Volkswagen AG (VOW3) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Volkswagen AG 5-year Planning Round: We are on track! Conference Call. 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, ma'am.

Ladies and gentlemen, welcome to this conference call updating you on the highlights from our most recent 5-year Planning Round, presented to our Supervisory Board, which we announced to you via a press release last Friday. I'm joined today by Dr. Herbert Diess, our CEO; and Frank Witter, our CFO; and also Christian Dahlheim, Director Group Sales of Volkswagen AG. As usual, you will have the chance to ask questions at the end. And as always, you can follow today's webcast via our website, where you will also find the charts available for you to download. So let me now hand you over to Herbert.

Helen, thank you very much. Good afternoon, everybody. Yes, thank you for listening to this report about our Planning Round, which we finalized and agreed end of last week. So I think it's quite remarkable that now 50% of our investment in Planning Round is about product allocation, investment resources and strategy. So 50% of our resources and investments go now into future technologies, mostly EVs and software. So if I would resume and, let's say, highlight the main work streams of this Planning Round, it is first about confirm our investment in EV, more EVs, more range, more investment into battery in Europe, in China. The second work stream is software. So we're investing much more in software than we had foreseen in the Planning Rounds before. And the third point is that we invest in efficiency, more efficiency in our ICV portfolio, streamline the portfolio, investing, getting more synergies out. So the first and I think quite remarkable point is now that this Planning Round contains all the investments necessary to really strive for technology leadership against Tesla. So it includes all the investment in the Artemis project for Audi car software or becoming independent in the software development. We will increase our in-house capabilities from about 10% today to 60%. All the car software yearly budgets of over and above EUR 2.5 billion are now financed within this Planning Round. So everything is set up to become on the technological basis competitive with Tesla. It also includes the product investment for 3, I would say, lighthouse projects for Bentley, Porsche, Audi becoming fully electric, top of the range products, being able then also to be Level 3 or Level 4 driverless capabilities. It also includes further investment in electric in -- when we -- when it comes to our manufacturing footprint, it includes investment into our Emden plant, which we will convert into an entire EV plant within this Planning Round. And it includes investment for finding or getting more synergies out of the ICV portfolio. This Planning Round also decides that we will bring the Passat and Superb, which are both cars from one platform together in one plant in Bratislava, to lifting synergies there and also getting some advantages on the cost base for both cars. So both cars should become more competitive and first in our Planning Round. We get all the synergies from the platform of MQB. So if you would allow me to highlight a few further, I would say, points where we are and where we are going, I would say that with all that investment, we -- once again, we strengthen our transition plan. We still think that we are probably from the conventional auto companies, the most advanced in preparing for the transition, transition into EVs and transition into a software-enabled car company. EVs, we just launched the ID.3. ID.4 is coming now. We are launching ID.4 basically at the same time in China. And in Europe, we are making good progress. And next year should really be the year where we can demonstrate that our EV strategy is the most successful. We will materialize the economies of scale. Products are coming along nicely. We have shifted up from about 2% to 3% EVs at the beginning of the year now to 5%, 6%. And next year, once again, we will double up our EV sales. And we are confident about that because the product momentum is there. ID.4 is coming. Audi A4 -- e-tron -- Q4, e-tron is coming. Skoda Aniak is coming. All cars on the same platform using -- creating more economies of scale. And then only next year in -- I mean, 2021, we will launch basically the ID.4 in America. And then the car becomes really a volume product around the world. So we feel quite optimistic and also confident with that product cadence to come. And we're also making progress on the software side. We are scaling up our operations and gradually step-by-step, with every launch, we're taking over more responsibilities. But until we really materialize our economies of scale in software, it's still until '24, '25 when we have built up our own software stack and we'll be able to roll it out through our brands. If we look at the Truck business, I'm also really satisfied with the progress we made over the past months. So -- and we started with the TRATON IPO. We could complete the rank sale, which is a major step forward. We made good progress on the Navistar acquisition, which is really -- which brings us very close to our target to become a global champion manufacturer there. And also, within Volkswagen, very important is that we agreed on the restructuring of MAN and also MAN ES, where the negotiations are really also last year -- last week, we came to a conclusion with the Works Council that we -- basically, we agreed on a social plan to significantly reduce headcount and also our footprint -- manufacturing footprint. So I would say, also, the Truck business is now -- has a very good plan forward to become really one of the most competitive truck players in the world. And I'm really happy about those achievements. So CO2 compliance. Yes, I think it will be tough in 2020. We will probably miss the target by a gram or so, but we will be very close, and we made significant progress. Now we started from last year, 124 grams, and we will get close to those 99, which we would have to achieve in this year. We will get very close, and this is a major step. So we could by 20%, now basically reduce our CO2 footprint, which shows that we are on the right track, and it should be a little bit easier next year. And then the full planning round basically is covered with all the plants to be compliant throughout the Planning Round. It doesn't include a potential green deal, no, which we would have to adopt for and replan, but this is probably a theme for next year's Planning Round, but the current targets are fully covered now with the investment in cars, in batteries and in infrastructure. So yes. So all in all, I think this Planning Round was a logical next step. We got good alignment between all the stakeholders that we are in the correct way. We are once again restrengthening our efforts in electrification. We're building up software, software, software, and we're doing a lot in the restructuring and getting more efficiencies out of the legacy business. So I'm -- actually, I'm quite happy with what we could agree and with the reinforcement we received from all parties. So I'm optimistic that even in this -- in the remaining months where we still have to have a critical situation because of corona, but we have good order book, so I'm quite optimistic that we can finish this year in a decent way within our, let's say, what we promised and then next year recover. And by '22, we should once again be back on track with our old planning before crisis levels. And that means that I think that we can perform quite well through the transition of the automotive industry. I would now hand over to so Christian Dahlheim, who will detail -- give us a little bit more details from the sales side.

Thank you very much. Yes, also a warm welcome from my side to this call. I'd like to briefly talk about market development for the future years on the one hand and then also comment our current e-mobility sales and the ones we expect for the future. Just a recap of 2020. As you all know, of course, we had a severe impact to the corona outbreak. As we have confirmed multiple times, we see a global market decrease in the range of 15% to 20% for 2020, and we expect to perform slightly better than that. We're much more optimistic for '21, and we see positive development despite the recent lockdowns in Europe. We see partially double-digit growth rates in all core regions, with China already reaching the pre-corona sales level and leading the recovery. From 2022 onwards, we're getting closer to pre-corona volumes, and we believe we can surpass 2019 sales volume on a global level probably around 2023. However, as we all know this development depends largely on the further extent of the outbreak for containment of the virus. And obviously, our projections are highly volatile. So allow me to take a look at our e-mobility strategy, just building on what Herbert Diess just said, and allow me a quick glimpse to 2020 because we sometimes feel we maybe undersell our successes here. We delivered 148,000 BEVS to our customers worldwide. That's an increase of 185%. Most notably in Europe, we have sold more Audi e-trons than all other competing electric SUVs combined. The Porsche Taycan in its first year has outsold its competition by almost 75% in the first full year despite a limited lineup, largely limited to the performance models. We have successfully launched the first members of our MEB family, the ID.3. And still in 2020, we will launch the ID.4, which we'll sell in North America, Europe and China. So let's take a look to the first year of our Planning Round in 2021 and maybe show you why we're confident that we'll have a great start, doubling our BEV volumes further in '21. In the course of 2021, we'll roll out our MEB strategy with Skoda Aniak, the Audi Q4 e-tron and the CUPRA el-Born. In the premium segment, we will offer the full range of the Porsche Taycan, including the Cross Turismo, and we will offer the all-new Audi e-tron GT. In North America, we will enter the market with the ID.4, the Audi e-tron GT and the Q4 e-tron family and also the Taycan full range. In China, we will expand our already existing BEV portfolio by the following new models, the ID.4, the ID.6, the full range of the Porsche Taycan, the Audi e-tron GT and also the ID.3, which will be launched in quarter 4. All of these models will play a crucial role in achieving our goal of a 6% to 8% BEV share on a global level in 2021 and also, as Herbert Diess has already pointed out, provide the basis for achieving CO2 compliance in '21. Until the end of the decade, we will launch approximately 70 new BEV models. We intend to produce and sell around 26 million pure battery vehicles. Therefore, we see a BEV share of around 20% in '25 and more than 30% share in 2030. These numbers, of course, might be slightly modified once we include the green deal in the future. And with that, I'd like to hand over to Frank.

Yes. Thank you, Christian. Let's now take a deeper dive into the financials with the chart you're all very familiar with. As Herbert already mentioned, the key message is, we are stepping up to the challenges of the transformation and at the same time, fully sticking to our strategic targets for 2025. This is despite significantly lower revenue assumptions for the forthcoming years compared to the assumptions in the last Planning Round. The fact that we are still consistent with these strategic targets set in our Capital Markets Day in March 2017 is quite a strong signal. Back then, we had already anticipated the tremendous transformation of our industry. This is what we built our strategy around, but certainly, we didn't know about corona. Since then, we have demonstrated our consistency, resilience and continued commitment throughout this transformation. Without a doubt, our turnaround on cash flow generation was our best achievement, and our focus on cash is still top priority throughout this Planning Round. I'm pretty sure that we by now all agree that there was and still is a real stretch built into these numbers, especially if you now take the significant COVID headwind and the ongoing challenges into consideration. At the end of September, we were thankfully back in the black zone and talked about the recovery in Q3 in EBIT and cash already. Without any major new COVID setback, we should be able to deliver reasonably solid results for the full year 2020. However, as is the case for the whole industry, COVID has hit us hard and will, for sure, also leave a mark, especially on the results for 2021. For that single one reason, COVID, we had to adjust, especially calendar year 2021 somewhat downwards compared to our previous plan. We now see particularly next year as a transition year due to the knock-on impact of the pandemic. Nevertheless, we won't fall off a cliff in any way. We don't want to leave you today completely in the dark for 2021 and realize that you need a certain level of transparency. Please take note that, as usual, the official guidance for the group and the respective brands for 2021 will be both disclosed in our annual report for the calendar year 2020 and discussed in detail during our annual press conference in March of 2021. But we want to give you at least some reference points. Group deliveries are expected to be significantly higher than in 2020. Sales revenue will follow that trend. For the following years of the Planning Round, we expect revenues to moderately increase. In relation to clean cash flow, the expectation is to land somewhere between EUR 5 billion and EUR 10 billion next year. For the Chinese equity business, there will also be a negative COVID effect to be seen in 2021. We nevertheless assume that the China business will remain the blueprint and continue to be the fastest on the path of recovery by delivering solid results throughout the rest of the Planning Round. Moving on to calendar year 2022. We have chosen 2022 as our interim milestone along our path to 2025. We more or less expect normalization to a pre-crisis level by '22, '23, for our key regions. This is to provide you with reassurance that our plan is still fully feasible. Our base case is that, by 2022, we will hopefully have a significantly lower level of distortion by corona. However, please be aware that for Latin America, the situation remains to be somewhat tougher, and we need to assume that the normalization there will be partially delayed. What does it mean for our group's KPIs in '22 and beyond? Starting with operating return on sales, we are striving to come in at the range between 6% to 7% in '22 on our path to 7% to 8% in 2025. Of course, after the tough experience with all the challenges with COVID this calendar year, it is understandable that this Planning Round has a certain level of conservatism built into it compared to the last one. If corona turns out not to be as bad as thought, there's certainly room for improvement in the outcome, especially in the years '21 and '22. In relation to the return on investment, this ratio should be somewhere between 10% to 12% in '22. The main lever for an improved ROI is, of course, a better EBIT and capital turnover. Investment discipline and further improvements in working capital would also help this ratio in the right direction. By 2025, we continue to strive for an ROI of at least 14%. Obviously, with a substantial loss of revenue in each year of our Planning Round, it is much more difficult to achieve the 6% ratio for CapEx and R&D. The one most difficult KPI is R&D due to the increased focus and spending for software in the car and digitalization. Let's take a holistic approach. As was mentioned in our press release on Friday, our total spend on CapEx and R&D is around EUR 150 billion in total for the upcoming 5 years. Looking firstly at CapEx in more detail. Despite further ramping up of the MEB and PPE platforms, we will fight to achieve the 6% already in '22. In absolute terms, we expect to remain on average annually around the level of 2019, which was EUR 14 billion throughout the Planning Round. To give you more color on the CapEx split. About 2/3 of CapEx is product related, around 1/3 of CapEx is going into alternative drive trains and digitalization projects. We will continue to rigorously roll out our multi-brand approach for our plants as we have done with our blueprint MEB factory in Zwickau. New examples are Hanover with the fully electric D-SUV models and Bratislava with the Passat Superb family. Furthermore, the second live MQB platform will also be rolled out further at a lower cost base since the initial investments have already been made. The R&D side is a tougher piece of work as we balance the necessary spend on CO2 compliance and digitalization, including the full rate of software development. For this reason, we expect the R&D cost ratio to be somewhere between 6.5% and 7% in '22. To reach our strategic target of 6% remains in the books, and we are assuming not to have to wait until 2025. Rest assured, we do not just count on sales recovery alone to work. We are, of course, determined to sharpen the pencil in all business areas. Cash remains king and a continued top priority in our organization. Our delivery in the last 3 years has proven our ability to generate clean cash, and we assume a net cash flow of more than EUR 10 billion already in 2022. We currently have a net liquidity target for the Automotive division of more than EUR 20 billion for 2022, which is vital for our credit ratings and our refinancing needs. The impact of the potential Navistar takeover is not yet included in the figures, and the closing is not expected prior to H2 next year. Now to the $1 million question. When will you see a 30% dividend payout ratio? It wouldn't be unreasonable to assume that we will exceed the desired 30% for the exceptional fiscal year 2020. For the fiscal year '21, depending on the pandemic impacts next year, a ratio between 25% and 30% could be for the moment a reasonable assumption. Now let's go into our planned capital allocation in more detail, with a focus on the spend for future-related business. The overarching message from this investment schedule is that the proportion of spend is shifting even further towards digitalization, electric mobility and hybridization. In absolute amounts, the shift goes from around EUR 60 billion to EUR 73 billion for a 5-year period. This corresponds to an increase of the respective share from 40% to 50% compared to the last Planning Round. Another key takeaway is that the bulk of the future-related spend, R&D and CapEx, is going towards the high-margin brands, Porsche and Audi. The premium and luxury brands are responsible for around EUR 30 billion, whereas the volume group has a share of around EUR 21 billion. To become a real best player and move us into the sphere of a software-enabled car company, it is clear that we have to invest in our future. We cannot compromise today on the investments necessary for our competitiveness in the long run. The first building block of our transformation are our investments in e-traction. This makes up for around 1/4 of the total of EUR 35 billion for future-related business. Of that figure, our pure BEV platforms, MEB and PPE, make up about EUR 10 billion, with the majority of the e-traction spend relating to vehicle heads. The highest proportion of the increase is going to digitalization, around EUR 27 billion, which is equal to 18%, will be allocated to this block compared to EUR 14 billion in the last Planning Round. The bulk of the spend is going towards in-house software development and autonomous driving since we see software as a key differentiator in the future. The goal is to build a proprietary software stack, which will be deployed the first time in Audi's Artemis project in 2024. The company's own share in software is to increase from 10% to 60%. In addition, a large share of the funds earmarked for digitalization will be invested in the mission-critical fields of artificial intelligence, autonomous driving and digitalization of significant business processes. The investment in hybridization, our bridging technology being necessary to achieve CO2 compliance, will be around EUR 11 billion, just over 7% of the total spend. Moving on to the critical area of our cost base. To make it absolutely clear, we haven't given up on our cost structure whatsoever. We do fully recognize the fact that our fixed cost base is not competitive. We're also fully aware that a substantial part of your concern relates to the complexity of our model portfolio. As you know, we are fully convinced that the path towards a comprehensive BEV portfolio is the necessary one, and the green deal in the European Union will drive the need for more BEVs to be sold even further. We are fully dedicated and on course to achieve a global BEV proportion of around 20% in 2025. This leads currently up to more than 30% towards the end of the decade, and the impact of the green deal in Europe is to be seen. However, this means that by 2025, around 80% of our fleet will still be up -- made up of traditional combustion engines. We realize fully that phasing out the legacy business is ultimate and necessary for a sustainable future. At the very same time, we cannot forget that there are still significant customer demand for ICEs. The ICE world is also providing us with the resources necessary today in order to invest in future technologies. Therefore, the ICE portfolio is for the time being still necessary to protect our operating margins during the BEV ramp-up. Most importantly for you guys, high-margin ICEs are also crucial for upholding strong clean cash generation during the transition and to enable competitive dividends in the years to come. So we won't give up on ICE too early, and we don't see this flexibility in our portfolio as a negative. We will, of course, adjust our portfolio to be CO2-compliant throughout the Planning Round. At the same time, we will adapt to customer demand for alternative powertrains. We are also not starting from 0. We have reduced complexity in many areas already. To give you some examples, we have canceled the Polo and Golf 2-door variants, have tightened our engine and transmission offering and have canceled options with low demand or grouping with other relevant option packages. The configuration of an ID.3 demonstrates what is possible, with only 10 clicks and a minimal offering that still fully satisfies customer needs. Another proof point of reacting to customer preferences will be the reduction of NPVs in favor of higher-margin SUVs. There's more to come. With EU 7 in mind, we intend to reduce our number of engine and transmission combinations by up to 70% in the forthcoming years. You will see a clear reduction in complexity to appropriately reflect the pace of the transition. We are also aware of your critique that we have not taken advantage of the crisis as much as our peers in order to improve our cost base. Honestly, we do not fully agree since we are pushing hard on significant incremental headcount reductions as we speak. Of course, this will have a price tag, but the payback will, for sure, have a positive impact on our fixed cost. Most recently, we announced that MA and truck and bus is involved in deliberations that involves cutting up to 9,500 jobs across all areas of the company in Germany, Austria and worldwide. Within MAN Energy Solutions, a headcount reduction program in the magnitude of around 2,600 employees is also currently being negotiated. Scania has targeted a worldwide headcount reduction of 5,000 by the end of this year. Thereof, 3,700 headcounts have already been reduced. Please also keep in mind that we started early with the future pact within the Volkswagen passenger cars. We agreed to reduce a net number of 14,000 jobs in Germany by 2020. Since the end of 2015, staff, including temps, have reduced by 12,000. By Q1 2021, we expect the target reduction of 14,000 to be reached a little later because of COVID. As communicated last year, Volkswagen AG also initiated the so-called roadmap digital transformation. This includes a headcount reduction of 4,000. In parallel, it is intended to hire 2,000 employees for future-related positions. This program is planned to be completed by the end of '23. Furthermore, within Volkswagen Passenger Cars, VW Brazil also faces another substantial restructuring process. This plan includes a 30% headcount reduction, which corresponds to around 4,500 employees. Audi has already reduced the overall headcount from 92,000 to 89 -- 91,000 to 89,000 as part of Audi Zukunft. By 2025, headcount of between 9,000 to 9,500 will be reduced along the demographic curve, including all levels of the organization. Bentley committed to reducing 800 employees as part of their program, Beyond 100. Already 700 employees have left the payroll there. All in all, we are pushing and the effect of VW's brand's future pack, and Audi's program will materialize over time as designed. Furthermore, we are currently negotiating severe incremental headcount reduction programs EG for MAN. Nevertheless, we can't allow the rubber band to tear since we need uninterrupted production and the cooperation of our workforce to manage the unprecedented level of volatility due to COVID this year and at least in 2021. We have to be also realistic about the real-life situation. At the very moment, we are happy about every single worker on the factory floor. Due to the substantial COVID hygiene measures, we have much higher absenteeism, more breaks and downtime than usual. The knock-on effect is lower productivity since the speed on the production line is slower. The daily reality is that we are at times are struggling to get all the cars built for customer orders. Who really can say with any level of certainty how quickly things will go back to normal? Last but not least, I talked earlier about the multi-brand approach for our plants. You should assume that, especially our plants in Germany, had to commit to their respective cost targets first. To sum up on today. We are fully convinced that our strategy, Together 2025+, is the right one and works in order to successfully manage the transformation. We started early enough and supported by all stakeholders in order to address all the issues along the entire value chain. This includes a lower vertical integration, stopping business, which does not add value, reducing headcount and making the company able to react faster to new challenges. You know our plan. We are fully convinced that we will intelligently phase out the combustion vehicles successfully while transforming the rest of our business. Our focus now is on the continued recovery from COVID and the delivery and execution of our strategy. We will deliver proof points to you that show that our ability to transform our company without eroding margins. For now, back to Helen.

Thank you very much, Frank. We would now like to open the Q&A round. Today, we have investors, analysts and also journalists taking part. So please feel free to start your questions. Thank you.

[Operator Instructions] We will now take our first question from George Galliers from Goldman Sachs.

The first question I had was just on digitalization. Could you provide a little more detail on the split of the investment? How much of the EUR 27 billion is going towards the Volkswagen operating system and stack? And how much is going towards autonomous driving? And do the autonomous driving investments include further investments in Argo AI? Then the second question for Frank, just on the 2022 margin targets. The 6% to 7% range at the midpoint, so it's around 100 basis points short of the 2017 to 2019 average. Now your R&D and CapEx ratios according to the slide are not expected to be higher than they were during that period. And whilst global volumes are down on 2019, it's not clear that they'll be that much lower than they were in 2017. So could you perhaps just give us a little bit more insight into why profitability will be lower in 2022 than it was during that prior period?

Yes, George. Yes, let me start. Argo is a financial investment. So it's not included in the CapEx and R&D numbers. With respect to the margin, 6% to 7% for '22, as I tried to elaborate on -- the challenge is to get our arms around the medium-term implications from COVID. In those numbers included is that we certainly have some maybe too conservative assumption on risk cost on the financial services side, but nobody knows what -- on the -- particular on the credit risk side, the true outcome will be after some governments programs and some protections on bankruptcy laws will be lifted. So there are some level of uncertainties. On the automotive side, we certainly need to see how incentives will work out in '21, in particular, with the current competitive set. So these are a couple of key arguments. But predominantly, this dramatic reduction in revenues which we can't fully compensate. But I think 6% to 7% certainly striving not to the lower end of the range is a pretty decent guidance from our perspective as we speak. Herbert, do you want to take on the question on costs here?

We can't disclose on detail, but let's say, from -- we basically, we're doubling up our investment in software now from EUR 11 billion last Planning Round to 20 -- close to EUR 24 billion this Planning Round. Most of it -- half of it are going to car software work. It means in building up our own software stack. And there, you could disclose what is operation system. Once again, half of this is going basically to -- into autonomous. Now increasing the capabilities of the car from driver assistance to becoming more and more autonomous over time. This is basically the -- where the resources go. There might be some, and we have also planned for some further acquisitions in certain competencies where we still have to buy in. The rest will be basically a ramp-out -- ramp-up in our own headcount in our own entities on the software organization.

And may I just quickly on the autonomous, just to follow up. Are you principally referencing level 3 type systems? Or is Artemis going to also in parallel to what's going on at Argo look to develop level 4, level 5 type services?

Let me -- our look at this field is that we basically -- we have to -- we see worldwide 2 approaches, which are significantly different. No one is -- I would call it the Waymo way is trying to become level 4 as soon as possible, covering some ODTs, means some areas where you can drive autonomously and substitute the driver up to a limited speed of probably -- right now, the cars are driving around 40, maximum 50 miles per hour, and then probably becoming faster and so. And the other way is basically, which you can follow, I would call it the Tesla way. You drive level 2, you -- probably it's a level 2 plus where you have -- the driver remains in control, but the car becomes more and more capable of handling situations, mostly on open roads first and then getting into more complex environments. Both ways are technologically quite different. You use different sensor setups. You use different compute hardware. You use different mapping technologies. And we decided already a few years ago, we decided that we have to go both ways, because so far, it's not yet clear who will make the race and who is going to become first, and we want to be competitive in both areas. In the Waymo way, we decided to join forces with Ford because we think it's a long way to go until you get to revenue streams. And we bundled our resources with Ford, and we are investing in Argo. We are very close to the Argo technical team. And the main route for, let's say, our Passenger Car division is, I would call it, the Tesla way, coming from premium applications, getting better and better in sensory equipment, in compute hardware in the car and taking over more responsibilities. In both areas, we are invested. We think we can be within the top 3 or 4 competing teams worldwide. And with that planning, we specifically increased our investment on their -- in their own software stack, which is, let's say, now targeting towards the Artemis project. And Audi is basically combining software and hardware in a lighthouse project, which is called Artemis. And we are trying to get very close to Tesla very fast in that -- yes, I would say, big investment and fast building up of capabilities. Did I answer your question basically?

Yes. That's very helpful.

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

Patrick from UBS here. I would have 2 questions for Herbert and one for Frank. My first one to you, Herbert. The portfolio restructuring, you highlighted some successes you achieved with rank, et cetera. But at the same time, that's -- these are not the deals that are going to get you to a EUR 200 billion valuation. I think that's fairly obvious. So the luxury brands you have in your portfolio are really key to that, Lamborghini or even Porsche. And we haven't heard anything about those as of late, and it seems like you prefer the market to have low expectation on that front. So can you just update us whether a spin or IPO could be on the agenda for Lamborghini or even Porsche in the foreseeable future? Or is that just wishful thinking? And my second question relates to the software organization. I think it's not an understatement to say it's been a bit of a bumpy start. There has also been a change in leadership. The ID.3 had some software-related issues. So what are you doing to make sure that this is going to be a smooth transition? It's probably one of the biggest challenges that an engineering and hardware-driven company can face to become a software organization. Is that all going to be organic development with the help of some external suppliers? Or do you need actually M&A to accomplish that mission? And my question to Frank, just very briefly. Have you factored into your '22 guidance some market share gains? And can you quantify them? And the flip side of the story, there is some cannibalization with the ICE business. And in particular, VW brand has a very busy EV pipeline on the MEB platform. So future pact is now implemented. What's next year? What do you want to do? What do you need to do to keep the cost control in the legacy business of VW brand in Europe?

Okay. Good. Let me start, Patrick, probably, the software question you raised. Will that be a smooth transition? No. I think it will be -- this is a very challenging project for us. Car companies have not been too much -- and most of our peers, it would be the same. I have not been too much focusing on software. So far, a car is already very complex software-driven machine. I would say, cars already has about 10x more code -- lines of code than a smartphone or any other computer device. So it's really complex. But so far, we are really relying on suppliers there. Now most of the software we are buying embedded, it comes with computers. It comes with the engine control unit, ECU with brakes. So with every other computer we buy software, and then we fix it together and we make it work as a complex machine. This is going to change because as soon as you start continuously deploying software onto your device, you have to own the software because it's just impossible to imagine that you're in a network of, I don't know, 10, 15 companies, you're configuring software and then you're deploying week after week. So you have to become self-sufficient in software, able to understand the full complexity of the software. And the car is a hugely complex Internet device. And even if you look in start-up companies like Tesla, starting with a clean sheet or white sheet of paper, they started with a lot of embedded software. And their way is also continuously. So this is what we have in front of us. I think we made significant progress already with the MEB. The first time the computer hardware is designed in a way that we can update, and the first updates will come early next year. When we will have direct contact to the customer, we will gradually work on the software and upgrade and update the software on a probably monthly or bi-monthly basis at the beginning. And that has to be -- and we have to gain more reason there. No, we have to gain more -- we have to integrate deeper into the car. So the next steps to come with MEB, I think the next launches should be smoother already, ID.4 to come, and then the rollout throughout 4 brands. And then the next step towards these capabilities is PPE, the first Audi products to come to market, Audi and Porsche products. And then with Artemis, I will -- with Artemis, we're really targeting to have our own operation system and being able to continuously deploy software, continuously stay in contact with the customer. So this is a major step change. So it will take us several phases in several years. It's not fully -- we already -- last year, we bought 4 significant companies, which we are really relevant. Wireless, providing the data channeled into our cars. We bought diconium, which is a specialist in automotive software, in application programming. Just recently, we have -- we are in an acquisition process for capabilities when it comes to object recognition and vision -- computer vision in the car, a group of 200 very relevant people, which we're buying from HELLA. So this is a process where we add resources ourselves, where we build -- where we hire relevant talent from outside and where we will see some more acquisitions to build up because we are coming from a situation where basically we had about 10% of value-add in software, and we will get that up within the next years up to 60%, probably over and above this. But this will be a process. Will it be a smooth process? We hope as smooth as possible now, but it's a challenging transition program for us. But the first steps are -- I would say, are positive. And I'm quite happy with the achievement at this transition we have within the group. We have been driving this process out of Volkswagen, which is not a premium brand. No, I think it's a technically competent brand, but not a premium brand. Now we handed over the leadership to Audi, Markus Duesmann. And Audi is driving that in a faster pace and with more competence because you normally -- always, you would develop software out of some premium brands into volume brands, which they have to be in the lead. We have not been able to do that in the last years because, now we had a lot of turmoil transition in Audi. But now Audi is geared up to lead the group into the age of software. So the portfolio, you mentioned, yes. Actually, this is -- it is a complex group, but I'm quite happy with the first steps we made. We made the TRATON IPO. We sold off Frank. As we could not sell off Energy Solutions, we decided on a restructuring program, which is now fully supported by the unions and Works Council, which will lead to a 20%, 25% reduction in troughs. Also, we will -- it will be really restructured that business. So we are making progress. Next step is we are working on our Italian legal structure. This contains Ducati, Italdesign, Lamborghini. And we are, let's say, bringing it into a legal structure where we could act. But it's not yet decided, but we won't give up on it. It's on our agenda. Frank is confirming what I say, just -- and we are working on that. Now it's probably a bit of a slower process, but it's -- we are consistent with our message.

Yes. Patrick, I think the last one is for me, but I also just want to confirm what Herbert was pointing to. We are not giving up on that question. And the dismantling of the Italian legal structure is a step, which we would have not proposed to the Board and got approval for without having action in mind, but obviously, more internal decisions to come, and it's work in process. Your question related to -- or I took it from -- as it relates to market share, I think we are quite confident that we will gain quite a bit of market share in 2020. I think in 2019, we were close to 13% worldwide. That should go up to 13.7%, something along that line. For the time period until '22, we only assume a moderate increase from 13.7% to somewhat above 14%. And we have a very attractive product portfolio, but we're certainly also conscious of our margin, and therefore, we will grow that market share potentially, but we will do it with care. I think, Patrick, you also addressed the question of ICE business and cost control for our legacy business. Certainly, I don't want to repeat what I said in the speech, but there were a lot of reference points that the ICE business is still what we are living off. But we are aware of the phase-in, phase out, which we will do certainly with an eye on profitability and also customer demand. But you might -- did take from my elaborations the hint in the speech towards to the German factories, which had to make cost commitments first before we allotted new product. So I think this is what we will continue and -- without being able to show you the chart, but Herbert presented just on Friday in the Supervisory Board. As a summary to our PR-69, yes, we made some progress, but we are not satisfied with the level of complexity, which we still have and want to reduce. That we will continue to work on development cost and CapEx. And particularly, the fixed costs were specifically addressed in our presentation. And it was already a clear point towards to PR-70 where we will continue. We will use the next 12 months to work feverously on those items. Just to make sure that this is not just what we are presenting in the Board of management meetings, we also presented exactly that message to our Supervisory Board again last Friday. I hope that tackles the pieces, which you addressed to us.

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

Yes. I have 2 questions, please. The first one refers to the other 50% of your investment spending. If we call that past technologies, maybe in reference to your future technologies, it's quite a bit of money that you spend on this. Can you go into a bit more detail on how much of that is really going into maintenance that you just need to do and how much is going into the development of new internal combustion engines, for example? And then secondly, just to really also understand your plans on cannibalization. It's great to see that you're ramping up BEV so aggressively. If we do take both numbers together and say that 20% of your sales could be 3 million units, you're obviously taking quite aggressive growth assumptions on the ICE business as well, Joe. So just to understand, is that the right way to look at it? Or do they -- these 2 numbers need to be seen separate? And also, what's your expected cannibalization of, for example, Golf from people buying an ID.3?

Tim, it's Christian. Just maybe I'll start with the last part of your question, the cannibalization. Obviously, eventually, you're tapping into similar segments. Initially, for the next few years, we actually expect to gain customers that are more attuned towards new drive technologies. So -- but overall, of course, eventually, the Golf segment will be transformed into electric ID.3 segment, but that will take about 10 years. Again, I mean, given that BEV will grow faster than everything else, we feel better prepared than most competition. On the BEV models, we think we can gain market share, as Frank has alluded to. And I'm not sure I got the first part of your last question, which was the 20% to the 3 million BEV vehicles, which we confirm. Obviously, correspondingly, we'll reduce our segment shares in -- or we'll reduce the volume in ICEs while not losing segment shares. But overall guidance I can give you is we're growing faster on BEVs. We're going to make most of the market share gains we're gaining out of BEV transformation. We do not significantly gain market share on ICE. I hope that helps to guide you.

Yes. Maybe I can add. Herbert speaking. We are -- and I can't explain it now in aggregated figures, but I could -- I can explain a few examples. Now you mentioned the Golf, and I think it's very relevant. The Golf, we already saw a decline in market share over the past years because of the increase in SUVs. Now T-Roc, basically also Tiguan. So people are moving away from the classic segment of hatches and also from sedans into SUVs. So we have a, let's say, shrinking market share of those kind of product. And we are dealing with it on a continuous in every planning round. So for instance, for the Golf, already 3 years ago, we reduced the manufacturing footprint significantly. The Golf was produced in Zwickau, in Mexico, in Wolfsburg and in China. And we basically, already 3 years ago, we consolidated the manufacturing footprint so that the Golf is only manufactured anymore in Wolfsburg. And we ship the cars to the United States and to the rest of the world. And at Zwickau, we used that consolidation then to dedicate one plant for EVs entirely. And in all our product planning, we -- for sure, we see a decline on the combustion side. And that is why we also agreed already in this year's Planning Round that next year's Planning Round, we will consolidate significantly more our ICV lineup. And we -- this is a continuous review process where we see, okay, can we delete one project, can we bring projects closer together, can we get more synergies and then make positive business cases out of those. The example of the Passat and Superb is one of those. Passat for 7 generations being built in Anting is going -- is being shifted now to Eastern Europe to our Bratislava plant. And production is combined with the Superb, which is a -- it's for you, probably it's quite -- for you, it's logic. But if you tell the people from Anting that they're going to lose out their core product and it's going to be shifted to Eastern Europe, and you tell the same story to our scholar people that they're going to lose their pinnacle product, which is the Superb, and it's going to be produced in another country, that was actually quite lively discussions and not easy decisions to be made. But because of the business cases we had to make, so we are foreseeing a continuous market share shifts between EVs and ICVs and also between the segments. And we think that we are -- so far, we think we made good decisions and the next round to come in Planning Round 70.

Yes. Tim, let me just also pick up on the one part of your question. You are challenging the one -- the other 50% of the invest, if we stick with CapEx and R&D bundled together. I think if I look at it from a finance guy's perspective, this other 50% counts for roughly 80% of the volume in 2025 and probably still the bulk of the profits. And when we talk about the ICE world, not only the profitability and the -- still desired and necessary contribution to the total. As 70% of CapEx is for product, so obviously, we are going to have the benefit of the second-generation of MQB because the vast majority of investments have been done. So a lot of opportunity to focus on that. But also, we obviously still need to focus on Euro 7 and UNECE and all those issues which certainly also require significant R&D, in particular. And at the very end of the day, it is the mix, and -- but that's the way we look at it, but it was important to us to really get the spend on future technologies to the highest level ever in our Planning Round, and we feel very comfortable.

Let me add, Frank. Our assumption was always that -- and this was something for you probably not easy to understand, that we said we would make that transition keeping our margins, yes? And this was always the basis that we would be able to afford the additional investment in new platforms in electric vehicles, streamlining our existing portfolio because we knew that -- or we are knowing that there are some I wouldn't call then efficiency potentials in the current portfolio. We have many brands. We have overlapping segments. And that is what we are working on. We try to get those efficiencies out through the transition period. And I think step by step, we are making progress.

If I can just follow-up to Christian's point then. Christian, you said you didn't understand the second part of my question. The fear behind this is that everyone believes your BEV ramp-up and people are very happy with those very aggressive numbers. The fear is that you're not cutting enough costs and capacity on the ICE side of things, which also the 2 previous asked -- people that asked questions probably refer to. So we just wanted to understand, 20% of 10 million units is 2 million units. 3 million units as 20% means you want to sell 15 million units by then, and that obviously creates the fear that you're very aggressive on your ICE development at the same time. Is that just -- do we need to see those 2 figures together, 20% is 3 million? Or are they independent of each other?

But 20% is our share of BEV vehicles. So if -- by 2025, exactly. So I think the error, if I may call it this way, you're probably rounding around the figures here. So we're not going to increase our sales numbers to the levels you just described. So I think your concern that we're too aggressive on the sales side, I think is not justified. Obviously, we'll continue to grow. But as Frank has said, we're not looking at ridiculous market share. He gave you an indication going to the 14% plus. And yes, consequently, of course, we will reduce our ICE production capacity that I think Herbert Diess just explained a little bit, a few examples, how that is going to happen. So I think we feel very comfortable that, let's say, the sales numbers compared to the market shares is realistic. And correspondingly, the production plan fits to not be overly pushy, because I think that's the core of your question, so.

Okay. I don't want to be annoying, but it says 3 million units also on your slides, right? Just I didn't round that number. It's there right next to...

That's fair. I'm just saying we probably give you rounded numbers. So absolutely fair, Tim. Maybe we can follow on your math. But I think the overall guidance is realistic market share with a slightly growth of less than 1%, plus more aggressive BEV growth, and then correspondingly, of course, an adjustment on the ICE production capacity that do not force us, that we need to push like crazy. Happy to follow up on the math.

We will now take our next question from Christoph Rauwald from Bloomberg.