Volkswagen Ag Unsp/Adr

Ladies and gentlemen, welcome to the Volkswagen AG Investor Analyst and Media Call 9th Month 2024. I am George, the chorus co-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 N1 on your telephone. For operator assistance, please place star and zero. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Pietro Zorino. Please go ahead.

Good morning, everyone, and a warm welcome to the nine-month 2024 results of Volkswagen Group. It is, as usual, a joint call for both media as well as investors and analysts. which is moderated by Rolf Woller, our head of treasury and investor relations, and myself, Pietro Zolino. I'm heading corporate communications here at Volkswagen Group. With us today is Arno Antlitz, CFO and COO of Volkswagen Group. Let me provide a few remarks before we start. By now, you should have received all materials, including the press release. the interim financial report, and the presentation, all of which were published this morning. If you do not have them yet, you can find all the documents on our corporate website. In case of any issue, give us a call or drop us an email, and we will send them straight to you. With that, let me now hand over to Rolf for a brief run-through of the next one and a half hours.

Thank you, Peter, and a very good morning to everyone on the call, also from my side. Thank you very much for joining us today. What's on our agenda? We will have Arno presenting the nine-month financials and then the key developments during the quarter, and thereafter providing the full year outlook for 2024. We will continue then with his presentation in a Q&A session for the investor and analyst community, which will be moderated by myself. And after this session, then we will have a short break, as usual, before we continue with the media Q&A, which will be hosted by Pietro. As a reminder, as always, the safe haven language and the other cautionary statements on page two of our presentation, which will govern today's presentation. Please read it yourself, because I will not read it for you. With that, I hand over to Arno. Arno, please go ahead. Thank you, Rolf, and good morning to all of you. Before we go into the details of the presentation, allow me to briefly comment on the current situation in Brand Group Core. The nine-month results, and particularly the earnings development at Volkswagen Brand, Volkswagen Commercial Vehicles, and Technology Components over the last three quarters demonstrate the urgent need for action in a volatile environment characterized by intense competition. This is why we are facing important and painful decisions that we need to make together and to bear together. I am well aware that the cuts we are facing are tough for all of us and that many employees are worried about their future. However, it is our shared responsibility to act for the future of this company and for generations to come. We have not forgotten how to build great cars. But the costs, specifically in our German operations and factories, are far from being competitive. This is why things cannot continue as they are now. In view of the confidentiality of the ongoing talks with our tariff partners, I ask you for understanding that we do not want to comment specifically on plans, on measures, or speculations in the press. With that, let me continue. to the presentation with the highlights of the third quarter. Starting with quite a number of exciting product launches in the third quarter, the new ID.7 GTX is currently the most powerful electric car from the Volkswagen brand. We have also just marked a new range record of 794 kilometers with one single charging load with the Pro S version. The famous four-way transporter is now in its seventh generation with more space and payload, as well as improved towing capacity and economics. The new ID.UNIX-E SUV has been launched to the Chinese market. The vehicle, which is tailor-made for the demand of Chinese customers, is characterized by a particularly progressive design and a smart human-machine interface with a customizable 3D avatar. New Skoda Elrock is a brand's first all-electric model in the important compact SUV segment. The model is on sale since early October with an entry price of around €33,000. The Audi A6 e-tron is Audi's first purely electric Sportback and Avant model. Its striking design enables the best aerodynamics in the portfolio and therefore greater efficiency. Last but not least, Porsche has just launched the new 911 Carrera GTS. as the first road-legal 911 to be equipped with a particularly lightweight performance hybrid. These exciting new models will add to the product momentum we see currently in our other intake figures. I come to that topic later. We also made important progress in the formation of the planned Joint Venture with Raven. In the past month, we received all necessary regulatory approvals And even more importantly, we were able to prove the full technical feasibility of the Rivian architecture and software in a drivable demonstrator vehicle. Both were key milestones on our way to set up the joint venture and finally start working on, as a team, developing the next generation STV software-defined vehicle architecture. The joint venture fits very well into our platform strategy and the roadmap we have set for software architectures. It enables our brand to launch future electric vehicles on the PPE and SSP platform based on a highly competitive and state-of-the-art electrical architecture and vehicle software at significantly reduced costs per vehicle and this more efficient use of capital. We also hosted the world premiere of Scout last week in Nashville. For us, as the Volkswagen Group, it is more than just another model or a new brand. It's a once-in-a-lifetime opportunity to strengthen our position in North America in the long term. With Scout, we will be represented in the most important segments of the U.S. market in the future, see pickups and rugged SUVs. These two highly profitable off-road segments have been dominated by American manufacturers for decades. The segment previously consisted of combustion engine vehicles, and we had neither the brand nor the scale to be able to seriously play in this segment. Now, this segment is also gradually turning towards electric, and we have all the ingredients we need to be successful. The electric technology, local batteries from PowerCore, and last but not least, a great brand with heritage, namely Scout. We are convinced that the future is electric, but the transition to electric mobility in the U.S., is not as fast as originally assumed. And one example of how we want to shape the transition to immobility is the introduction of a range extender for Scout. Scout is a fully electric vehicle per se, but we want to offer a range extender as an option from the beginning on. With that, back to the nine-month results, starting with group deliveries. We delivered 6.5 million vehicles to customers, about 3% below the prior year level. Order intake in Western Europe remained robust due to seasonal effects. Q3 order intake at 674,000 units were some 82,000 vehicles below the number achieved in Q2 2024, but 27% up on the prior year number. And it's worth noting that September order intake accelerated again substantially compared to the summer month and compared to the previous year, driven by a good customer demand for the attractive new product lineup, which is becoming more and more available in the markets. As per end of September, the order bank in Europe stood at 870,000 units. The 3% decline in deliveries was in particular driven by lower volumes in China, where volumes were 10% lower year over year in the first nine months and 15% lower in the third quarter. The overall growing Chinese market is still characterized by significantly declining ICE volumes and a shift towards BEVs and specifically PHEVs. Deliveries in Europe were almost stable in the first nine months, but weakened in Q3, with a decline of about 7%, not least to the lower BV volumes. In the North American, South American market, the positive trend seen in the first half year continued in the third quarter. Our team in the North America delivered a very solid 7% growth, with Volkswagen brand growing even by 24% in the region, a significant first step towards a more robust global footprint and an excellent result of our team there. Group deliveries in South America grew by 15% year-over-year. Demand for battery electric vehicles in Europe and North America continued to be mooted as a result of BV deliveries were 5% lower year-on-year. BVs deliveries in Europe and the US were down by 14% and 26% respectively. This could not be compensated by double-digit growth of 27% in China. In total, we delivered 507,000 BVs to customers worldwide in the first nine months, corresponding to a share of about 8% of group deliveries. During the year, the BV share improved sequentially to a level of around 9% in Q3. BV order intake in Western Europe showed an encouraging trend recently, more than doubling compared to year-end 2023, supported by recent new model launches. Let me now give you a summary of the Q3 financials. The third quarter was expected to be the weakest quarter of the year 2024 in an overall challenging environment. Not only for seasonal reasons and corresponding lower volumes, but in particular due to the flagged restructuring expenses booked at Audi related to the potential alternative use or closure of the Brussels plant. In addition, supply shortages were a headwind at Porsche and Brand Group Corp. whereas availability of six and eight cylinders engines that Audi was normalizing in Q3. With this general remark, let's move on to the financials and the operating performance of the Volkswagen Group. Vehicle sales came in at 6.5 million units in the first nine months, down year on year at minus 4%. Excluding our joint venture operations in China, vehicle sales were down by 1% to 4.6 million vehicles year to date. The corresponding slight decline of 1% in automotive sales revenues could be overcompensated by improved sales revenue in the financial service business. And as a result, group sales revenue improved slightly year-over-year to €237.3 billion. This is up 1%. Operating result came in at €12.9 billion, corresponding to a margin of 5.4%. one percentage point below the prior year period. Profit before tax amounted to €12.5 billion in the first nine months of 2024, some 29% below prior year period. In addition to the lower operating result, this was due to a lower financial result. Profit after tax declined by 31% to €8.9 billion, and as a result, earnings per share were down by 33% to 50%. All these figures are reported and are not adjusted for any non-operating effects. Third quarter results were impacted by additional €1.2 billion restructuring charges, largely related to ongoing information and consulting process with regards to the Audi Brussels side. This brings the total impact from various non-operating items accounted for in the first nine months to 2.5 billion euro. The remaining 1.3 billion had already been booked in the first half. Net of these non-operating items underlying operating result in the first nine months to that 15.4 billion euro and a margin of 6.5%. The underlying operating result in the third quarter stand-alone amounting to 4 billion euro and a return of 5.2%. But to be very clear, a reported margin of 5.4% after nine months is by far not a satisfactory level and clearly below our ambition and potential, giving the product substance and the global scale of our group. We must and we will continue to intensify our efforts across all brand groups and business divisions to bring costs down, improve our competitiveness, and our financial performance going forward. Net cash flow in the automotive division totalled €3.3 billion in the first nine months, about €1.6 billion below prior year level. This was mainly due to the lower gross cash flow, which was driven by the lower operating result, as well as a build-up of working capital of about €2 billion and higher investments. Now, working capital higher inventories in the magnitude of €7 billion were partially offset in particular by increased provisions and higher payables. In the third quarter, the standalone net cash flow came in at a solid €3.4 billion. Which brings me to our automotive net liquidity, which recorded a corresponding improvement of €3.1 billion compared to end of June 2024. Compared to the year end, 2023, it declined by about €6 billion. This was mainly attributable to the dividend payments as well as the redemption of a hybrid bond, which has already been booked in the second quarter of the year. Overall, at €33.4 billion, net liquidity continues to stay on a solid level. Coming to the divisional performance, passenger cars recorded an operating result of 7.3 billion, about a third below the prior year period. The margin amounted to 4.7%, 1.8 percentage points below the prior year level. Commercial vehicles continued their convincing performance trend, results advanced to 3.1 billion euro and return on sales stood at a strong 9.1%. The financial services division recorded an operating result of €2.2 billion, corresponding to a decline of 27% year-over-year. Let us look at the drivers behind the operating result development in the passenger car segment. Volume price mix contributed a negative €0.7 billion. As already mentioned, vehicle sales, excluding China JVs, were 1% lower. The volume other effect on the operating result was positive despite the slightly lower vehicle sales, excluding the Chinese JVs, and this was mainly due to an improved spare part business. Mix over nine months was affected by a weaker model and brand mix with lower sales at Porsche and Audi. It was however neutral in the third quarter. After it had turned negative in the second quarter, pricing nearly stabilized in the third quarter, benefiting from last year's price increases, but offsetted by higher temporary sales promotions, specifically for battery electric vehicles. Product costs were a minor headwind year over year, and fixed costs and other costs increased considerably as a result of higher R&D costs, increased depreciation and amortization, as well as continued inflationary trends including higher wages. This bucket also includes the restructuring provisions in the magnitude of 2.2 billion euro. Our overhead costs in our automotive division continue to show a clearly disappointing trend. Both in absolute and relative terms, overhead costs increased considerably in the period under review. This was mainly driven by the carryover effects of wage increase from 2023 and the lower sales revenue. And as a result, overhead cost ratio stood at 17.4 percentage points in the first nine months of this year, 170 basis points above the prior year level. Given an intensifying competitive environment as well as the ongoing transformation of the industry towards better electric mobility, this is clearly a call for action. We increased challenges in the market environment. We have to step up our efforts to improve our competitive position and cost structures, in particular in our German operations. Moving on to automotive investments into R&D and CapEx. R&D costs increased by €1 billion in the first nine months as a result of the accelerated transformation of the Volkswagen Group's brand towards electrification and digitalization, as well as the ramp-up of our PPE and PPC platform at Audi and Porsche. CAPEX continues to be at high levels due to significant upfront investments in new models, in battery and software, as well as the execution of our regional strategies. Relative to automotive sales revenue, the investment ratio stood at 13.6% up on the prior year level due to higher investments as well as lower automotive sales revenue in the first nine months. We continue to work towards reducing investments in R&D and CapEx to $165 billion in the next planning round, 2025 to 2029. Key to achieving this is a consequent utilization of synergies across the groups and within the brand groups, of course, more efficient R&D processes and structures, gradually lower investments in ICE, the expected effect from the Plantron venture with Rivian, and adjusting our battery capacity build-up to the market needs. With that, let's move on to the performance of our brand groups, platforms, and financial services business. Brian Krupp Core recorded stable sales revenues year-over-year, supported by increased list prices and positive mix, but held back by higher fixed costs and higher technicals, specifically for battery electric vehicles. The operating result declined by about 10% to €4.5 billion, corresponding to a margin of 4.4%, 50 basis points below the prior year period. If adjusted for restructuring expenses, however, the underlying operating margins stood at 5.2%. Brand Group Progressive recorded sales revenue significantly below last year's level, mainly due to lower vehicle sales and constraints of V6 and V8 engines, in particular in the first half of the year. Operating results came in at 2.1 billion euros, corresponding to a margin at 4.5%. As mentioned before, earnings were particularly burdened by the restructuring provisions of 1.2 billion in the third quarter related to the potential alternative use or closure of our Brussels side. We expect the positive underlying earnings trend to continue in Q4 with Brand Group Progressive aiming for a double-digit margin in Q4. Brand Group Sport Luxury recorded an operating margin of 14.6% in its automotive business, corresponding to a decline of 4.3 percentage points compared to the prior year figure. This was mainly due to lower sales volume, in particular in the Chinese market, higher ramp-up costs due to a record number of new model launches, as well as headwinds from supply shortages. In Q, overall Q3 should have marked a low point and Porsche plans to re-accelerate into Q4. Let us have a more detailed look at the brand group core. Two developments stand out here. First, Goda delivered a very consistent performance throughout the year and achieved a solid 8.3% return on sales in the first nine months in a challenging environment. This once again underlines that efficient cost structures combined with strong product substance can generate highly competitive margins. All other brands and businesses of the brand group recorded a sequential erosion of the operating margin in the course of the first nine months, once again highlighting the urgent need to take decisive action to reduce cost and enhance productivity, in particular in the German operations at Volkswagen brand, Volkswagen commercial vehicles and technology components, as mentioned earlier. Carriot continued to roll out software which resulted in an increase of sales revenue of about 20% year-on-year. Operating results continued to be significantly negative at minus 2.1 billion euro. Reported net cash flow stood at a negative 1.3 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 2.4 billion closer to the operating loss. Our battery business continues to ramp up the organization and advances in the construction of production capacity in particular at the Salzgitter site leading to an operating loss and cash out of about 400 million euros year to date. Trayton continued its positive earnings trajectory and delivered another strong performance in the third quarter after already very solid results in the first half of the year. Unit sales normalized in a weaker market environment, specifically in Europe, and decreased by 2% year to date. Operating margin came in at a strong 9.1%, up 110 basis points versus the prior year period, driven by increased ARPUs and improved cost structures. In the period under review, Trayton delivered a net cash flow of $1.1 billion and was able to reduce indebtedness in its industrial business further. Volkswagen Group Mobility saw a slight increase in overall contract volume. The credit loss ratio was stable on an overall solid level. Operating results in the financial services division in the first nine months of 2024, as expected, fell by about a quarter to €2.2 billion. This reflects a continued normalization of used car prices, a more difficult business environment in markets outside Europe, and higher risk costs. Moving on to our performance of our China JVs. From a volume point of view, sales decreased by 11.5% to 1.9 million vehicles in the first nine months of 2024. We saw strong growth in sales of battery electric vehicles, which could not be compensated for significant decline in our ICE business as the market continues to shift to NEVs. The proportionate operative result of our Chinese JVs amounted to €1.2 billion after nine months in 2024, down 37% on the prior year number. Lower volumes in a highly intense competitive environment, the margin dilutive effects from higher BV sales and costs related to the realignment of our business and the VCTC ramp-up were main reasons for this development. Overall, results here to date are in line with our expectations and we expect to end the year at the proportionate operating result of around €1.6 billion. Finally, moving on to the full year outlook for 2024, which we had adjusted on the 27th of September. We expect sales revenue to around €320 billion, operating profit at around €80 billion, an automotive investment ratio between 30.5% and 40.5%, and automotive net cash flow of around 2 billion euro. Net liquidity is expected between 36 and 37 billion euro. The outlook reflects a total of minus 2.6 billion in non-recurring earnings effects. However, it does not include a potential additional burden from a conclusion of the current ongoing negotiations in Germany. That said, we continue to expect a solid fourth quarter this year, In order to deliver on that expectation, we built on a step-up of sales and earnings momentum supported by the launch of the new models. We are building on a solid order bank in Western Europe with visibility well into the first quarter of 2025. At the same time, we factor in that markets will remain highly competitive. And we continue to push ahead with the execution of our performance programs and intense cost work across all brands and divisions as the basis for a successful transformation. of the Volkswagen Group going forward. With that, I hand it back to Rolf, and thank you for listening. Thank you, Arno. And we will now proceed to the live Q&A session. Anyone who wishes to ask a question may press star followed by 1. And I can already see first questions coming in. we would start the Q&A with Jose Azumendi from JP Morgan. Jose, please unmute and go ahead.