Volkswagen AG (VOW3) Earnings Call Transcript & Summary

Good day, and -- ladies and gentlemen, welcome to the Volkswagen AG live audio webcast and conference call on the first quarter financial results 2020. For your information, today's conference is being recorded. At this time, I would like to turn the conference over to Mrs. Helen Beckermann, Head of Group Investor Relations for Volkswagen AG. Please go ahead, madam.

Hello, everybody. Welcome to the call. Firstly, our apologies for the slight delay. We had some technical difficulties, maybe due to corona, like we're having every day, really. Yes, we'd like to say a warm welcome to you all, and welcome our investors and analysts. We're going to speak today about the results from January to March 2020 based on the interim report we published early this morning, and to follow-up on the ad hoc release, which we published on the 16th of April. For today's conference call, I'm delighted to be joined by Frank Witter, member of the Board of Management, Volkswagen AG, who is responsible for Finance and IT; and also our Director of Group Sales, Dr. Christian Dahlheim. Most of you will have followed the webcast from this morning's press conference. Our focus now is to cover your specific needs as investors and analysts. Following the presentations, we look forward, as usual, to taking your questions. So let me now hand over to Frank.

Thank you, Helen, and a warm welcome to all participants on this call. First and foremost, we sincerely hope that you, your colleagues and your families are remaining healthy during these ongoing unprecedented times. We've already given a heads up on the preliminary Q1 figures in our recent talk statement, and the picture hasn't changed with concrete numbers. As you are well aware, the automobile retail network largely came to a standstill during Q1. The resulting decline in customer demand caused our deliveries to customers, especially in China and Europe to be down by 600,000 units year-on-year. The knock-on effect caused revenue to decline by over 8% year-on-year to around EUR 55 billion. The operating result came in at EUR 0.9 billion, which corresponds to an operating margin of 1.6%, very low numbers, which we haven't seen in quite some time. The turbulent raw material and financial markets led to significant fair value impacts from commodity derivatives and negative currency effects which burdened the first quarter in 2020 result by EUR 1.8 billion versus Q1 2019. For the 3 months period, profit before tax came in at EUR 0.7 billion. Automotive net cash flow after diesel outflows and M&A came in at a negative EUR 2.5 billion reflecting the weaker underlying operating result and negative effects in working capital. Automotive net liquidity amounted to EUR 17.8 billion, still at a robust level. I will take you through more details shortly. Let's take now first a closer look at the sales side. So I'll hand you over to Christian.

Ladies and gentlemen, I would also like to extend a warm welcome to you -- to you all and present you the sales results of quarter 1. Despite a difficult market environment, we were starting well into 2020 until the corona outbreak suddenly stopped this development, first in China, and since March, also in almost every other region of the world. As a result, the Volkswagen Group delivered a total of 2.0 million vehicles to customers worldwide in the first quarter of 2020, a minus of 23% compared to the prior year. The Volkswagen brand delivered nearly 1.1 million cars worldwide, a drop of 25% compared to last year. Chinese deliveries, however, were down by 35%, accounting for around 2/3 of our brand's volume loss. ŠKODA delivered nearly 233,000 vehicles to customers, minus 24% down versus last year. This decrease was mainly driven by the collapse of the Western European market in March and in China. Sales deliveries fell by 14% to a total of 130,000 vehicles. A strong January could partly compensate the severe declines in many European countries in March. Moreover, please keep in mind that SEAT is not selling any cars in China or the U.S. therefore, they are not affected by the declines in these markets. Volkswagen Commercial Vehicles delivered around 95,000 vehicles to customers, a minus of 24%, mainly impacted by the European corona crisis and partially by WLTP-related availability issues. Year-to-date, Audi delivered 353,000 cars, a decline of 21%. After a positive start in all core regions, the overall result was dampened by corona related slumps in China and as for March worldwide. Porsche's deliveries also shrank by 4.6% to 53,000 vehicles. The brand started very positive. However, corona-related declines in China mainly in February, and in the U.S. and Western European markets in March left their marks on their volume results. With 2,400 cars, Bentley recorded a plus of around 5.6%. The key driver is the introduction of the new Continental GT and GTC in the U.S. market. In Q1, the truck and bus division recorded a total of 46,000 deliveries, a decline of around 20%. In a very difficult market environment, Scania's deliveries fell by around 17% and MAN's by minus 23%. Let us now take a look at the performance of our deliveries to customers versus the car market developments on a regional basis. In the North American region, our deliveries fell by around 13%, along with the markets. The positive result in the first 2 months were overshadowed by the loss in March of more than 40%. Year-to-date in the U.S.A., deliveries dropped likewise by 13%. The situation here is changing daily. As of today, dealerships in several states are closed and sales stops as well as curfews have been ordered. Due to even stricter governmental regulation, especially in the provinces of Ontario and Québec, the situation in Canada is even worse, leading to delivery decline of around 23%. In Western Europe, passenger car deliveries recorded a minus of almost 20%, with corona hitting all main markets in an already tense environment. Despite the production breaks, there was no total sales stop in the region. However, many dealerships and registration offices had to be closed during March, which significantly impacted the month's deliveries, causing a decline in March of 45%, while the market shrank by around 53%. The biggest negative deviations in percentage terms currently seen in Italy, France and Spain, as these countries are particularly hard hit by the coronavirus. Despite the coronavirus effects, Volkswagen Group outperformed the European market or the Western European market by 7.5 percentage points. In Central and Eastern Europe, passenger car deliveries dropped by around 9.3% in Q1 and around 21% in March as the corona crisis spread further into the East. Highest absolute declines were recorded mainly in Poland and the Czech Republic. In contrast to this, the performance in Russia in the first quarter was stronger compared to the prior year, as neither corona or the oil price decline can be seen in the sales performance so far. Again, that relates to quarter 1. In the South American region, the group's deliveries decreased by only 4.2%, while the market recorded a fall of almost 15%. Due to the ongoing financial crisis in Argentina, deliveries fell by 34%. On the other hand, Brazilian deliveries increased by 4.4%, thanks to a favorable start into the year. However, as corona has reached the region with dealerships and workshops mostly closed as well as curfews partially in place, deliveries recorded a strong decline in March, specifically Brazil, minus 14%; Argentina, minus 58%. In the Asia Pacific region, the Volkswagen Group recorded a fall of around 34% in deliveries along with the market. Since the earlier outbreak of the virus in China, which led to a radical decline of sales in February of 74%, we see in the month of March, important signs of relief. Curfews and travel bans have been terminated, production activities were widely resumed and dealerships have reopened. This led to an increasing customer demand and a slowdown of the sales decline to only 35% for the Volkswagen Group, but the total market decreased by 40%. As you're all aware, the current corona crisis burdens the whole automotive industry with unprecedented challenges. Nevertheless, I would like to share the following assessment with you. There are increasing signs of recovery with a good chance that the Chinese car market could reach last year's level in early summer on a monthly base. All 2,000 Volkswagen brand dealers in China have reopened. Audi and ŠKODA have reopened more than 95% of the dealers and the number of customers in car dealerships, if we take the last weekend of March, reached a level comparable to the previous year. Moreover, 32 of our total 33 vehicle and component factories have resumed production activities. Beyond China, we expect a volatile development. The corona-driven steep market decline has almost hit every country worldwide, some countries earlier and some later, directly impacting the start of their recovery. Within Western Europe, we've seen Germany first positive signals for gradual recovery. Simultaneously with a step-by-step resumption of production, the majority of dealerships were allowed to reopen their doors to the public again last week. To keep sales and production balanced, to safeguard liquidity, Volkswagen offered dealers in Germany, for example, liquidity support by extended payment deadlines, temporary increases in credit lines and improved interest conditions. As of today, we expect the global market decrease in the range of 15% to 20% for the year 2020, which is in line with the estimation of external institutes. Please keep in mind that the economic strength as well as the political framework for restart, reopening and potential government subsidies play a major role in the speed and degree of recovery of every affected market. As a consequence, any projections on market and sales developments are at this point in time highly volatile. Our expectations for our deliveries to customers is slightly better than the total market development. Thanks to our stronger new product portfolio with models such as the new Volkswagen Golf, ŠKODA Octavia, Audi A3 and SEAT Leon as well as broadening range of e-vehicles, which we intend to sell as planned. Moreover, can rely on a strong and agile dealer network, and we have enlarged our online sales capabilities. And with that, I'll hand it over to Frank.

Thank you, Christian. Moving on to look at the group operating result performance for the first quarter 2020, as always in comparison to the same period in 2019 in more detail. There were no special items booked in the first quarter. The block volume mix prices deteriorated by more than EUR 1 billion year-on-year. The main driver was COVID-19 related lower sales volume, roughly minus EUR 1.5 billion. On the other hand, mix plus EUR 0.1 billion as well as pricing plus EUR 0.4 billion remained positive. The block exchange rates and derivatives came in at minus EUR 1.8 billion, around EUR 1.1 billion minus of that came from the commodity hedges that are not in the hedge accounting. Further drivers were currency effects of minus EUR 0.7 billion from the valuation of trade receivables and liabilities as well as revenues and related costs. Product costs remained flattish, whereas fixed costs increased by EUR 0.7 billion, reflecting the ramp-up of our electromobility strategy as well as higher depreciation. We are now in full-blown task force mode and are utilizing any countermeasures we have to stabilize our business. This involves stringently reducing costs further and cutting budgets back drastically in all areas like external consultancy and marketing. At the same time, we make no compromises on costs for safety or legal requirements. We are also pushing our brand efficiency programs through even stricter steering of the brands and continued discipline with our platform rollout. We are striving for further synergies. From the product side, we are bundling more vehicles in model families, for example, Passat and Superb and further reducing complexity and variances, where we still have a lot of savings potential. Turning now to our brands. The vast majority of our brands remained profitable during the challenging first 3 months. At around EUR 0.5 billion, Volkswagen passenger cars operating result was burdened significantly by COVID-19 impact. The percentage return on sales declined to 2.5% compared to 4.3% in the previous year. Audi reported an operating profit of EUR 15 million compared to EUR 1.1 billion in the prior year, amounting to a margin of only 0.1%. Alongside the COVID-19 related volume decrease, negative fair value impacts from commodity derivatives in Audi's case, in particular, for aluminum, and negative currency effects burdened the first quarter 2020 results by EUR 0.8 billion. Å KODA came in with operating earnings of EUR 0.3 billion versus EUR 0.4 billion in the prior year. Margin could be maintained at a respectable 6.3% versus 8.3% in the prior year. Positive mix effects could not fully compensate for the volume decrease and the negative currency effects. SEAT slipped into a loss situation with a result of minus EUR 48 million, mainly due to a lower volume and CO2 costs. This compared to a positive result of EUR 89 million in the prior year. Bentley's operating result not only stayed in the black zone at EUR 56 million. Volume and mix actually drove an improved result compared to the previous year. Porsche Automotive delivered an operating profit of EUR 0.5 billion, leading to a margin of 9.8% versus 15.9% last year. Volume decrease and cost increases could not be compensated by the positive mix effect. The Volkswagen Commercial Vehicles operating profit declined substantially to around EUR 14 million. Volume decrease, negative currency effects, CO2 costs and higher fixed and development costs burdened the result. Scania was able to generate around EUR 0.3 billion or 8.6% margin compared to the double digit, 11%, of the prior year. Lower volume was partially compensated by improved fixed costs and a stronger mix. MAN Commercial Vehicles declined to a loss of EUR 0.1 billion, largely on account of the reduced volumes. Power Engineering went against the trend with the operating result improving from EUR 9 million to EUR 16 million despite a continuously challenging market environment. Volkswagen Financial Services operating earnings remained flat at EUR 0.7 billion, thanks to a solid customer book. COVID-19 negative impacts on our Finco will appear later in the year as the business model is different from the automotive business. The full financial services division also remained flat at slightly more than EUR 0.7 billion. Typically, the level of credit losses for financial services is relatively low. For example, the credit loss ratio was only 0.4% at the end of March. However, COVID-19 will certainly present new challenges in the areas of residual value and credit risks, which will probably cause higher risk provisioning. It is positive that financial services has always practiced a conservative approach to risk management and we are monitoring the situation very carefully. The other volatile other line came in around -- at around minus EUR 1.3 billion compared to a marginally positive EUR 28 million in the prior year. The most relevant negative impact came from the fair value of commodity derivatives and currency effects. As you know, this position also consists of the elimination of intercompany profits as well as the earnings from nonbrand companies, such as Porsche Holding Salzburg and PPA cost allocation. Let's now take a closer look at the underlying automotive net cash flow. Net cash after 3 months, including diesel payments and M&A activities, came in at minus EUR 2.5 billion. Cash outflows for diesel amounted to EUR 0.5 billion in the first quarter. Please be aware that payouts for the recent settlement with German customers are not yet included and are expected to hit cash in Q2. The cash paid out for M&A activities of EUR 0.5 billion relates mainly to investments in our used car online platform company, HEKA, and also in Northvolt as part of our long term battery cell strategy. Stripping back, the underlying clean net cash flow in the automotive division came in at minus EUR 1.5 billion. To understand the cash generation a little better, for the first 2 months of the year, cash generation was not yet an issue. Once dealerships began to shut down in mid-March and sales more or less collapsed around the globe, we were forced to stop production. Consequently, cash inflows for sales were less due to the standstill. In relation to inventory, we ended Q1 with a certain amount of overstock when comparing the balance sheet level of inventory at the end of Q1 versus the amount at the end of 2019. Even if many plants were closed, we still continued to make contractual payments, reducing liabilities, which negatively affected cash. We need to look at the way forward for cash recovery in a staggered approach. The first necessary step is to get the dealer network reopened, and customers need to resume buying cars. A part of this is clearing the significant amount of used cars. As you well know, we are now beginning the process of restarting phased production, which, of course, is also a necessary step. However, we need to be very carefully -- we need to very carefully balance ramping up production with inventory management. The last thing we want to do is bank excess cars because the pipeline is overfull. Cash is king, and even more so in a severe crisis. Moving now to CapEx and R&D. CapEx at EUR 2.1 billion corresponds to a CapEx ratio of 4.7%. Total research and development costs, or cash spend came in slightly above prior year at EUR 3.6 billion, but not a surprise as we continue to work hard to realize our e-mobility strategy. Capitalized development cost came in at EUR 1.6 billion, versus EUR 1.1 billion last year. For CapEx and R&D, we expect the full year amounts to be significantly lower than 2019 on an absolute level. We are prioritizing all projects and canceling and postponing where possible. However, we are financially robust enough to keep to our commitments on critical projects such as the rollout of MEB or PPE. These are necessary to safeguard our future. Furthermore, it makes no sense to cancel projects if we are far advanced in the time line. Regarding the R&D as well as CapEx ratio, it will be very difficult -- it will be a very difficult year since turnover is working strongly against us. Moving on. Automotive net liquidity ended at close to EUR 18 billion, roughly EUR 3.5 billion lower than at the end of 2019. Chinese dividends had no impact in Q1 as dividend declaration as well as payments are expected later in the year. The change in accounting for leasing had only a minor impact of minus EUR 0.1 billion. A decent impact of minus EUR 0.7 billion related mainly to the fair value measurement of securities and financial liabilities. The distortion on the capital markets impacted both. As in any crisis, securing liquidity, gross and net is the most critical area for any company, and we are monitoring our position like hawks. We have a multiple set of diversified funding tools available. We have proven throughout the diesel crisis, how financially robust we are. We continue to have access to fixed income capital markets, have significant unused credit lines and Volkswagen Bank with access to ECB instruments. This flexibility is also crucial to maintain our credit ratings. You would see dips in net liquidity in the coming months, depending on the timing and degree of recovery in the individual markets. We also assist our dealer network and support our suppliers as needed. While it is certainly important today to explain the Q1 developments, it is much more important to focus on the path forward towards recovery. Without argument, we are very early on in the year, and no one has a clear visibility on the duration and severity of this crisis. It is near to impossible to currently make reliable forecasts and giving you already operating margin ranges would be creating a false level of accuracy. From where we are now, it is obvious that the full year operating result, although positive, will be severely below the prior year. On the other hand, we see from the positive rebound in China, what can be possible and why we may not have a V-curve development in all market. Some meaningful recovery can be expected. We also hope that governments will take measures to stimulate the industry. As you know us well by now, we take on the fight. However, let's be very clear that we will not enter a price battle at all costs and protecting the P&L as well as residue values remain top priorities. To wrap up for now, we are not writing off the year yet, and we will push ourselves to the limit to achieve the best possible results. And for now, back to Helen.

Thank you very much, Frank. Thank you very much, Christian. We will now take questions from investors and analysts. So operator, I'll hand back to you.

[Operator Instructions] We will take our first question. Jürgen Pieper from Metzler.

I have 2 quick questions. One is more a housekeeping question. You mentioned in your presentation, partially, the decline of EBIT of EUR 300 million. The -- it looks like revenues are up, the mix is up, you mentioned that. And you said cost increases were responsible for the earnings decline. Could you be a little more precise maybe on that? And secondly, on incentives, it looks like we get some buying incentives in the German market. Do you agree on that. Do you foresee it for other markets, too? And what could that mean for the change of the mix. Certainly, it's positive for the volume, but couldn't it be a little more negative for your product mix in the next few months?

Yes, Jürgen, maybe I'll start with your second question on incentives. We believe that incentives to push sales are an intelligent way to restart the economy, especially in a market like Germany, where the car industry has such an important position, and it will drive the recovery of other industries. It's not yet decided if such incentives will happen, but the discussions are ongoing. We do not believe that these buying incentives will hamper the transition into a more CO2-neutral automotive industry. But of course, we believe that these incentives should include gas cars because current modern gas cars are significantly better. Just to give you 2 examples, they're about 30% better on CO2 and about factor of 3 to 5 better on NOx and other gases than comparable cars that are 3 to 5 years older. For your numbers, we still have about 11 million cars and more in the German market alone, which are EU4 and older. So incentives are not yet decided. We believe that they will not hamper the sale of battery electric vehicles because they are already incentivized. And as you've seen from our projections, we actually expect battery electric vehicles to be sold as planned, while, of course, we'll see a drop in ICEs corresponding to the market developments.

Yes, Porsche EBIT, the other piece. The cost increase relate to a certain extent to depreciation related to the investments we made. And Porsche has a clear focus on the electrification and also related investment in personnel, but also technology. These are the 2 main areas I would identify going forward. Further, just to maybe address potential concerns, Porsche has a strong portfolio. Porsche has a pretty decent order bank. The mix has been improving continuously for an extended period of time. So going forward, I think we are quite comfortable with the prospects even though COVID-19 certainly is a challenge also for Porsche, but the framework conditions are quite favorable.

We will take our next question from Horst Schneider from Bank of America.

It's Horst here from Bank of America. I think the most important question that everyone has got today is about your net liquidity guidance because you've said that it should be below last year's level. Should -- is -- does it also mean that the automotive net cash flow will be negative, respectively, the adjusted net cash flow will be negative. And would your net liquidity guidance change if you were not paying the dividend, respectively, if you were not pursuing, you announced M&A projects. Then another question that I have is on Q2 because you stated in the press call today that you expect Q2 EBIT, of course, to be negative. Does that also mean that the free cash flow going to be negative. And I would appreciate if you could elaborate what the CapEx and the working capital should be then in the second quarter?

All right. Hi, Horst. Yes. To -- I think the outlook for Q2 EBIT, I think it's very clear, EBIT Q2 will be negative and net cash flow as well. That will be a very difficult quarter in all respects. The overall guidance for automotive net liquidity, certainly, there continue to be significant number of variables, which make it hard to be as precise as we tend to be. We expect and we'll work as hard as possible that the clean net cash flow will be positive, that is our goal. Certainly, one of the areas where we need to do probably even a little better than in the past is certainly on inventory management, but we have a clear focus, and I think in my elaborations earlier this afternoon, I made it very clear that we will continue to balance very carefully, deliveries and production. So I think from what I said, you can assume that around mid of the year, we will have, if everything worked as we currently assume, the lowest point of our net liquidity and with the improvements coming in Q3 and Q4, we assume to improve from this low point, so to speak, in the middle of the year. We are looking at all relevant areas and you touch base on M&A projects. We obviously, I think, hopefully, made it clear, we certainly will turn around each and every stone, but we also have a very clear picture about the strategic necessities. So we will not compromise on our electrification strategy in general. We will continue to focus on the relevance of software and our competencies and skills. And within that portfolio of possible M&A projects we had in mind, we certainly also had a very clear focus on electrification, better results, may be in Europe as well as China. And we still continue that they are important, but we will make decisions step-by-step when we also have a clearer picture regarding net cash flow, net liquidity and the customers coming back around the globe. So this is the framework. CapEx and R&D, I think you mentioned. I think we will push even harder. We -- and I mentioned it in the speech that the absolute amounts for CapEx and R&D will be substantially below the absolute amounts of the previous calendar year. The challenge are the ratios under normal circumstances, we would have had a very fair shot at the 6%. We were targeting for calendar year 2020 for a very long period of time. Now our biggest enemy is the revenue variance. And we will push even harder on the absolute amounts. But on the other hand, as I mentioned earlier, jeopardizing CO2 compliance and some other strategic areas would not be a good idea or stopping projects which are very far down the road. This is the balance we are striking. Revenue is the big unknown.

We will take our next question from Tim Rokossa from Deutsche Bank.

I'd have 2 questions, please. One for probably Christian and one for Frank. Frank, if we can just follow-up on what Horst was also trying to get to. You have been very instrumental in driving free cash flow focus at VW. So I know that this is absolutely at your heart. And it's also what many investors really appreciate about the equity story. So a few more questions about how we can possibly quantify that. If we think about the metrics and the ingredients that you can't control here, the China dividend, for example, will probably come in Q2 and Q3. Can you just reiterate that you expect something similar to last year? Or will that number be lower? And then also, how should we think about the diesel outflows in Q2? And then for the full year, please? And if possible, could you at least elaborate a little bit on the working capital impact that you might see in Q2? I realize that obviously, this is subject to demand, certainly in the second half of the year. And then Christian, if I could come back to some of the comments you made earlier today on the press call. Obviously, we had this massive debate on your auto sector about the shared economy. And that -- what that means for individual car ownership going forward? Now you said this morning that you realized that some of your customers are trying to avoid public transport, which is obviously quite crowded. And now, therefore, ask you for individual mobility, i.e., your cars. Is that a trend that you see as being very pronounced? Do you expect to see it in other regions outside of China as well? Or is that just really just a minor phenomenon? And if you could share any of your experience that you had over the last week in Germany, I know it's only been a week, but are retail customers coming back at all? Are you talking to some of the fleet customers, for example, are they at least already back in store?

Yes. Hi, Tim, maybe I'll start with your second question. First, the question on, let's say, do customers prefer to have an individual transport. Yes, that's something we're seeing in China, and it's something we're also seeing in Germany, for example, the dealers reopen in discussion with our customers. I think it's an understandable reaction that people prefer the -- let's call it their personal bubble versus a more crowded public transport. Do we believe that, that's sustainable long term, probably not, honestly speaking because obviously, it's unthinkable that we replace public transport by individual transport in all major cities. But we believe it might drive demand in the shorter term because people might think I need a proper set of wheels to drive to my vacation, if I don't take the plane, et cetera. Second, building on that, yes, we share your view that probably there will be a hit on the sharing economy, that all sharing activities will probably down, we see the same for own office. That might be a longer slump. So any change or move into shared mobility will certainly happen much slower than we maybe thought before the corona crisis. One additional topic we see, which we haven't mentioned, but maybe it's an interesting thought, we see it in China, we also see it in our early web traffics in Europe is that luxury brands seem to recover much earlier. So we see much stronger traffic in the Internet in all configuration for our luxury brands, starting with Audi, then for the volume brands, and we see the same in sales in China happening. With that, on the second part of your question, regarding Germany, I think mixed picture. So if you look at traffic in the dealership, that's at about 25% versus normal. So that's still low and it's in line with what you hear from other industries, furnitures, any other industries that have reopened. We do continue to see a strong order bank from our fleet customers that has virtually been unchanged during the crisis. But as you know, of course, this requires strong demand from private customers on the used car side. There, we see encouraging signs. On the one hand, in terms of leads, leads are almost back to normal levels, if you look at our online activities. If we look at actual sales, we're maximum at about half of where we need to be. So mixed picture. I think the key driver will be to drive private demand, especially for used cars, and of course, going to new cars.

All right. Hi, Tim. Yes, with respect to China dividends, there are 2 elements to my answer. First of all, we expect exactly the amounts which we planned for in our budget. So we have no reason to assume that the dividends for all China joint venture will not be paid and current development in China supports that assumption since there are no major concerns on the available liquidity. We knew -- assumed in the budget that the total amount would be lower than in 2019, but at a still very high level and just a little different allocation on the quarter since we already had in Q1 2019, a payment, as we mentioned, we didn't have that. But the amount for the year is what we currently expect to be according to budget. Diesel outflows, in total, I think I indicated that earlier, we expect total diesel outflows, including the recent settlements with customers to be in the range of EUR 2.9 billion, with the peak quarter to be Q2, particularly due to the settlement I was referring to. The corresponding number, you certainly recall for total payouts in 2019 was EUR 1.9 billion. I think you also asked, finally, on the working capital impact for Q2. This is truly a challenge if you don't have a crystal ball. We are obviously very early, like in Germany, where we just opened dealerships again. We know that the traffic was -- there was some traffic, but certainly way below normal levels. I think it's extremely difficult, particularly in this transition period to give you more details on the different elements what I can promise you. And we have a very clear understanding on the very highest level of the organization that we will balance production and sales very, very careful -- carefully, and including our CEO, he's on that subject with us. So this is a joint task for the entire organization on a corporate and brand level as well. So -- but more detail at this very early part of Q2 is just not appropriate.

I understand. Can I just follow-up with a tiny one on this one. With all those 100 measures that you now have to take in order to safeguard your employees from getting a second round of infections, for example. Will this sustainably change something in your working capital management? Do you need to structurally hold more inventory, for example, or anything like that?

That's an interesting question because we are learning how to safely build cars in the corona era. So -- but we are extremely well prepared. Obviously, it's too early to say what productivity will be. And -- but we have -- we are a learning organization, and I'm personally quite comfortable that people will get used to the respective measures. So from today's perspective, I don't think that the school book on proper inventory management needs to be rewritten.

[Operator Instructions] We will take our next question from Harald Hendrikse from Morgan Stanley.

Two quick questions, if you don't mind. Just on the operating leverage, and I know you've been quite detailed on that already, but the Q1, you've got some sort of slightly strange movements where positive price and mix have been helpful, but obviously, the product cost and on the cost side, you've had the derivative and FX going the wrong way as well. How should we think about -- or can you help us a little bit in terms of how we should think about calculating operating leverage for Q2? Because obviously, the revenue and the overall operating leverage impacting Q2 from the closures will be significantly bigger. So that's kind of the first question. And the second question, can you just address the idea on residuals. How -- what comfort level do you have on residuals in your lease assumptions that you have today relative to what is presumably a very, very weak residual market at this moment in time, given the closure of the dealerships and auctions and stuff? I'm a little bit surprised that even Daimler didn't make a very big provision. And it doesn't look like you've made any incremental provisions in the first quarter. Could you talk about that a little bit for us, please?

Yes, certainly, Harald. I mean, residual values, we need to see over time how the markets are developing. I think it is fair to assume that there is pressure on residual values, but to what extent is to be seen. We've seen over the pretty extensive period of time that residual value development was quite stable. There are also some very interesting general rule, what cells, new cells used. We have a reasonable approach to managing residual values. We are not setting, as you know us from the past, we are setting residual values very carefully, and based on true market expectations. So we have -- and that is certainly 1 of the elements in order to address a crisis. The first thing we agreed upon between financial services and the brands is a used car program because it certainly always is one of the major dealer concerns. And by having a program in place gives them the chance to clear the pipeline. So from today's perspective, you're absolutely right that it needs to be an area where we need to -- where we focus on. But given the quality of our books, our focus on used car management, which is part of our DNA, the distribution channels -- the different distribution channels for used cars, so we have a focus. But from today's perspective, that was not the reason to completely change the picture, and we are properly reserved. But on the other hand, time will tell. So that is certainly to be seen, and we need more evidence from -- through market. I mentioned earlier, you might remember, our used car platform, HEKA. It is one of those investments, which we made, financial services and automotive to have even better access to potentially used car buyers, and this is one of those strategic investments I was referring to. On the operating result, obviously, the big -- other than volume, the big difference was the -- in the [ schaukel ] the minus EUR 1.8 billion on exchange rates and derivatives. I personally never in my career have seen within just 1 quarter raw material prices for relevant raw materials in our lineup to fluctuate so much. Just in the month of March, they came down between 10% and 20%. That is unprecedented. And obviously, depending on the recovery of major markets, those prices also have a chance to go up again. So that is a snapshot development and what the full year impact will be is certainly a very difficult one to predict, which certainly applies even more so to Q2. What is currently -- obviously, we know that it is very difficult second quarter. We have the hope that volumes are going to improve at least in some markets due to the reopening of dealerships. But we are very early, and it's currently very hard to predict the total outcome. So the drivers in general will be pretty much the same. The one we hope for us that we have a bit better volume development than we had in March, in particular. January, February have not been impacted that much. So we need to obviously break the trend, which we had in March. Subsidies, I think Christian can certainly also add to it. There's a discussion. We know from 2009 that the stimulation of the German economies for the car industry worked extremely well. A very fast reaction. People took the opportunity, the bull by the horn. It worked, and it also led to tax payments. So it was an investment with a pretty decent return, and it helped the economy tremendously. So we have very strong evidence from those years. But it needs to be a plan, which is easy to implement, easy to understand by the customers and it also does something for the CO2 because if we support ICEs and BEVs, every new ICEs is also significantly contributing to the overall balance in the respective markets. So it's hopefully decided sooner than later. Christian might also shed some more light on developments in other markets and his perspective from the sales guys.

Yes. Frank, I think most has been said. Again, just reiterate to what you have said that even in a market like Germany, we still have a very old car park with significant number of cars. So in Germany alone, it's close to 20 million EU4 and older which if we could replace part of these. And at the same time, use that to drive up the economy that would have an immediate effect, and it would also have an immediate effect, not only in economic recovery, but also in CO2 and NOx emissions. So we believe that would kill 2 birds with 1 stone if you want. But to Frank's point, it should probably be decided quickly and not be discussed endlessly.

We will take our next question from Patrick Hummel from UBS.

Yes. Patrick from UBS here. Apologies if I'm asking questions that have already been asked, but I got cut off and it took me 15 minutes to get back in this call. Looks like that your company is running smoother than the telco here. First question regarding the situation at Porsche. Can you be a bit more precise or specific. The only thing I believe that has changed in Porsche's product portfolio is the Taycan. And I was wondering whether the relatively soft result is also related to ramp up issues we're seeing with the Taycan? And can you just comment a little bit more about the contribution margin of the Taycan in the Porsche portfolio for the quarters ahead, assuming that at some point later this year will be in a more normalized environment? And then second, the auto stimulus debate in Germany. It seems there is 1 political pushback and that is receiving state aid doesn't go hand-in-hand with paying dividends to shareholders. So are you willing to sacrifice the dividend even if it's possible to pay it from a liquidity standpoint, in order to get this auto stimulus done in German politics? And very lastly, on dividends, do you already have any visibility what dividend level we can expect from the Chinese joint ventures this year as things have normalized and seem to be almost fully back to normal already in terms of the current run rate. Can we assume at least almost flattish dividends coming out of the Chinese JVs?

Yes. Hi, Patrick, yes, we are sorry for the technical problems. So I hope that is a onetime issue. Yes, Porsche, obviously, it is the Taycan, as you mentioned, but it is also the platform, the PPE platform, which was developed together with Audi. These are 2 main venues. And obviously, Porsche is also looking into and offering hybrid. So the electrification strategy is close to the heart of my colleagues -- our colleagues in Stuttgart. Obviously, we are not disclosing contribution margins for products. But let me describe it in my words, the Taycan is not only a great car from a driving experience perspective, but it fits perfectly well in the margin expectation of the company even though there is a gap between the Porsche ICEs, but it is definitely a car, which is not that far off of the overall margin aspiration of that fine brand as you would expect given the pricing power of a very iconic company. The second part of your question relates to a potential stimulus package. The -- I think there is a misunderstanding in the public debate, at least in our clear understanding, the short term -- short work labor is an insurance concept to say it very clearly. Over the last 10 years, I think Volkswagen and their respective employees, the costs are being shared 50-50, paid roughly EUR 4 billion, if I'm not mistaken into that insurance concept. And even in this calendar year, what we pay into the pot, so to speak, is much higher than what we possibly draw under the -- with -- related to the employees who are being in short work schemes -- short time schemes. So we don't think that this is state aid. It is an insurance concept and therefore, the discussion about the dividends, we don't see in any way, shape or form related to it. Nevertheless, the proposal was made at the time in February, clearly, on our path to the still existing 30% payout ratio target and 24.5 is -- would have been the right step in that direction. And therefore, given also the success within the given calendar year 2019, conceptually is still the right proposal. Nevertheless, we can't be ignorant to the developments in the market. And hopefully, a recovery scenario for the second half of the year. And the final decision will and should be made at the shareholder -- annual shareholder meeting. So that is to be decided at a later point of time. And to be very blunt, the more we know regarding the recovery, the future outlook for cash flow, profitability and net liquidity, the easier such a decision can be made. And last but not least, the overall dividends from Chinese joint venture, as I mentioned earlier, will be a little less than in calendar year 2019, but still an amount north of roughly EUR 3 billion.

Sorry for asking that question again, I just missed it. Congrats.

No, no, we understand the importance in the greater scheme of, don't worry.

We will take our next question from Henning Cosman from HSBC.

Frank, you've talked about the raw materials in the context of Audi, and now also what you said about the PPE and the higher depreciation. Could you maybe break down a little bit more what the significant impact that Audi there was? I assume that, that also was a bit of a PPE and depreciation impact, just to understand that a little bit better. And then I'm not going to ask you what severely means in the context of the decline in operating results? But I was hoping you could maybe just share your budgeting thinking a little bit as to what magnitude of residual value provisions would be possible, or if that's included or not included in the context of a positive operating result and the same maybe for the other line, if you budget this to reverse or continue at a negative even if lower run rate, and if that is included or not in a positive operating result. Because, of course, I've also heard you about your hope or expectation of a V-shaped recovery earlier on the press call. You're saying you're not prepared to write off the year. So I'm wondering if some of these items turn out a little bit better than maybe what might be a cautious estimate here on the slide. If it's then still possible to turn out quite a bit better than just towards breakeven.

Yes. Hi, Henning. Yes, pretty broad bunch of questions. Let's start with the type of recovery, may it be a V or sharp V or extended V or whatever type of different level, obviously, it's different by markets and regions. I think we said it earlier, the overall markets we expect to be down between 15% and 20%, little different by the regions. We continue to believe that, I think, 2019 has given us some evidence that we have the potential to perform a little better than the overall market. I'm sure Christian can elaborate a bit -- even a bit more to it, given the new products and also the continued rollout of SUVs, the new electric vehicles in that end. But this is a scenario. We are not planning for a worst, worst, worst-case scenario to find some out there. We don't. Certainly, we take quite a bit of help from the development in China where the March -- the month of April is already pretty close to what it was a year ago. The way we talk internally, China had the worst month so far in February. And our worst months with a 2 months delay is April in Europe. And then we need to see what's happened -- is going to happen in the Americas. We are not assuming a major setback in autumn or winter from the corona perspective. But certainly, volatility is tremendous. When we talk about the operating result to be severely down, then we include, obviously, automotive and financial services. And also our expectations regarding provisioning on that side of the house, as it pertains to credit and residual values, so it is to the best of today's knowledge, and we are learning as we speak. So certainly those developments are estimated to the best extent possible. In terms of what's going to drive the [ schaukel ] for the full calendar year, so to speak, obviously, volume will be a negative driver. We will continue to focus on pricing and mix, as you know us being able to do and trying to offset some of the negative volume impacts. We continue to be, based on the experience in the first quarter, quite cautious on currency and derivatives. There might be a little bit of an upside if those markets develop differently, but we know what tremendous volatility is here. And we've painfully seen it with a negative 1.8 for the quarter. Fixed cost, we are working heavily against. And we will see improvements versus the normal negative trend, which we've seen due to particularly the investments we made and the related depreciation. These are the main drivers on the passenger car side. Commercial vehicles, trucks and buses will be a difficult year, 2020. So we are also trying to better understand the prospects for the year, but we also know trucks have always been an early indicator, but also recover earlier than the passenger cars, but definitely a challenging year ahead of us. And last but not least, Power Engineering, flat. And if I look at financial services and assume that with our conservative provisioning today and a very strong portfolio, that we might be able to pretty reasonably balance the challenges which we certainly also have on the financial services side. Because as we all know, the P&L for automotive works differently than the portfolio model which we have for financial services. So these are the drivers and the risks and opportunities, the way I would describe them, with the first quarter, which we obviously know about. I think last but not least, I think you referred particularly to Audi. Obviously, pretty much all of what I said earlier, applies to Audi too, the volatility on the derivative side, the foreign exchange impact and the volume impact. If you ask me about what does it mean going forward? My gut feeling is that the luxury brands probably in the difficult Q2 will do a little better than the other brands. That is an indication that Audi potentially could improve from a very difficult first quarter. But obviously, a lot of question marks still to be set just being at the end of April as we speak. I hope this addresses all the different elements of your portfolio of questions.

[Operator Instructions] We will take our next question from José Asumendi from JPMorgan.

José, JPMorgan. Frank, first one, please, on price mix, on the profit bridge. Can you just repeat again what is the share of that price and mix within the bucket? And also, explain a little bit better, if you expect the mix to continue to evolve also positively in the coming quarters, which vehicles could be driving it? That's the first one. The second one, on the net cash position. So we're all trying to figure out the cash burn for the second quarter, the moves in working capital, the payables, the dividends from China, the diesel outflows. At the end of the day, cash flow is going to normalize in Q3 and Q4. You will generate cash again in the third and fourth quarter. So the question is, are you still sort of thinking about that EUR 20 billion net cash position towards the end of the year, if not the latest 2021 first quarter. That will be the second question. And third, Christian, please, 48-volt Audi, it looks like 48-volt technology is in some serious share within the -- within the Audi product portfolio. Is it the same across the Volkswagen brand? Are you implementing 48-volt across the Volkswagen brand? If yes, can you give us some color? And if at all this technology is relevant for the Volkswagen brand. Any color, please, around 48-volt?

Yes. Hi, José. Yes, on the bridge, I think you requested some more details on volume mix price, which was in an aggregated manner at minus EUR 1.1 billion. Lower sales volume, obviously, was the biggest challenge, did account for minus EUR 1.5 billion. In pricing, positive, round about EUR 0.4 billion. Mix was not a major issue that quarter. As you know, it always relates to country mix and model mix. For the full calendar year, I think -- personally, I think mix can continue to be an opportunity, but probably some challenge on the countryside maybe overcompensated by model mix. But that's to be seen because we also need to obviously see how potential incentive schemes are designed and what customer response to it is. So that's -- yes, the other question, and Christian will pick up the other part. Cash burn, Q2 will be substantial. I can definitely rule out that we will show at the end of this calendar year at EUR 20 billion. That is -- that's not going to happen. But as I described earlier, the low point from what we know today, we expect pretty much with the close of the books in June and hopefully, reasonably improve on the net liquidity side from there on, but we will end the year definitely below the EUR 20 billion.

Maybe address 2 questions you had asked, which cars might drive a positive price mix. I mean, as I mentioned, we're launching -- we have launched the Golf. And we're launching based on that platform, the Leon and the Octavia being the 2 core models of the brand, SEAT and Å KODA. And as you know, in our industry, if you have a new product portfolio, you typically realize higher prices and higher margin or spend less technical. So that should help. Additionally, we are also adding a lot of PHEVs to our lineup. As you know, the Volkswagen Group certainly has been -- has had less PHEVs than the industry. We're there in the competition, so we're filling these gaps in 2020. So these are certainly 2 major impacts, which should help us to continue to drive a favorable price mix and make Frank and the financial numbers happy. Second question, on the 48-volt technology. Absolutely, we will use that technology also for Volkswagen. This is certainly the new standard for internal combustion engines, especially for premium brands. So you will see the technology also on Volkswagen products, maybe not at the complete range, but at the higher positioned cars you will see it.

[Operator Instructions] We will now take our next question from Tom Narayan from RBC.

Tom Narayan, RBC. I believe, in the past, you've given out a breakeven level at, like I think it's 60% utilization for VW brand. And I think 80% is like your normal utilization level. The question is, is this still accurate given how presumably you're experiencing lower labor costs during the shutdowns? Or is this breakeven level even lower? And then I'll just sneak in 1 real quick. The -- do you have any commentary on the status of the ID.3 and the software issues associated with it?

Yes. Hi, Tom. I think the breakeven level -- I think, we had a related question regarding impact from the necessary precautionary measures under corona and what that will mean for production. As I said earlier, I don't think the text book in general don't need to be rewritten. I think from today's perspective, we are not changing our general approach regarding breakeven. But we have, obviously, at this point of time, short time work schemes applicable in major parts of our German setup. But that certainly does not materially compensate for the labor cost. So I think generally speaking, we will see over time how we can respond and how we can deal with it during the course of the year. I mean, productivity improvement is essential, but we had to reprioritize, to be very clear. The health of the employees, the trust that safe production is possible has been more of a concern. But I clearly expect some learnings and some normalization going forward. And I think in quarterly calls to come, we will definitely discuss the level of breakeven on productivity in greater detail. But this time here is crisis mode management and all the normal KPIs just need to be seen in the light of.

And the ID.3?

Yes. Tom, so as we said earlier in the press call this morning, we continue to be confident that we'll launch the ID.3 in summer. Obviously, in the corona crisis, we had to adjust certain processes, but we're on line to launch the ID as planned, and then also, as I said, to sell it as planned, meaning to sell it in accordance with the budgeted numbers contributing to our CO2 compliance.

We will take our next question from Angus Tweedie from Citi.

The question actually relates to inventories. And when I look at your disclosure on the first quarter, there's been a very big increase in the raw materials and the work in progress. Presuming this is pre-buying from the supply chain. Could you perhaps help us understand what you've been doing to support the supply chain? And is there any way of quantifying how much cash you tied up in that aspect of inventories during Q1 in case there's any volatility in Q2?

Hi, Angus. No, I don't think that I have a concrete number on hand. I think supply chain support is what I mentioned in my speech. We are working extremely closely with our major suppliers. We've clustered them into the most critical areas, we all know, for example, the complete shutdown in Northern Italy, which is, for example, important, we have brakes -- supply of brakes for Porsche, for example, but also some of the China products. Last weekend, we got actually quite a bit of news that suppliers are -- under strict precautionary measures are able to open the gates again. So we are obviously trying to support them in getting the necessary funding. They are obviously very dependent on predictable forecasts from our production area, which we are working on. So it is a balancing act. But for the time being, I think our organization did a tremendous job. And in terms of money tied up, I would need to dig into the numbers a bit deeper. I think generally speaking, yes, we had a quite relevant buildup of inventories. But this is obviously not a surprise given the abrupt shutdown of major markets around the globe. And that certainly left us in a difficult territory. But as I mentioned earlier, Christian and his colleagues are working extremely hard to revitalize the sales channels. But we will watch like hawks, the balance between production, inventory and sales and deliveries. And we need to do well in that respective area in order to get to the minimum net -- clean net cash flow target I was talking about earlier.

So -- sorry, if I could just make a slight -- a small statement. We're looking at the time management, we're coming near half past, which was our scheduled time. We could take maybe 2 or 3 more questions because we have appointments just coming up towards 4:00 that we need to get to. So just one question per person, please. And operator, just 3 more, please. Thank you.

We will take our next question from Philippe Houchois from Jefferies.

My question is on M&A. You have made some commitments on Argo AI and Northvolt, which is well understood. It seems like Navistar is -- you have an option or second priority, second tier. I was wondering what is happening on the disposal front. I think we've been hearing about potential sale of MAN Energy to private equity. If you can update us on what is happening on disposals and possibly if it's reasonable to make the link, that if MAN energy happens, then Navistar is definitely more possible.

Yes. Hi, Philippe. I think Navistar, I think we explained it very carefully that it would be a perfect fit into the global champion strategy of TRATON. We still believe that this is true. Nevertheless, any future decision can only be made in light of improvements and stabilization in the overall picture. So that is to be seen. On the disposal front, I mean when I talked about difficult money in capital markets, that also applies to the M&A market. So it is currently extremely difficult, and prices are pretty much distorted the way I would describe it. But you can rest assured that the Board of management is not running out of ideas. But obviously, you know the reason why we are not discussing our ideas in public is that this makes things internally more difficult. But currently, markets need to come back to levels where disposals makes sense, but we're clearly not losing sight on that part of the house either.

We will take our next question from Christian Ludwig from Bankhaus Lampe.

Two quick questions from my side. First of all, I noticed that your R&D ratio went above 40% in Q1. Is this just something you're doing to basically helping the P&L for this year? Or is that a structural change versus the previous years? And second question would be on fuel cell development. Daimler is now shutting down its activities on the car side. Do we have similar plans for the Audi activities now that R&D is, yes, basically something that you have to cut back?

Yes. Hi, Christian. No, we are not fuddling around with the numbers on R&D. The higher capitalization ratio is simply the result of the change in accounting, which we -- by moving on to the cash-generating unit. So we are rather than looking on a model by model basis. We are basically testing on a brand level. And that is the effect. So I think we made that public. We indicated early that there would be a moderate increase. But capitalization ratios in the range of 40%, 42% are not unusual for our company, and we have seen them at numerous times in the past, even though before that change, we were a bit lower. But we're absolutely convinced that testing on a brand level is the only appropriate way since ICEs and BEVs are only to be seen and looked at in combination, and that's the reason why we continued to do so. But there's no other reason. And yes, that's the answer. Fuel cell. We made it very clear, and Herbert Diess in particular explained very early why that fuel cells might become in many, many years, part of the options being available. But in the short term, at least for passenger cars, they are no option to become CO2 compliant down the road, that picture might change. We are probably closer to becoming a relevant part of the set in the heavy-duty truck and bus arena. But even there, financially, it's a difficult case. Nevertheless, we didn't stop doing research and development. But certainly, top priority is electrification with MEB and PPE.

So operator, if we could please take the very final participant for today.

We will take our last question from Stuart Pearson from Exane BNP Paribas.

Just a quick one to maybe revisit the M&A side that Philippe was touching on, but from the opposite angle. Because you did mention it's not a great time to be selling assets, and that's true. But maybe more about in terms of buying assets and maybe just bear with me, but if you fast forward 6 to 9 months because I'm sure, it's obviously all about liquidity management today. But it all goes to plan, presumably Volkswagen will emerge from this as one of the strong balance sheet companies with one of the stronger share prices, hopefully, but there will be weaker players, and crises like this are traditionally when some bigger deals are struck. So just conceptually, is M&A on a 1 to 2-year view on the acquisition side, in the automotive business, something you'd consider should automotive assets become available. And just again, conceptually, would that -- from your point of view, have to be done on a pure cash basis. Could you consider the use of equity with the preference share capacity you have? And if you were looking at acquiring anything, would it be a regional gap in the portfolio? Would it be a technology gap in the portfolio would be the priority? So as much as a comment on any of that, as you can, would be welcome.

Yes. Hi, Stuart. When we talked about M&A activities, it relates to technology more than anything else as it pertains to electrification. We talked about the used car platform. We talked about Northvolt. We talked about China. So this is what we are currently reviewing and this is our job, challenging our planned investments. What you probably have in mind are questions of consolidation within our industry. So a much bigger scope. In all fairness, this is not a subject anybody pays currently attention to. We are in task force mode. We have clear priorities. So this is what we define to be part of our M&A activities, everything else is to be seen not a focus at this point of time given the circumstances under COVID-19.

Okay. Thank you very much to all for your participation in our conference call today. Also, a very big thank you to my colleagues within the team who are working like crazy from home office. And also big thanks to our internal colleagues for their support today. As always, if there are any open questions, please contact myself or the IR team. Most importantly, today, please stay healthy, and have a good rest of the day. Thank you. Bye-bye.