auto intake. Skoda just revealed the epic, its first entry-level BEV. The model will be delivered to customers from 2026 onwards at an attractive price point starting at around 25,000 euros. Most important, the first quarter has seen the very successful launch of the first Porsche and Audi models based on the PPE, the Premium Platform Electric, a great progress in our group's transformation towards electric mobility. Our capital market stay in China last week was another milestone in our building block strategy of the Volkswagen story. About 170 guests joined the event at the Phoenix Center in Beijing one day before the Beijing Auto Show opened its doors. Let me highlight my main takeaways of the day. Despite challenges such as fierce competition and evolving market dynamics, We pursue a clear plan to strengthen our position as a market-leading international manufacturer. Our target is to increase the proportionate operating result to around 3 billion euro by 2030, including the fully consolidated joint venture in Anhui, and to achieve a 15% market share by 2030 in China. We expect the market to grow to 28 million vehicles by then, and we penetration in our vehicle sales should reach 50% in 2030. To meet our goals, we have taken decisive action. Together with strong partners, we enhanced our technological competitiveness with a locally developed zonal electric and electronic architecture, local advanced driving assistance functions, or sophisticated infotainment solutions in our smart cockpit. The introduction LFP battery technology is expected to reduce battery costs by one-third. In total, we expect to reduce material costs by 40% with our China main platform and achieve prosperity with local BV leaders in the price-sensitive Compact A- segment by 2026. Thanks to the new local independent structure with the Volkswagen Group China Technology Company in Hefei, we will shorten time to market for new products by 30%. And over the next three years, the group's brands plan to launch 40 new models in China, half of which will be electrified. With these actions and our highly profitable combustion engine car business, we are well prepared to continue to play a leading role in China. Back to the first quarter results. Global deliveries in the first three months of 2024 increased to 2.1 million vehicles, 3% above prior year quarter. Despite the geopolitical tensions, global supply chains continue to be robust. However, our deliveries were held back by temporary supply shortages, in particular affecting all the vehicles with V6 and V8 engines. Incoming orders continue their encouraging positive trend in the past month in both BEV and combustion engine car segments. The brands of the Volkswagen Group collected in total 730,000 new orders in Western Europe in the first quarter. BEV order intake was particularly strong, more than doubling compared to the same period last year. As a result, The order book in Western Europe improved to a solid level of about 1.1 million vehicles by the end of March, including 160,000 battery electric vehicles. Growth was primarily driven by a strong increase in China, totaling 8%, as well as North America, where deliveries increased by 5% year-on-year. Our South American operations recorded even double-digit growth, with a particularly strong increase in Brazil from a relatively low basis. In our home market Europe, deliveries were slightly down year-on-year to about 907,000 vehicles, largely due to weaker PV deliveries. Demand for better electric vehicles was muted at the beginning of the year in Europe and North America. Substantial growth in China could not fully compensate for this, And as a result, BV deliveries declined slightly by 3%. BV delivers leached 136,000 units corresponding to about 7% of group deliveries. BV deliveries were down in Europe and US by 24% and 16% respectively, while BV volumes in China almost doubled. BV incoming orders, on the other hand, had doubled versus the first quarter 2023. The BV share target of 9 to 11% is confirmed. Performance in the coming quarter should be supported by the most recent and upcoming launches, such as the all-new ID.7 Tourer, the Macan Electric, and the Q6 e-tron, resulting in an increasingly competitive product offering. Let me now give you a summary of Q1 financials. All in all, There are no big surprises in the sense that Q1 was never going to be our best quarter. As planned, we are preparing for exciting product launches later in 2024 at Porsche and Audi. During this ramp-up phase, cost and consumer behavior was affected. Especially Porsche were held by well-flagged cost increases ahead of their model changeover. As previously indicated, We have had supply shortages relating to six and eight cylinder engines at Audi. However, we are now in the process of ramping up supply and the situation should improve already in Q2. And it will take a while for the efficiency program at brand Volkswagen to show its full impact, not least because of the wage increases initiated in 2023, which are unfolding their full impact now in 2024. As also previously guided, 2024 will be the peak year for R&D spend, and we can see this effect in the Q1 numbers. This has all been flagged previously and factored into our 2024 forecast, which is why we remain confident about our 2024 outlook. With that, let's move on to the financials and the operating performance of the Volkswagen Group. Vehicle sales came in at 2.1 million units in the first three months, slightly down year-on-year at minus 2%. Including our joint venture operations in China, vehicle sales were down by 5% to 1.4 million vehicles year-to-date. These vehicle sales are the driver of our automotive sales revenue. Group sales revenue was slightly lower year-on-year at 75.5 billion euro, which is down minus 1% versus last year. Strongly improved sales revenue in the financial services business could almost compensate for the decline in automotive sales revenue of minus 4%. Operating result came in at 4.6 billion euro, corresponding to a margin of 6.1%, 1.4 percentage points below the prior year period. Net cash flow in the automotive division totalled minus 3 billion in the first three months, about 5 billion below the prior year level. This is largely related to a significant build-up of working capital of in total 4.6 billion euro after we managed down our inventories at the end of last year. As indicated in our full year results called in March already, we had already anticipated a reversal of the exceptionally strong release of working capital at year end 2023, which contributed to the strong full year cash flow of €10.7 billion in 2023. In total, we recorded a cash outflow of €5.9 billion from the build up of inventories in the quarter under review. Which brings me to our automotive net liquidity, which recorded a corresponding decline of about €3 billion compared to the year end 2023. Overall, at €37.2 billion, net liquidity continues to stay at a very solid level. Coming to our divisional performance, passenger cars recorded an operating result of €2.6 billion, about a third below the prior year period. The margin amounted to 5.3%, down by 1.7 percentage points. Commercial vehicles continued their strong earnings trajectory Also in the first quarter, results advanced further to €1 billion, return on sales stood at a strong 9%, confirming that the group is well on track towards delivering on their full-year targets. The financial services division recorded an operating result of €0.9 billion, corresponding to a decline of 24% year-over-year, in line with our expectations due to the normalization of the used car business. Let's have a look at the drivers behind the operating result development in the passenger car segment. Volume price mix contributed a negative 0.5 billion euro. As already mentioned, vehicle sales, including China JVs, were 5% lower. Mix was adversely affected by weaker model mix, in particular due to the V6 and V8 engines and Audi, and negative regional mix due to the negative V6. relatively weaker performance in Europe and not least brand mix. However, model and brand mix should clearly improve in the coming months. Pricing continued to be slightly supportive benefiting from rollover effect from last year's price increases but burdened by higher temporary sales promotions for our electric vehicles. Compared to the prior year operating results, Q1 benefited from a swing of fair value effects outside hedge accounting amounting to about €900 million. Product costs were a slight headwind year-on-year, mainly due to the one-offs, but we continue to expect product costs to provide tailwind for the remainder of the year. Fixed costs and other costs increased considerably as a result of higher R&D costs, higher depreciation and amortization, and the ramp-up of new business like PowerCo, like Scout, or our fully consolidated joint venture Anhui. as well as continued general inflationary trends. Let's have a more detailed look at overhead cost development. Our group has demonstrated remarkable overhead cost discipline in recent years, which has led to a significantly improved overhead cost ratio and a much more robust cost structure. In Q1 2024, we were not able to continue this trend. Higher overhead costs driven by the carryover effect of wage increases from 2023 and lower sales revenue resulted in a strong increase of the overhead cost ratio in the first quarter. This development clearly shows the need for speeding up the implementation of our efficiency programs in the coming months. And it's our clear target to improve our position here throughout the remainder of the year. Moving on to automotive investments into R&D and CapEx. As already flagged at the full-year results conference in March, automotive investments are expected to peak this year. The currently high investment levels, particularly in R&D, are reflecting the accelerated transformation of the Volkswagen Group's brand towards electrification and digitalization. As a result, R&D expenses increased by almost €1 billion to €6 billion in the first quarter. is at elevated levels due to currently high upfront investments in battery and software, as well as execution of our regional strategies. Relative to automotive sales revenue, the investment ratio stood at 14.4% up on the prior year level due to high investment, as well as lower automotive sales revenue in the quarter. This is clearly a level that needs to be significantly reduced going forward. Even stronger focus on group synergies more efficient R&D processes, and the reduction of this year's peak of ICE investments will drive the reduction in expenditures. Moving on to the performance of our brand groups, platforms, and financial services business. Brand group core recorded Fed sales volume in Q1. Sales revenue declined slightly by 1% year-on-year. supported by continued positive price mix, but held back by higher temporary tacticals for our BVs. The operating result grew by 20% to 2.1 billion euro and a margin of 6.4%, 120 basis points above prior year quarter. Each brand contributed to this performance, expanding operating margins year over year, with significant contributions from the smaller brands. Skoda and Seat Cupra stood at about 8% and 6%, Return on sales, respectively, Volkswagen commercial vehicles achieved even a 9.6% margin. Also, Volkswagen brand recorded a step up in performance to 4%. Nevertheless, there is still some way to go to achieve the target of up to 5% this year. Reinkrupp Progressive recorded sales revenue significantly below last year's level, mainly due to the constraints of V6 and V8 engines. Operating result came in at 0.5 billion euro, corresponding to a margin of 3.4% and 740 basis points below prior year quarter. In addition, operating profit was burdened by valuation effects in the magnitude of about 0.3 billion euro, in particular resulting from all this residual value model. Adjusted for valuation effects of the underlying margin at Brent Group Progressive came in at about 6%, clearly below their full-year target range of 8-10%. Brand Group Sport Luxury achieved a 14.8% operating margin in its automotive business despite lower sales volume and higher ramp-up costs due to a record number of new model launches this year. In addition, POS recorded an increase in development costs and depreciation on capitalized development costs as already flagged in the full-year results call. Coming to Carriot, operating results continued to be negative and came in at 552 million loss, slightly up from prior year number, but down versus the fourth quarter 2023. Reported net cash flows stood at a positive 0.5 billion euro, as Carriot benefited, like last year, from a 1.1 billion intra-group income tax refund, the underlying cash out total to minus 0.6 billion euro. Our battery business continues to make fast progress in the ramp-up of the organization as well as the construction of Salzgitter plant, which is developing according to plan. Despite the continuous build-up of the organization and higher capex, the operating loss at 79 million was kept largely unchanged compared to Q1 2023. Needless to say that we review the global BV sales expectations continuously and are prepared to adjust the capacity and capex planning in power core units accordingly, if necessary. Trayton continued this positive top line and earnings trajectory and delivered another strong performance in the first quarter. Unit sales normalized and decreased by 4% year-to-date. The lower volume was compensated by favorable product mix, better average revenue per unit, and a continued higher demand for vehicle services, driving sales revenue up by 5%. Operating margin came in at a strong 9.0% and with that confirming the stronger profitability levels achieved in 2023. The increase in profitability was driven by sales revenue growth and improved cost structure. In the period under review, Triton delivered a net cash flow of 0.4 billion and was able to reduce net indebtedness in its industrial business further. Volkswagen Group Mobility kept the overall contract volume stable. A slightly lower number of financing contracts was compensated by an increase in the number of both leasing and insurance contracts. The credit loss ratio continued to be stable. Operating results in the financial services division in the first three months, 2024, fell by about a quarter to 881 million, or a 6% margin. Operating profits were sequentially up compared to Q3 and Q4 2023. This expected decline reflects a continued normalization of used car prices and provisioning for residual value risk, as well as a significantly increased interest rate. And as you know, we take a conservative stance when it comes to residual value risks. Moving on to our performance in our China joint ventures. From a volume point of view, we saw a strong start to the year with deliveries increasing almost 8% to 694,000 vehicles. This was also driven by growth in BV sales, which nearly doubled year on year. As a result, the BV share in the deliveries in China advanced from 3% in Q1 2023 to now 6% in the quarter under review. The proportionate operating results of our China JVs amounted to €0.4 billion after three months in 2024, down 31% on the prior year number and in line with our expectations of €1.5 to €2 billion proportionate operating result this year. The decrease is reflecting the margin dilutive effects of the ramp-up of our BEV business in a very competitive market environment. Finally, on to the full year. We confirm our outlook for 2024. We continue to expect sales revenue to advance by up to 5%, the operating margin in the bandwidth of 7% and 7.5% and automotive net cash flow in the range of 4.5 to 6.5 billion euro. Already anticipated back in March, the Volkswagen Group recorded a mooted start to the year with a slight decrease in sales revenue and operating margin of 6.1% below the full year corridor and recorded negative net cash flow. We expect an improvement underlying operating and financial performance already in the second quarter and stronger earnings trajectory during the remainder of 2024. In order to deliver on our full year outlook, we factor in a significant step up of sales and earnings momentum at both Porsche and Audi based on the ramp up of new models. A much stronger product mix at Audi due to a better availability of six- and eight-cylinder models, a decisive implementation of the performance programs at Brand Group Core to achieve a margin well in the range of the guidance corridor of 6% to 7%, and a rigid cost work and overall disciplined investment spending across the entire Volkswagen Group. What gives us additional confidence for the quarters to come is that we can count on a solid order book and improving auto intake, the gradual materialization of effects from numerous strong product launches, and a very solid truck business. To further support our efforts to reduce personnel costs in the administrative function of Volkswagen AG, the Board of Management in April resolved the offering of selective severance payments. It is important to know for the severance pay program that we as employer must also accept the severance pay request. This ensures that we do not lose key employees. We expect this to result in expenses of total 900 million Euro and will accordingly book a provision in the second quarter. We aim to compensate for those effects in the full year. Ladies and gentlemen, In the coming months, we will focus on the ramp up of our great new products and the decisive execution of the performance programs across the Volkswagen Group. We continue to have a very solid balance sheet and financials. We continue to transform our company towards electrification and digitalization. Our great product substance and flexibility between BEVs and combustion engine vehicles will help to master the current challenges. That's it. We remain fully focused on stringent execution, capturing synergies within the group, and delivery on net cash flow. Thank you very much so far, and let me now hand back to Rolf.

Thank you, Arno, for that comprehensive and detailed presentation on the Q1 financials. We will now proceed with the question and answer session, and anyone who wants to raise a question, please press star followed by one. And we start right away with the first question, which comes from Jose Azumendi from JPMorgan. Jose, please go ahead.

Thank you, Wolf. Thank you very much. Just a couple of questions, please. Arnold, can you please comment a little bit more on the dynamics of the result in China, a little bit what you saw in the first quarter in terms of volume, in terms of maybe pricing and any elements around incremental fixed costs? And second, can you comment on residual values? How is this impacting some of the brands across the fossil iron group? Is this a wine time that you expect to see in the first quarter or do you expect any recurring items in the coming quarters? Thank you.

Thanks very much for your questions. I think you have also participated in our from our perspective for a successful capital market stay in China, where we laid out a lot of details already. First and foremost, I must say the proportion of the result we achieved in the first quarter is fully in line with our expectations for the full year of 1.2 billion euro. If you look at the market dynamics, we clearly have to decide between ICE and PV business. As always flagged and as flagged already, we have a very strong ICE business with very solid margins and cash flow delivery. And on the BV side, you see, I would say, let's call it very challenging pricing environment. And we always said also that we will make sound compromises between prices, pricing, and volume in order to have a balanced approach in line with our value over volume approach. And having said that, we will in the, I would say, quarters going forward benefit continuously from our ice business, which has, I think, we jumped over 20% market share in China. And in our BV business, we will make, as said, compromises between ramping up the volume, staying in the market, at the same time improving the cost position of our BVs. in China. And with the cost measures and the competitive measures kicking in our platform, for example, then bringing the LFP battery, bringing more advanced driving system functions, improving in-car entertainment, we will then continuously to participate in the growing PV segment. And we already gave you the indications also for 2027, more than 2 billion proportion of the result in China. Residual value. Yeah, residual values, I would say overall, residual values are still stable, also slightly differentiated between BEVs and ICE. If you remember, they were very high in the last two to three years after COVID. So we always said we see a normalization. That means residual values came down slightly. But over time, but it's more like a normalization with a little bit more pressure on the BV side. But we must also take into account that due to the subsidy schemes in the markets, the proportionate residual value is also influenced. And if you take out that effect, then we see, I would say, yeah, a normalization of the residual value situation. They are still strong. But, yeah, slightly under pressure in the PV side.

Thank you, Arno.

Thank you.

Thanks, Jose. And we move over to the next question, which comes from Tim Rocosa, Deutsche Bank. Tim.

Thank you very much, gentlemen. It's Tim from Deutsche Bank. I have two questions, please. The first one is an evergreen. I know you and I discussed about it many times. There's no doubt less complexity would do very well for you guys. Trayton had a very good Q1. They shut out the CMD now. The free flow is an issue for investors. When do we finally see you guys making use of the higher stock price? When is something happening on that side? And then secondly, I thought that your comments on the auto intake were actually quite encouraging. Now, I've heard over the 16 years that I look at autos, all OEMs always saying that car launches were a great success and that the auto intake really does surprise them to the upside. Can you put a bit more flesh to the bone here? We're hearing very good comments about the auto intake for BEVs. Is that developing year-to-date or did it just happen in March? And for the new models, does the order intake that you record currently suggest double-digit growth or is there any other quantification that you can give us? Thank you.

Yeah, Tim, first and foremost to the first question, Trayton. Let me start a little bit from a more global perspective. First and foremost, we are very pleased with Trayton operating performance over the past 18 months. and pursuing their strategy. MAN has achieved a turnaround and presented impressive figures for 2023. Scania has regained its former strength, operating a double-digit margin. Volkswagen truck and bus continues to deliver solid results. Navistar is now fully integrated, so traditionally they are well on track. There's still a lot of self-help potential, and they are looking confidently into the remainder of 2024. And you're right, we've been frequently told by analysts and investors that the liquidity and free float in the shares are holding them back to unfold their full potential in the stock. And we've always said we are open for a next step at the right time. And this view has not changed. This is what I can say at the moment. And in terms of auto intake, look, it is specifically encouraging for us that the order intake was really up in the BVs. It was specifically up in February and March. We had still a rather weak January, but February and March was strong. And it more than doubled to the prior year period. And we still have some more chances if you take into account that EMA can't, Q6 e-tron. A very important car is the Tourer, the ID.7 Tourer. For the time being, we have only the limousine in the market. So they will specifically continue to drive auto intake even further. And with this auto intake, we are confident to achieve our 6% to 8% It's 8% to 10% market proportion operative share of BEVs this year. And even more important, that will give us momentum with, for example, in E6 to the 2025 BEV share target. So let me precisely, the target for this is 9% to 11% BEV share. And we are well on track on that target.

Thank you. Thank you, Tim. Thank you, Arno. The next question comes from Michael Punset from the Z-Bank. Michael, please.

Good morning. I have two questions. The first one is on the The negative effect of 400 million relates to hedge accounting because, as you mentioned also, that this effect was related to the residual value provisions at Audi. Maybe you can explain a bit more in detail what is the key driver for that and what should we expect for the full year. And the second question is with regard to your guidance for the industrial cash flow. In the presentation you mentioned 4.5 to 6.5 million. And in the footnote, you mentioned possible investments of up to 4 billion in battery. But if I remember correctly, in the full year conference, you mentioned the figure of 6 billion. So what is the right figure to take into account for the forecast for the full year industrialification?

Yeah. I start with the second question. So the target for the for the net cash flow or the outlook for the cash flow is 4.5 to 6.5 billion and that hasn't changed. But what we have into, what we factored in, in the 4.5 to 6.5 billion is we foresee in terms of cash flow about 6 billion for the ramp up of our battery business. And then this is what we indicated in last year's conference call. And 4 billion out of that is R&D in CapEx and about 2 billion in additional M&A. These were like the differentiation between the 4 billion and the 6 billion. M&A specifically for getting more control over the value chain, as we always said, It doesn't make sense to just invest in battery capacity in terms of factories. We have a threefold approach. It's development of a unified cell. It's ramping up our own battery capacity in Europe with two factories and in the U.S., in Ontario and Canada. And the third pillar is having more control over the value chain for raw materials, specifically cobalt, nickel, and lithium. And this leads to the difference of the $4 and $6 billion. Again, $4 billion in total, I would say, reserved for cash out for battery this year. And $6 billion and $4 of that is capex. Yeah, the orderly residual value model, I'm sure my colleague, Mr. Wittesberger, will go into more detail on Friday. I think they have to call on Friday. It's kind of a model for the financed vehicle in the German market, and it's basically accounted as valuation effect on that hedge accounting. It's a derivative, and since it's a derivative, we book it like a derivative. And there was a burden of about $300 million for the change in residual values this year, and this is why we booked that. If you add that back to the performance of the Audi, which is 3.4% EBIT margin Q1, you end up at 6%, closer to the performance of 8% to 10%, what you could expect from them. And the difference between the 6% and the 8% to 10%, which they indicated, is basically the impact of constraints of the 6- to 8-cylinder models, which hold them back both in terms of volume and in terms of margins.

Okay, thank you.

Thank you, Michael. Important to note here, when you look at the year-end presentation from March, there is no change in guidance for the net cash flow. The footnote still stays the same, 4 billion, but I think the clarification from Arno was precise and very good. So next question comes from Horst Schneider from Bank of America. Horst.

Yeah, good morning. Thanks for taking my questions. The first one that I have relates more to the outlook basically until the rest of the year. So if I get it right, basically you say that Q2 is going to be back in the 7% to 7.5% range, and then you need to achieve a higher margin in H2. I just want to understand what makes you confident really that H2 then is better than H1, given that the price pressure in the market is probably rather increasing. So in other words, what is the level of visibility that you have for H2O, given that your order book probably just reaches until September now? And then I'll ask the next question thereafter.

Okay, Horst, thanks. First and foremost, let me start with that we fully confirm our outlook for 2024 in total. To be a little bit more precise, For Q2, before the booking of the restructuring of the severance package, we expect to be clearly in line with our margin guidance for the full year also in Q2. And now on top we book that $900 million in Q2, which might lead to a burden in that respect. But we promise to catch up. on the remainder of the year. So what makes us confident? If you go through the EBIT bridge, there's basically, in a lot of elements, there's confidence. First and foremost, Audi was really held back by a supply constraint of V6 and V8 engines, both in terms of volume, but much more important in terms of margins, specifically at the eight-cylinder model. So that will improve already in Q2, with a significant improvement then in Q3, Q4 going onwards that will both improve by volume, but also by mix. Then from the material cost topic, we had a slight burden in Q1 due to a one-off effect at product cost, but we're still about at least a billion positive in that bucket. And then we have the product momentum. both at Porsche and Audi going forward, specifically Porsche, with a huge number of model launches in very important model lines, which will drive their profitability. And last but not least, from, I would say, a fixed cost burden versus efficiency measures effect. We saw the wage increase in mid of 2023, And the full year effect we have now in 2024, specifically first quarter, where we compare with the first quarter of 2023 where the wages were not increased. And so on the other hand, the efficiency measures, specifically at Brand Group Core and Volkswagen Brand, of the efficiency program, they will kick in throughout the remainder of the year. So the net effect of the burden of increases last year and efficiency measures will also give us confidence for the remainder of the year. So these are some of the ingredients, Horst, hopefully you can factor them in in the bridge, which gives us confidence specifically for the second half of the year.

But again to my question regarding the visibility on the order book, so am I right in assuming that the order book currently reaches kind of till September, and what we're also going to see in H2 is a significant increase in the BEV share, but that is all within your planning. That does not make you any worried about the H2 outlook at the moment.

No, this is in our planning, and we even expect an increase in incoming orders. Look, key models were not available to order in the first quarter. Passat, a very important model for Brent Volkswagen. Tiguan. Not all the engine models at Tiguan were open to order and others at other brands. So we expect the order intake to even increase throughout the year due to availability of the models. And yes, the BEV share will increase throughout the year. Yes, they are margin dilutive, but that's all factored in in our outlook.

Okay, that's great. The last one that I have is just more a housekeeping item in the trade of power core versus carrier. Is it fair to assume that from now on, basically, the carrier losses will get smaller in terms of quarterly run rate and the power core losses will increase since you ramp up the capacity for 2025?

Yeah, the power core losses will increase with the ramp up. This is clear until 2025. And the Carriot, we don't want to, for obvious reasons, give you a quarterly outlook for the Carriot business. But what will happen at Carriot business, I mean, you have the spending on the one hand. On the other hand, as you know, the sales revenues of Carriot and the top line of Carriot depends on the number of models that are sold. Basically, Carriot is paid by a licensed model, car by car by the brands. So with the ramp-up of the MAB, for example, ID.7 Turo, with the ramp-up of E-Macan Q6 e-tron, then the first 1.2-based cars, so significant ramp-up of sales is expected at Carat, and that should improve the situation further.

Okay, great. Thank you.

Thank you, Horst. And we are moving on to the next question, which comes from Henning Kosman from Barclays. Henning.

Thanks for taking the question. I just had a very small clarification on how you're going to be reporting the provision in the second quarter. in the line item that corresponds to your full year guidance, you will fully include it, right? It will not be somehow adjusted out as a one-off. So just to clarify, Arne, what you said, the Q2 margin as you show it could again be outside the bottom end of the full year range. And then you're saying, you have enough tools at your disposal in the second half to offset that, which effectively means that's on top of what you would previously have expected in the second half when you weren't yet anticipating the 900 million provision.

Yeah, that's exactly right. When we say we aim to compensate for that additional effect is that we really try to, we aim for compensating that. That means we won't deduct it or won't adjust for that. we confirm our guidance, including the 900. But as also said, it might be not, we might be not able to fully compensate it in the first quarter alone. So the second quarter, sorry, in the second quarter alone, we will book in now in the second quarter. So we might not be able to fully compensate in the second quarter, but we aim for compensating it through the remainder of the year.

Okay, that's clear. Thank you.

Thank you, Henning. And we are moving on to the next question, which comes from Daniel Schwartz from Stiefel.

Yes, thank you. I had one question regarding the management compensation. The new free cash flow component that you introduced this year, could you say what the target corridor is in 24, so the minimum-maximum target? And are the targets adjusted for MOTA, for example, what you're spending on the battery side? Or if you would decide to sell Traton or Porsche shares, would that be adjusted for? And the second question, also clarification, the 900 million provision, will that lead to a cash outflow in 2024, or is it stretched over a longer time period?

Daniel, it's an absolute cash flow figure, and of course it has been twist, but I don't think that we disclose the actual mechanism behind it. And it's basically all in. So it's based on the 4.5 to 6.5 guidance, including the cash out of investments, for example, in battery, but also including now the additional cash out for the severance payments. And it's basically up to the supervisory board to decide on that.

And maybe to add that, because you explicitly asked for it, a potential sale in trading shares would obviously not be net cash flow, because this would be accounted as cash flow from financing.

No, you're right. At the $900 million, it will be booked in the second quarter, and the cash out is obviously then And once each personnel accepts it, we expect then the cash out, I would say Q3, mainly Q3. And so this is how you could model it in the Q flash. I would say the majority can be expected in Q3.

Thank you, Daniel. And we are moving on to the next question, which comes from George Gallias from Goldman's.

Good morning, and thank you for taking my question. Obviously, the research and development expenditure was very high in Q1. I was wondering if you could give us some insight into how you see the absolute expenditure on R&D trending in Q2 and the second half relative to the €6 billion. in Q1. Second question I had was just with respect to the overall net liquidity. Obviously, it sits below 39 to 41 billion that you're targeting for the full year in Q1. But maybe revisiting a broader question, when we think about what is the targeted level of automotive net liquidity in the long term, can you remind us what you are looking for. Obviously, some of your peers are at close to 20% of top line. Is that an appropriate level for Volkswagen, or do you not need that much? Thank you.

Yeah, thanks for this question. In terms of R&D, I mean, we gave a guidance in terms of We have the top line of sales revenue and the guidance of R&D and CapEx. And this would be like proportionally in the first, second, and third quarter, ideally. And then in the fourth quarter, we have a higher outflow in the CapEx because this is typically where the big investment projects are – basically are cleared and the outlook for investment ratio combined is confirmed between 13.5 and 14.5 for the full year 2024. This is what we can say, but clearly with the majority of that will be R&D and the smaller proportion of that will be CapEx. We are aware of the number, both in terms of overall number, both in terms of Yeah, I would say benchmark to our peers. We know where volume competitors stand. We know where premium competitors stand, also in different regions of the world. We clearly indicated where the benchmark is for us. We always said it's like eight for volume, ten for premium, so we long-term shoot for nine. And this we indicated on the Capital Markets Day last year in summer. So we target for 11% in 2027 and eventually 9% in 2030. And the levels are also clear. We have to work on more synergies to run out of the combustion engine. Upfront investments will help us. And this is the way we want to go forward there. In terms of net liquidity, target is what we indicate is more than 10% of group sales. But we also see that some of the competitors who have much more net liquidity compared to sales, they have also a stronger rating. So there's also a tradeoff between holding more cash and the rating, which in turn leads to a better refinancing cost, less cash out for interest, which then leads to better cash flow. So this is what we're looking at. also depending on the cycle of the business. But for the time being, our target is clearly indicated with more than 10% of sales.

Thank you.

Thank you, George. So I can see no further questions here on my list. And thank you for the vivid Q&A, the very good questions we had. If anything is left unanswered, please contact the team in Wolfsburg. The next time to meet with us is at one of our numerous conferences we will attend. Our annual shareholder meeting will take place virtually and is scheduled for May 29th. Half-year results are to be presented on the 1st of August. and the respective pre-close call will be hosted on July 10th after the market close. So we will now continue with a short break, about five to ten minutes, before we then start with a Q&A session for the journalists. Thank you again for your numerous participation. Take care, all the best, and speak soon. Thank you. Thank you. Thank you. Thank you. Thank you.

Hello and welcome back to our Q&A session now for media. And on my list, I see Frank Johansen from DPA. Frank, do you want to kick it off? Frank, we can't hear you. I don't know if it's on our end or it's I want to remind everyone who wants to ask a question, please press star one. And Frank, we still can't hear you. Okay, I would suggest we circle back and try to figure this out. Christian from FAZ, do you want to kick in, please? Unfortunately, it doesn't work either. So let's give us a couple of minutes to try to find out what's happening here. Because with the analysts and investors, it worked. So give us five minutes, please.

Operator?

Hello, can you hear me? Yes.

The line is open.

The line is open, okay. So, it should work right now.

Okay, Christian, you want to try again? Thanks.

Yes, thank you for taking my question. Can you hear me now?

Perfect, loud and clear.

Okay, perfect. So, just a question on the engine topic. Can you give some more details why you had some trouble with the DE6 and V8 engines at Audi? And another question on the surveillance program. You will make a rückstellung, sorry, I don't have the English word, of 900 million in the second quarter. Is that right?

Yeah, I'll start with the easy one. The provision will be 900 million in the second quarter. That's right. But as I explained, the provision will be in the second quarter and the cash out then will be then eventually second and third quarter. On the V6 and V8 engine, there's a certain specific part that we don't have enough capacity. Audi is in the process of adding capacity, adding a second supplier. What I would like to ask you, Friday is a call at Audi, Jürgen Bittersberger, and he will really do a really in-depth explanation of that effect, also how it's resolved and how it affects then basically a more positive mix effect and volume effect going forward. And I would rather refer you to Jürgen's call on Friday because it's a very specific call. But as I said before, we expect an improvement in the second quarter already and then specifically also in Q3, Q4.

Okay, thank you. Can I add one more question? Yeah, go ahead. Looking on the European best business, it doesn't look very good at the moment. What's your perspective looking ahead on the European best market? Do you see upside or will there be a permanent problem in that segment for the next month and maybe years to come?

That's a very good question. Let me start from 2030 backwards. Our plans and our forecasts haven't really changed due to the ramp-up of PVs. And eventually the future will be electric. This is our conviction for various reasons, CO2 emissions and others. And so we still plan until 2030 to have 50% PV share. But the way from, let's call it today until 2030, will be not linear. It's really, there will be different speeds of development in different regions. China will develop very fast. US and Europe will develop also, but not as fast as we have originally planned and expected. That's part of the truth. On the other hand, you have to also take into account that we don't have electric cars in all models. Look, we add great models this year, E-Macan, Q6 e-tron, eventually E6. This will open a whole BV model range in the premium segment. Then 2026, I must say only by 2026, we bring in the ID.2 and the ID.2 family, 25,000 euros car, basically in the segment of T-Rock and T-Cross. So it also takes a little bit of time until all the segments will electrify, first and foremost. Second, charging infrastructure will evolve. Then we work on also implementing LFP battery technology in the ID2, which will bring down the cost and eventually also the prices. So it will take a while until the BEV penetration will increase. It will increase quarter by quarter year over year, but not as fast as we have expected. And secondly, what I also must say in terms of specifically our situation is Look, we are in a situation that we spend a considerable amount of energy, time, and resources to keep our, let's call it, last generation of combustion engine cars competitive. We bring great combustion engine and plug-in hybrids, Passat, Tiguan, T-Roc, also new cars at Audi. in in between we we are rather flexible and that this flex we have great bvs we ramp up our bvs and don't get me wrong we are fully committed to ramp up our bvs but we also flexible and have great combustion engine and pv um and and phv so and this flexibility is also a strength of the volkswagen group thank you thank you thank you anu frank from dpa you we want to try again

yes can you hear me now yes perfect ah perfect thank you so just uh a couple now only three questions the first question just to make it clear that i understand you right and mr humbert you told that you had another order intake of 730 000 in western europe in quarter one and that's if i could correctly 60 000 less than your deliveries in the same time so uh your order book uh shrink by 60,000, if I like correctly. Second question, you said 2 billion euros, also 6 billion investments in Powerco will go into M&A. Can you tell any more details? What's planned? Is it all for this year? Are there already plans that you can state what to buy other companies, which... may stay state now and third one picking up the last question to the best share next year in europe the fleet target for co2 emissions will will increase or they will decrease the plan was to reach the target by a higher share of best so Have you already a plan B now, what to do if this will not work due to the low best sales in this year, lower than you expected before? Will you increase prices for the ICEs or what will you do to solve the problem? Thank you.

Okay, very comprehensive questions. I try to come up with solid answers to all of them. Look, our order book is standard 1.1 million cars, which is basically on prior year level, but it's on last quarter's level, but it's very healthy. And specifically, since we increased the order intake of BEVs by more than 100%. So why are more confident going forward. Our order intake was 730,000 cars, although a lot of very exciting cars and very popular cars you couldn't order at the beginning of the year because of the model changeover. Look, the new Passat, new Tiguan, they had a model changeover and we were not able to open basically the model book or the configurator for all of the variants. And despite of this situation, we increased, we achieved the 730,000 order intake. So this is why we are confident that both the order intake for combustion engine cars and BVs will further increase. At the BVs, as I said before, E-Macan, Q6, E-Tron and the Tourer will hit the basically order book and the showrooms, which will drive then also the incoming orders further. And 1.1 million cars is rather healthy order book, it's still above pre-COVID levels. This is important to note. To the power core, I think there's a lot of, I would like to clarify that again. In what we said, in our cash flow guidance for this year of 4.5 to 6.5 billion euro, we foresee, let's call it foresee, about 6 billion cash outflow for the ramp-up of our battery business. We explain that specifically because it is ramping up a business where we don't have business today, so no turnover, no sales. It's really on top so that you can also reflect a little bit what our real cash performance is. It's a cash flow of 4.5 to 6.5 billion plus an additional 6 billion we foresee for PowerCore. That $6 billion is in total for PowerCore, and if we divide that roughly, it's about $4 billion for the ramp-up of our business in terms of capex throughout the world. We are ramping up in now three plants in Europe. In two plants in Europe, we have the ramp-up of Saltskitter plant. In parallel, we ramp up in Valencia plant, and in parallel, we ramp up Ontario-Canada plant. And we foresee about additional $2 billion for strengthening our value chain in terms of having more control over the value chain, lithium, nickel, cobalt. And here I must ask for understanding it's too early and we can't really tell you specific transactions here. But rest assured, we will move on to that topic as well because it will always only make sense if you ramp up a capacity of of battery that you have also secured your raw materials. We don't want to run into the situation that we have a battery capacity on hand and have not competitive supply of raw materials, specifically lithium. In order to have a safe and secure and also cost competitive supply, you need both. You need capacity, but also you need to have the raw materials secured. This is the story behind And in terms of, I think the first, the third, for 2020 going forward, 2025 onwards, yeah. We expect to be 100% compliant 2024. The compliance 2025 will be more challenging due to the new targets. From today's perspective, We strive also for being compliant in 2025. What gives us confidence here is the new cars that hit the road. I talked about the Tourer. I talked about E-Macan, Q6, E-Dron. Also E6 is then hitting the road. But on the other hand, we see a very challenging pricing environment in the BVs, specifically in Europe. And we also embarked on a strategy that we say value over volume. We want to find sound compromises between pricing, basically margins, and volume. And this we have to also take into account. So it's too early to give you specific guidance for 2025 because we don't know how the market conditions will be by 2025. We work on the cost side, but what I can say from today's perspective, we basically work on achieving the target for 2025, and we strive for achieving the targets also for 2025.

Okay, I can see on my list, next would be Christina Ammann from Thomson Reuters.

Oh, I hope you can hear me.

Yes, perfect, wonderful.

Oh, fantastic. Well, the first question, I guess, Mr. Anders, you've just answered, was the outlook on 2025. That's two issues on the one, the CO2 regulations, and the other question was on the overall market. You're expecting a better market in the second half. Will that last into 25 or not? The other question was on the best orders. You said they were more than doubling Q1. Where do you think you end up at the end of the year? How is that going to keep on and can you say also something on audi and porsche who are both having issues this quarter um is that approach on the or is the luxury market or the high-end market still intact and um what does that mean for your value of a volume approach thank you yeah thank you christina for two questions um for the bv orders

We have a very good order intake right now. We expect the level of order intake per month to basically more or less stay on that level until summer. And then summer, the new models kicks in. As I said, Q6E26, the tourer is also fully available. And with the new models, we expect then also even stronger order increase from there going forward. The question on Audi and Porsche is really the situation that led to the margin of Audi and Porsche in the first quarter are really explainable by technical factors. First and foremost, I refer to the availability of six and eight cylinder models that At Audi, this is a specific part that we have not enough supply. Audi worked on it, and we are confident as soon as the supply is ramping up, starting with the second quarter, but specifically done in the second half of the year, availability will increase, and then Audi will come back to all strengths. And Porsche also well-flagged already in the year-end result call. they have a huge number of model changeovers in 2024, which gives us more strength, even more strength in 2025. If I remember right, Oliver Blumen talked about the transition year 2024. And it's not unusual that if you have model changeovers, that both in terms of costs that are incurred due to the ramp-up costs, preparing of the new production, and also in customer behavior, The period where you ramp up the new models, they are slightly under pressure, but then you could expect after the new models are all in place, it could be even a more positive momentum then. This is why we are, both for Porsche and Audi, we are still very confident about their future trajectory and success.

Okay. So from what I can see, I have one more caller. It's Lazar Bakovic from Handelsblatt. Lazar, you want to kick in, please?

Yeah, thank you. I hope you can hear me.

Very good.

OK, thank you. Yeah, thank you, Arno, for taking the questions. One quick on the V8 and V6 motors. There was a similar problem at Mercedes in the first quarter, which had problems with turbochargers. It was due to a supplier called Hasenklever that also is supplying other premium OEMs. The question would be, is Hasenklever the reason for this specific situation that Audi is currently in? I think they filed bankruptcy last autumn. Yeah, it would be interesting to know if it's this specific company. And the other question would be on the free cash flow, which was negative. So maybe you can give me a bit more details, which were the biggest tickets that really put the cash flow down and what makes you confident that you are in line with your goals for your cash flow this year?

Thanks for the questions. Although I said I would like really to leave the technical details to my colleague, it's not the same case you just mentioned. It's a different situation.

Okay, thank you.

And it's not the housing labor. And in terms of free cash flow, let me explain it a little bit more in detail. Look, we are kind of a victim of our own success. Last year, We had supply constraints in the delivery of our finished goods throughout the year. If you remember, we were missing trucks, trains, people at the ports. And so we really set up a comprehensive team on that. And this team was very successful. It was so successful that we de-bottlenecked the whole situation. And Q4, we achieved a very good cash flow. But that was due to that basically most of the inventory was sold to the customer, and our inventory pipeline was rather empty, but which also led in terms to a free cash flow of, I think, $10.8 billion last year, so very successful. And now we started this year with our pipelines basically, sorry to say, of course not empty, but with a much lower inventory. And now we have two effects. First and foremost, we are increasing the inventory throughout the whole world. Look, we produce cars, we have to get the parts for it, and then we ship them to US, to Japan, even Australia. So there's a lot of pipeline. And second, since we prepare for a huge model launch at Audi and at Porsche, it's also not unusual that in Before this new model launch, you have more. You build these cars already. They sit already on the yards and on the books, and you deliver them to the customer. So these two factors were planned and anticipated. But in total, that led to a buildup of finish of inventory of about €6 billion. So basically €6 billion more inventory, two-thirds of that are finished goods and one-third of that unfinished goods. And so... If you reflect now our negative free cash flow of 3 billion, so minus 3 billion, minus 6 billion of that is due to the inventory. And so part of it that will somehow be resolved throughout the year because at the end of the year 2024, we again will ramp down the pipelines, use all the parts we have. So this is why we are confident that we achieve our free cash flow target in 2024.

Okay, so if I'm not mistaken, I think we diligently worked through the question queue. It leaves me only to thank you for your participation in this joint call for both media as well as investors and analysts. I want to thank you, Arno, for hosting this call and Rolf. I'm looking forward, we are looking forward to get in touch with you again, maybe during or around the annual shareholder meeting. We wish you a wonderful week and stay safe. Thank you.