Volkswagen AG (VOW3) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Volkswagen AG live audio webcast and conference call on the first quarter financial results 2021. For your information, today's conference is being recorded. And at this time, I'd like to turn the conference over to Ms. Helen Beckermann, Head of Group Investor Relations for Volkswagen AG. Please go ahead, madam.

Thank you. Ladies and gentlemen, welcome to Volkswagen conference call for investors and analysts on the results for the period January to March 2021 based on the interim report we published early this morning. For today's conference call, I'm delighted to be joined by Herbert Diess, our CEO; Arno Antlitz, our newly appointed CFO; and Christian Dahlheim, our Director of Group sales. 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 always, to taking your questions. So let me now hand you over to Herbert.

Thank you, Helen. So a very warm welcome from my side. Welcome to our Q1 call. It's the first earnings call with our new CFO, Arno Antlitz, and I'm very pleased that Arno is now part of the Group Executive Board. This is strategic approach. He will play a crucial role in our transformation in the coming years. Together, we will ensure that we set the right priorities for the next phase of the transformation. More on this later. Overall, Volkswagen had a strong start in 2021. Our operational performance was significantly above the first quarter last year, which had already been burdened by the first wave of the COVID-19 pandemic. We managed the global semiconductor supply shortage by prioritizing and shifting capacities. Our task force fought for every single car to ensure that we are getting the necessary semiconductors. In the first quarter, our BEV ramp-up gained further momentum, and we built the foundation to tap into future profit pools, be it battery and charging or software. While we foresee the semiconductor shortage to substantially burden earnings in the second quarter, we will do everything to offset a significant demand of the lost cars in the second half of the year. Given the positive momentum from the first quarter, high volumes, strong product mix and favorable pricing as well as progress on the fixed cost side, we updated our '21 guidance by 0.5 percentage point and now expect an operating margin of 5.5% -- between 5.5% and 7% of the group. In Q1, our group delivered 2.4 million vehicles to customers worldwide, a plus of around 21% compared to last year. In total, our volume brands have increased deliveries by around 18%. Our Volkswagen Passenger Car business delivered 24.6% more vehicles, thanks to the market recovery in China. ŠKODA grew deliveries by 7.3%, with high demand for the Octavia as well as the SUV models, Kamiq and Karoq. With its strong focus on Southern Europe, SEAT deliveries fell by 3.7%. However, we see good sales momentum with the new CUPRA models. We delivered 10,000 CUPRA Formentors in the first quarter alone. Our premium brands grew by 31%. Audi had its best first quarter in China ever and grew deliveries in the U.S. more than 30%. Porsche's strong performance in China and in the U.S. drove growth of 36% in our sports segment. The truck and bus division reached around 60,000 deliveries, an increase of 31%. We also gained market shares in most of our core regions. In North America, we demonstrated a strong comeback story with deliveries rising 16.1%. In March alone, deliveries grew 80% compared to the prior year. We see high demand for the Atlas and expect similar momentum from the [ tours ]. In the South American region, our deliveries rose 6.5%, while the market remained on the low prior year's level. This was particularly driven by the Nivus and SUV that will come to Europe later this year. In Brazil, we expect to reach the breakeven point in 2021, following a clear turnaround strategy. Coming to Asia Pacific. Based on the strong performance in China, we outperformed market growth by more than 15 percentage points, which with the Viloran we introduced a comfortable luxury 7-seater, serving families and business needs. In Central and Eastern Europe, we increased our deliveries by 5%, while the market shrunk by around 3%. Looking at Western Europe, deliveries were impacted by COVID-related lockdowns and temporary factory shutdowns. However, order books are well filled, and the demand for our models is high. As promised, we will report our best sales on a quarterly basis. We delivered 60,000 BEVs to customers, 78% more than in Q1 last year and around 73,000 plug-in hybrids, a plus of 178%. In Western Europe, order intake amounted to 65,000, bringing the order backlog to more than 100,000 BEVs at the end of the quarter. Across the group, we already ranked #1 with our best sales in Europe. Meanwhile, our global BEV portfolio is growing rapidly. The Volkswagen brand introduced the ID.4 in China and in the U.S., further accelerating its electrification push. Other new e-models include the ID.4 GTX, the ID.5, the ID.6 as well as ŠKODA's ENYAQ, Audi's Q4 e-tron, Porsche's Taycan Cross Turismo and the CUPRA Born, all coming to market this year. In total, we expect to reach 1 million deliveries of e-models, BEV and PHEV combined in '21. Thus, we are fully on track to meet our CO2 targets in the EU. Over the next 10 years, Volkswagen will manage the largest transformation in its history to become a globally leading, climate-neutral, software-driven mobility group. As part of the transformation, we have further consolidated our smaller luxury brands. Bentley, Lamborghini and Ducati will be managed by Audi to help leverage the synergies in the luxury segment. Now under the roof of Porsche, Bugatti plans to join forces with Rimac. Our future profit pools will center around platforms: Our hardware, software, battery and charging as well as mobility and services platforms. In the first quarter, we continued to roll out our MEB platform with a production capacity of 1 million cars globally. On March 26, we presented our new software brand, CARIAD, to more than 4,000 employees. CARIAD will allow us to turn the car into a smart companion which will communicate 24/7 with the customers and provide updates and new digital features even years later. By further integrating the people and software capabilities of previous acquisitions, we are continuing to increase our in-house software expertise. I just visited our new CARIAD colleagues from HELLA Aglaia in Berlin, a top motivated team, state-of-the-art technology, now 200 experts work in the fields of perception, situation recognition and object classification. CARIAD has also set up a team to build up expertise in the definition of semiconductors a core competence as cars becoming Internet devices. Another important milestone was the bundling of our battery and charging activities under the leadership of Thomas Schmall. At our Power Day in mid-March, he and his team presented our road map for batteries and charging up to 2030. One unified cell approach, production in Europe, further partnerships with BP, Iberdrola, Enel to extend our charging infrastructure. At the same time, the transformation of our components business has proven to be an industry blueprint to make jobs in Germany and Europe future-proof. In the first quarter, we signed a joint venture agreement with Brose to establish a leading global seat supplier, together with our SITECH business. Finally, we are building system skills to offer mobility as a service to our customers for every situation in life. Together with Argo AI, we are pursuing the driverless vehicle for mobility services. In the first quarter, we got green light for test operations with our concept car I.D. BUZZ, laying the foundation for bringing the Argo system into driverless serious operation by 2025. As a new group leadership team, we achieved good earnings in the first quarter '21. Our semiconductor task force has played a big role in keeping our production up and running. We are pleased to see that the capital markets are increasingly recognizing our potential as drivers of tomorrow's mobility world. In 2021, we will further accelerate our transformation, backed by a strong operational performance and following our platform approach, which will be a cornerstone of our strategy 2030. With that, I hand over to Arno Antlitz, who will give you a deeper insight into our financials.

Yes. Thank you, Herbert. Ladies and gentlemen, dear colleagues, we're still very much living in unprecedented times. COVID continues to have an impact on our society, on ourselves and on our business. At the same time, the shortage of semiconductors has put added pressure on the whole industry. But against that backdrop, we delivered a solid first quarter. Sales revenue increased to EUR 62.4 billion. Operating profit came in at EUR 4.8 billion. That is EUR 3.9 billion above last year. The corresponding margin is 7.7%. Profit before tax came in at EUR 4.5 billion, while profit after tax was EUR 3.4 billion. This result was mostly driven by strong Passenger Car business, in particular, premium, which benefited from market recovery and strong product momentum. Overall, we showed strong mix and pricing as well as fixed cost discipline. Our Financial Services business also performed strongly. As you are aware, we cannot speak about the key drivers of our business without mentioning China. As part of the financial result, that equity result came in at around EUR 500 million, mainly delivered by our Chinese joint ventures. We have a clear focus on cash flow generation, even more so in our transformation. Our reported net cash flow came in strong at EUR 4.7 billion. Clean cash flow before M&A and diesel amounted to EUR 5.5 billion, and net liquidity rose to EUR 29.6 billion. This is an increase of EUR 2.9 billion versus year-end of 2020. These results clearly demonstrate our strong operating performance, show our focus on working capital and prove the robustness of our business. Liquidity. Our net liquidity profited from the strong net cash flow, while the payback of EUR 1.2 billion hybrid bond burdened the liquidity as well. At the end of Q1, we stand at EUR 29.6 billion. Coming to the performance of our divisions. With Automotive Division, passenger car delivered EUR 3.8 billion operating result, a strong 8.5% operating margin. Commercial vehicles came in at EUR 100 million. This result was burdened by a substantial restructuring cost at MAN. Power Engineering came in at a loss of around EUR 40 million. The Financial Services division, again, provided a strong pillar and contributed a strong EUR 1 billion result. Coming to our EBIT bridge. The strong result of EUR 3.8 billion for the Passenger Car business was driven by volume price/mix of EUR 2.5 billion, whereas about half of that came from volume increase against Q1 2020, which was already burdened by COVID. Price and mix contributed significantly as well, and we showed incentive discipline, especially on our MEBs. The block exchange rate derivatives came in at a positive EUR 500 million versus last year. The swing was mainly driven by fair valuations of commodity derivatives of EUR 1.4 billion, of which the absolute positive contribution in Q1 was EUR 500 million in 2021. Fixed costs increased slightly by EUR 200 million due to continued upfront R&D investment in our BEV ramp-up, the first positive contributions from our fixed cost program, and CapEx discipline compensated this effect. Coming to our brand group performance. Within volume group, brand Volkswagen made significant progress and came in with an operating margin of 4.5%, mainly driven by strong recovery in the regions, North America and South America. ŠKODA delivered a strong operating margin of 8.9%. Within the premium group, Audi continued the strong product and earnings momentum from last year and delivered a rock-solid first quarter with a double-digit operating margin of 10% and an extremely strong cash flow. Bentley also came in with a double-digit operating margin. In the sports and luxury group, Porsche very consistently delivered an impressive 16.7% operating margin. Looking at the commercial vehicle business in more detail, you get a mixed picture. Scania delivered a 12% margin. The underlying business of MAN had a small positive result, which was negatively impacted by restructuring costs of EUR 400 million. Coming to the outlook. Q1 has been a decent quarter. We have managed COVID and the semiconductor restrictions well so far. However, we still have limited overall visibility on the financial impact of the semiconductor shortages. While we expect a more difficult Q2, we see a good chance to recover a significant amount of the vehicles lost in the second half of the year. This development, together with our strong product momentum and our ambitious on the cost side, gives us enough confidence to raise our group operating margin guidance to the range of 5.5% to 7%. And we expect the net reported cash flow for the Automotive Division before Navistar transaction to come in significantly above 2020 figure. Ladies and gentlemen, we are clearly ambitious in our transformation, combined with the shift in resource allocation towards electric software and services. We will push to transform this company to a leading tech and mobility player in our industry. Cost and investment discipline are key to finance our strategy. Today and also in the future, I would like to give you an update on our progress by outlining some proof points of our strategy. Focus on product transformation, focusing on our BEV ramp-up, we are scaling up our BEV volume. The proportion of vehicles on the MEB platform is already over 30% of our total battery electric vehicles. Our deliveries are nearly 80% above the prior year. And technicals, especially on MEB cars are very low. Our over-the-air functionality will have regular updates available in the coming months. Software. With CARIAD, we are fully committed to developing a leading automotive software stack in the industry, which is an integral part of our strategy and a key differentiator for the future of our industry. Currently, the performance of CARIAD is shown within the other line of our group P&L. So I would like to give you more transparency about the planned business case. CARIAD already has around 4,000 employees, and Q1, CARIAD spend around EUR 500 million on R&D. The business case foresees a significant investment phase. The R&D cost for software stacks in the brand will fully shift to CARIAD. In the income phase, CARIAD will receive license fees paid by the brands for software used. This already started with the rollout of the ID family architecture. R&D and CapEx. We have very ambitious transformation plans that are required to safeguard our future. For that reason, we have guided for R&D around 7%. While this is still above our strategic target of 6%, it's necessary reflection of our execution of BEV strategy and of building up our software competence. On the other side, we will continue our strict CapEx discipline approach, and we will increase our efforts to capture synergies between brands also to compensate for higher R&D costs. In Q1, CapEx was not only in percentage terms well below 2020 figure, the absolute amount was also below the prior year. We are convinced that a lower fixed cost base is necessary to improve our competition and our competitive position and to finance our future. Therefore, we want to reduce fixed costs without R&D and CapEx until 2023 by 5% versus a defined base in 2020. Taking the year 2019 as a more normalized base, the group-wide program target implies a reduction of around 10%. We managed to decrease the cost base under this program by around 6% versus 2019 so far. There's still a way to go to achieve the 10% target, but we see this as a promising start. Ladies and gentlemen, we have a clear plan. We will strive to even better position our fascinating brands in the future through draw synergies where possible and work hard on the cost and efficiency side for the good of our customers and stakeholders. At the same time, we will transform ourselves into a technology and mobility service group. To achieve this goal, we will scale up our BEV platform, invest in battery energy and charging solutions. We intend to develop a leading automotive software stack and continue to invest in autonomous driving and mobility services. We intend to do this based on integrity in our values and with as much accountability, transparency and measurably as possible. Thank you very much.

Thank you, Arno. We will now take questions from investors and analysts. Operator, over to you, please.

We'll now take the first question from Arndt Ellinghorst at Bernstein.

I have 2 questions, please, one for Arno and one for Herbert Diess. Arno, you know the company super well from your time at the VW brand and then also recently at Audi. Frank did a fantastic job helping the group to deliver significantly more free cash flow over his time as CFO. What will be your key focus, your, call it, signature dish as CFO for the group? And then for Herbert Diess, please. Dr. Diess, you've received really strong support from the Supervisory Board in December. Your competitive component, Bernd Osterloh, is joining the management team. Earnings look strong. EVs rollout. So it's fair to say that Volkswagen is a far more stable waters now. So what are the areas where you think you could unlock meaningful value in the coming 1 or 2 years? And I ask that question not in the context to lift liquidity because I do believe you can finance your transformation. I'm thinking in the context of lifting shareholder value.

Yes, Arndt. Thanks for your question, and good to talk to you. Yes, you raised it very well. We increased focus on cash flow in the past already. And -- but I can tell you, we will focus even more on clean cash flow in the future because we need that cash flow to finance the transformation to BEV and software. And we will even focus more on transparency on that topic as well. And I don't rule out that we will report cash flow per brand, for example, from Q2 onwards to bring even more transparency into that. Yes, my signature dish. Look, as I laid out before, it's really twofold. First and foremost, I will focus on securing and strengthening the financial foundation of our group. That means focus on EBIT, cash, draw synergies between the brands. I think this is really a potential we really have. And we haven't really lived up to what we could do there. Focus on margin instead of volume, fixed costs, capital efficiency, so basically these are the -- really the basic CFO topics. But also, as I said before, I have a second area, and this is financially see the transformation of the group together with Herbert and the whole Board team from today's business to battery electric, to software, to battery and eventually to mobility services and autonomous driving. Look, you mustn't underestimate that point. This is important because a lot of these initiatives need a lot of cash and they are today borderline profitable, if at all. So they need to support. Because in the long run, we believe there are substantial parts of the revenue stemming from these profit pools in our industry from battery and also from software. And in some of your reports and reports of your colleagues, you reflect to that. And I'm sure Herbert will tackle on that in a minute as well. So in order to be ready then, we need to invest now as we basically did in the brand Volkswagen about years ago when we moved to all-electric platform. And we -- it would have been much cheaper to go for our next best. And Arndt basically, these are the 2 topics: strengthening the financial foundation and steering the transformation. Arndt, what can you expect personally? I think you know me since quite a while, open as transparency and hopefully, ambition.

Yes. Arndt, for me, the biggest -- I will dedicate much more resource than before because as you say, I'm a little bit freed off now from, let's say, the daily burns because the company is in good shape. We fixed basically our problems in the U.S. We have good situation in Latin America. I think the brand Volkswagen is on its way, and EV rollout should be working, we should be one of the best EV players and try getting closer to Tesla, also achieving margins should be possible we saw. I will dedicate from now on a lot more time to making sure that CARIAD is successful. We see the big profit pools getting closer to 2030. We see shifting from ICEs into electric, but then even more so software will play a major role. Autonomous driving will play a major role. We think that the total earnings potential 2030 will be much higher than today. Probably the spending in individual mobility will double until 2030. And we want a share of that. And to gain a share of that, we need to become much stronger in software. So CARIAD is really my focus for the next months and probably years to make sure that they get into shape to deliver, to get to the economies of scale. It is by far the most important platform theme through the group. It's complicated. No, we have to catch up, and I will dedicate at least a day per week. Currently, it's more to make sure that CARIAD is working. On the other hand, to get there to 2030, I think the other prerequisite is good cash flows. So together with Arno, I will make sure that we push for profitability, cash flows, reducing complexity in the ICE business to make sure that the ICE business continues to properly finance the transition. And then I think we can be doing both things. I think we can be in very good shape coming 2030 and very competitive and even bigger than we are today.

We'll now take the next question from José Asumendi at JPMorgan.

It's José Asumendi from JPMorgan. Two questions, please. Arno, would love to hear a little bit more about directionally for the second quarter where do we stand in terms of disruption, in terms of units, if possible. Or directionally, how do you see that momentum going into Q2? And if on a full year basis, you're looking now maybe at the mid- to upper range of the margin guidance for the group, any comments in the direction of travel? Love to hear a little bit about the great work you're doing on the battery side. Can you comment a little bit around the work you're doing with QuantumScape, with Northvolt to accelerate the battery work within the group? And also, as we think about those 6 battery factories that you want to roll out in the coming years, can you support this expansion with your own free cash generation? What's the plan there for the coming years? Obviously, very, very -- I think, very interesting expansion plans, but I would love to hear a bit more about how you plan to support that with your own free cash generation or with suppliers.

José, in terms of semiconductor, Herbert will make some remarks, and I'll come back to you with the EBIT topic.

So let me start probably, José, with your battery questions. We announced 6 battery plants, which will we -- which we need to support our aggressive BEV strategy leading to 55%, 60% of BEVs by 2030. We invested already quite a lot in battery technology, our investment in Gotion, QuantumScape, Northvolt, but we need a faster ramp-up of battery capacity. I think meanwhile, we are in good shape to define the right chemistry for batteries, also the right formats for our car lineup, and this is what we basically presented on our Power Day. Now it comes, who is going to invest for those 6 plants. We can't. We are looking for partnership. There are different options, which we are exploring currently. We have strong partners which are currently suppliers to us, where we might enter into joint venturing. We have strong interest from local governments, from the political area to invest, to co-invest in batteries. And we have strong interest from other industry groups, not even petrochemical industry, although the utilities are usually interested. So we will make sure that we can finance those 6 battery plants, mostly from outside cash. But we also want to make sure that we define the right technology, the economies of scale and we define the locations and the production processes. So it will be a mixed picture. And I hope that within the next couple of months, we are able then to announce already the next sites and the next partnerships, even I wouldn't exclude IPOing some of the activities. Then back to second quarter. José, the threat there is semiconductor supply. That's -- you know that it's all -- through the industry, I think we have to separate. We have, let's say, kind of a structural shortage of semiconductors, which we have seen in the first quarter already, which we can manage. It's basically we have to optimize our sales programs. And this structural shortage will remain for the next months, probably even for next year because we have to add capacity, together with semiconductor suppliers. Even in older technologies, we need additional capacity in 54-nanometer technology. That is we are working on. And there's a lot of investment coming into semiconductors, but it will take time. But still, I think that will be manageable because our share in semiconductors is probably 10% worldwide, 8% to 12% probably. So that should be manageable and over time should become better. What we're currently facing and what in quarter 2 is hitting us and our peers is the incidents we have seen in Japan, in the Renesas plant, which went off-line basically for 4 or 5 weeks and then in the winter storms in America, where we had a shutdown of 3 semiconductor plants for more than 3, partially for 4 weeks. Two of those plants, I've been mentioning are dedicated 100% to automotive, and that is what we're going to see in quarter 2. So we are working hard to make that as smooth as possible. We're also working on plants. So we will lose some volume, that's for sure, and in the hundred thousands. And it's -- we are trying to make sure that we can recover that in the second half of the year. There are plans in place. We have a task force working. That's what's going to happen. So I think with the second quarter -- overcoming the second quarter is really for the 2020 is the biggest turn. From then on, we see we have a positive outlook. Demand is picking up. Our sales are good. We have good product momentum. The regions are picking up. U.S. is extremely good momentum on the customer side. Even Latin America, which is stricken hard by COVID, is recovering. So Europe should recover after vaccination is being rolled out. And that is why we also -- we dared to increase our forecast because we think that it still can become a really good year.

Yes. José, Herbert mentioned already. Let me start with the full year I mean you're aware and Herbert mentioned the reasons we increased our guidance, product momentum, pricing. Also, we see -- again, when the demand is high and the supply is short, then you get better -- we can do better on mix. We have very good pricing discipline, extended discipline. And we think we can keep that throughout the year. And this was the reason why we basically are more confident and increased our guidance. So Q2, as said before, the visibility is really limited. But we understand that you would like to have a rough -- very rough indication. So we lost 100,000 cars so far, and the disturbance in Q2 might be even higher slightly. But from today's perspective, we think a very rough ballpark in terms of EBIT could be around 5%. But don't nail us down. You know normally, our second quarter is the strongest due to volume. But -- so it will be a burden, but something like around 5% should be doable.

We'll now take the next question from Kai Mueller at Barclays.

Two, if I may. The first one to Dr. Diess. To maybe start off on the semi issues, of course, it's a temporary issue, but you mentioned on the press call earlier that it might lead to more inventories going forward. How do you think about this right now? And is that something that you're starting to build already in the second half? Was it something for 2022 and beyond? And to follow-up from that, do you think that those benefits you've seen on pricing are sustainable also into '22, '23, that the industry has just gotten a lot better about that? And the second point -- second question to Dr. Antlitz. At your full year results, you already mentioned that had you set the long-term outlook margins at that point compared to November, you would have been putting them more ambitiously. What were really the key drivers for that statement? And where do you think the biggest levers are really to get to better margins than where we've come from in the past?

Okay. Semiconductors. Actually, today, we are reducing the stocks because we are leaning out the pipelines between second, third tiers and first tiers. So the buildup of inventories will take time. But I would say it's a strategic target to be more independent of interruptions like we have seen now in America and in Japan because if we would have had a month of stock, the situation would have been much less difficult for us. So that is what we are aiming for, but it will take time to get back into inventories because we need every semiconductor being produced currently. About pricing, I don't dare to predict really what's going to happen in '22. We don't know how we're going to end up. With COVID, there was so much money spent now. There's so much money also printed. So it's very difficult to give an indication of what's going to happen in '22. For '21, we think we still will see the second half of the year high demand worldwide probably.

My comment back then, based on the more structural consideration, I mean, we have strong products. Product momentum, we have strong ramp-up of our BEVs, ID.4 doing extremely well, Q4 e-tron and others are hitting the showrooms. So -- and mix and pricing, we will focus continuously on these topics. So there's -- also in the volume brand, there's a good chance. You know you're aware of that we were working on turnaround plans in North and South America for years. And now basically, we earn the fruits. We see good chance both in North and South America for the brand Volkswagen to achieve, basically breakeven. So -- and last but not least, on the fixed cost side. Yes, as I showed before, we increased turnover year-over-year, but we also increased fixed cost. And if we are able to like keep on growing, both in terms of turnover and margin, but keep fixed cost was under control within our program or even lower fixed costs at the same time, so that would give us more headroom. So these are the ingredients. And we will put all these ingredients in the new planning round. Of course, we are ambitious in terms of software and upfront investment. We have a good -- I would say, a good chance on CapEx to stay well below 6%, driving more synergies, put even more cars on the same platform in one factory rather than investing 2 or 3x. So overall, we are confident, but it's too early to say. We have a planning around, a normal planning a lender. We do our planning now, and we will communicate the results in October, November, as always.

We'll now take the next question from Stephen Reitman of Societe Generale.

I have 2 questions. First of all, on China. We've seen sequentially that your adequacy earnings declined in the first quarter compared to the fourth quarter of last year. And we are aware that you've had some issues at Shanghai Volkswagen. You're now launching new products and then you have the launch of the ID.4 at both JVs. First of all, could you talk about what is going on at the Shanghai Volkswagen? And what's the reception you're seeing already from the launches of the ID.4 in China? And with that, when do you think you'll be in a position where you'll be able to satisfy the requirements of the Chinese authorities with EV sales, so you won't need to be buying emissions credits from third parties like Tesla? My second question is about -- is related to semiconductors as well. And what we've seen, of course, is that it's not so much how many vehicles are used, but which you lose because of the semiconductor shortages, but which vehicles you lose. So I'm just wondering, over the 100,000 units you say you lost to semiconductors in the first quarter, were they more of the SEAT end of the range? And do you think that in the second quarter, when you say you'll be facing more pressures, you'll still be able to borrow from the low-contributing margin divisions and in order to keep the higher contribution divisions like Porsche and Audi running at full speed?

So let me start with the last one. It's not so easy to switch semiconductors between car lines and platforms. It's mostly really specific. What we do, yes, is prioritize high-contribution markets, lineups. And for sure, the more precious cars have higher semiconductor content. So they are more exposed to the shortage, which we see currently. And within this range, I think we managed quite well and also we prioritized. This is why, for instance, China and China South, China Shanghai was hit harder. Because, let's say, if you calculate the contribution through with our 50% or 40% joint venture ownership, then the contribution levels are just lower there, and we would prioritize some cars here in Europe. The -- Shanghai, yes, it's in kind of a transition. We have some new management appointments there. And we have to see that they have -- we have a little bit stronger internal competition, what I think is positive because FAW has now full SUV lineup and are very successful in the market. Our northern joint venture is more than successful than ever. And that probably our team in the South has to accept the challenge, work a little bit harder. I think there's no structural issues. We have a good product lineup, and they will regain momentum because it's a very competent team. We have with [indiscernible] very competent partner. The e-cars are coming now. We have a ramp-up for the ID.4 ahead of us where everyone is committed. So I think we should see within a couple of months, we should see clearly an improvement in China South and getting back to normal and at least at par with our North joint venture operation. So then you referred to CO2, the emissions scheme in China. Yes, currently, we are buying, but with the ramp-up of our EVs, we think by '23, we will be fully compliant with the Chinese legislation as well.

We'll now take the next question of Patrick Hummel at UBS.

It's Patrick from UBS. My first question would be for Arno. You have now an industrial net cash position of almost EUR 30 billion. And it seems like increasing the spending is not so much the name of the game. You're prioritizing EVs, but you're cutting in AVs and software, but you're cutting elsewhere. So I'm just wondering, you're going to have another high single-digit billion cash inflow in the remaining quarters of the year, which will get you close to EUR 40 billion. So how do you, as a new group CFO, think about that massive liquidity buffer? The business is self-funding, as you highlighted. So what's going to be the use of that EUR 40 billion net cash pile? And the second question would go to Herbert Diess. Herbert, in terms of the structural takeaways from this semiconductor crisis, I'm just interested, what are you taking away here as far as your inventory management is concerned as far as your pricing strategies are concerned or even as far as your degree of vertical integration is concerned. Does Volkswagen have to think about in-sourcing semis or reserving capacity with additional financial commitments to avoid such situations going forward?

Yes, Patrick. That's -- you mentioned that. Yes, don't forget, we have Gotion -- payout for the Gotion transaction, and we have Navistar still expecting this year. So in all our guidance, we always mentioned that we didn't include the Navistar transaction. But you're right, we are doing very well on net cash flow. There were some extraordinary positives in the first quarter, to be honest, because for the first quarter, the EUR 4.7 billion is really strong. And then the clean cash was even strong with EUR 5.5 million. So basically, normally, as you know, in our industry, you ramped down the pipeline at the end of December and you increase it. So due to the semiconductor shortage, we were really -- we have -- we saw very little increase. So we are below ideal stock, but still, yes, we expect the Chinese dividends. We said we want to focus on cash, but as said before, we have some transactions planned. But what I can say, and this is -- I think it's a good message, even with Navistar and the payout of Gotion, there's a good chance to stay well below EUR 20 billion of net liquidity, I think which will be a very good and strong message from today's perspective. And don't forget, there will be some diesel outflows in the year as well. So overall, we are confident, but don't forget what the outflows that are coming.

Yes. Structural takeaways from the semiconductor shortages. I think there are several. So I'm really -- and I'm talking a lot with the colleagues from the -- even from the foundries, I have now a very good overview of how the industry is set up. And for sure, what we will take away is that we need some inventories between the foundries first years and then probably our pipeline. That is low investment compared to the amount of money you can lose if you can't build a car. So I think it's well spent, and we are agreeing with the -- even on the foundries, but mostly with our first years the level of inventories which we are running in each phase, but it will take time to build those up. So structural takeaways are also -- and that will cover incidents like we have seen in Japan or now in -- the winter storms in America. But we have a structural problem there that as the Internet of Things is growing so fast, that the consumption and the growth in semiconductors is bigger than the plants or the capacities we see in the market today, structurally hurting automotive. Automotive is probably 10% -- or 9% of semiconductor business worldwide. So it's always a question of prioritizing. But in this case, Internet of Things is mostly based on relatively old semiconductor technologies of 54 nanometer or so, which is exactly the technology which we most use in our cars. As our life cycles are relatively long, we stick to the technology for many years. So there, we have a structural problem. And we are in talks with the semiconductor manufacturers how to solve it. Probably, the best way is to move the other products out of those plants to give more room for our expansion and for growth. But that has to be tackled that also someone has to spend the money for moving -- shifting to newer technologies to 9 nanometer, even 5. That is where we are, and we are in basically daily dialogue with the Infineons, even with TSMC to -- how to get the structural solution to that. And -- but I have to say, in the newer technologies, there's a lot of capacity coming to the semiconductor industry. You know that probably better, but TSMC is investing. Intel has announced huge investment plans. So we will see some structural growth. Our theme is mostly in the relatively old technologies of 45 -- 54 nanometers where we have to find a solution, and we are working on that. What we also learned and it's had nothing to do with the crisis, but it's evident that as the car becomes much more dependent on semiconductors, not only when it comes to production but also to the properties of the car, not the differentiation, then we need to get closer to the semiconductor. So we are -- yes, we are building up a group, which is able to influence design, codesign, semiconductor layouts, but mostly for specific ASICs, for specific microcontrollers, for autonomous driving and for the operation of the car. So we are getting more into semiconductors. We are investing there all through our software division, and this is a structural change. As the -- our industry becomes much more a device industry, a connected device industry, we need to get closer to the semiconductor industry.

I think -- sorry, I need to come back to your question or to my answer. I don't want to confuse you guys. Of course, I wanted to say we will stay above EUR 20 billion or above EUR 20 billion net liquidity, including Navistar. I think as I said below, sorry for that. So the correct formulation is above EUR 20 billion.

Can I just follow-up with Herbert briefly? Do you think the right level of inventory prepandemic is different because we see now that low inventories result in a very benign pricing environment? Is there anything you plan to structurally change on that front?

You referred to our inventory, not the stock we have in our dealers and internally? We will strive for lower inventories, I might say, no, Arno? Arno agrees. Low inventories always help for pricing. And as you know, we have been very much geared up for volume leadership, being #1. We don't pursue this target anymore. We see the ICE business as the source of cash we need for the transition and for being profitable. So we will focus on profitability and cash flow.

Let me add on what Herbert just said. We -- what already -- what we obviously see is low inventory help on pricing and incentive discipline. But from the current situation, we are well below ideal stock. So if you do basically a cash flow work until the end of the year, you might see a slight increase of stock and basically a slight burden of cash flow due to that because currently due to the semiconductor topic, we are understocked, and we try to catch up in the second half of the year, as I said before.

We'll now take the next question from George Galliers at Goldman Sachs.

Earlier in the year, you talked about your target to reduce procurement costs by 7%. Could you provide an update on the latest status on that program? And is this an area where you plan to give the market further details later in this year? And then secondly, I just wanted to clarify a point on the semiconductor impact for Q2. You mentioned 5%. Is that a 5% cut to EBIT versus plan? Or were you saying that you expect the EBIT margin or the operating income margin to be around 5% in the second quarter as a consequence of the semiconductor disruption?

I might answer that. It's 5% EBIT margin remaining. And the question regarding our purchasing targets, I would like to postpone because we have Murat Aksel being preparing a meeting specifically with you, and we will have a deep dive in summer. I think he's very good underway. Now he set up a big team. We have external support. He has really motivated his 7,000 people in purchasing worldwide in group conferences. So they are gearing up, and I'm sure that in summer he will give a very detailed picture of how it's going to happen and what is the additional value in it.

We'll now take the next question from Dorothee Cresswell at Exane.

Dorothee Cresswell from Exane. I only have one left. Just coming back to the BEV sales volume in Q1, 60,000 units, that's less than 3% of your volumes. And I think for the full year, you're planning to be at 6%. So how can we be confident that you'll get to that level, given it now requires a really rapid ramp in the coming quarters and, of course, in the context of the semis disruption as well? Any comments on that would be really helpful.

Yes, for sure. Yes, we have been -- we are very happy with the launches so far, but there's now a huge product momentum building up. The ID.4 just was introduced into the markets, beginning in Europe, but now comes China, United States, which is our main volume driver for this year, but then comes in short distance, ENYAQ from ŠKODA, which is we have very good order book on this car. We have a different plant. So it's additional capacity we add. Then the Audi Q4 e-tron is coming on the same platform. And the ID.5 towards the end of the year. So there's huge -- ID.4 GTX is being launched. So there's huge product momentum on the MEB cars. But also, you -- we will see an additional Porsche model, the Taycan additional derivative is coming, and the Audi TT e-tron is coming into the market. So there's huge product momentum worldwide, which gives us big confidence for -- to achieving those 1 million cars between EVs and plug-in hybrids in 2021. CUPRA el-Born, I didn't mention there's also ŠKODA or CUPRA car coming. So we have basically all dealers stocked with electric cars, which might be an advantage compared to some competitors, where they're only focusing on one region. So you will see in most of our brands, a very attractive EV lineup. We have direct customer access. Battery supply seems to be good so far. So the ramp-up is going really well. So yes, we can -- I think we can double our, let's say, the market share and get to those 1 million or 0.5 million EVs.

Thank you, Herbert. We've just looked and noticed, we still have quite a few analysts left in the queue. So if you could please restrict to -- yourself to 1 question. That would be very helpful.

We will now take the next question from Horst Schneider at Bank of America.

I have got one question on the EBIT bridge. So you showed a price/mix impact of EUR 900 million for Q1, and also product costs, just a minus EUR 100 million impact. I mean, on price/mix, I find the impact a little bit low as compared to that what we have seen from some other car makers. For example, from Stellantis or, for example, Mercedes in the premium business. So can you maybe explain a little bit what is behind this volume price/mix impact? Is it maybe weaker at the mass market brands? Or is that just the case that the pricing in Europe is maybe weaker? And just in North America, the price [indiscernible] would be appreciated? And then also on the raw materials, I can't see really a raw material negative impact. So is that falling then into [indiscernible] quarter? Or why has been the product cost not being more negative in Q1 already?

Yes. Thanks for the question. First, on the EBIT bridge, I said before it's half volume and half price and mix. And so basically, if you divide that price/mix, pricing and incentives has been pretty strong. We have a positive product mix, but we also see a slightly negative regional mix. Since our regions in specifically South America performed really strong, north America performed really strong. And although within these regions, we had a good product mix, the overall margin is a little bit weaker compared to the strong margins in Europe and other regions. So you get -- although we're doing there very well, also in pricing and mix in South America, we have a negative, yes, let's call it, country mix, and that might be different to some of our European competitors who don't have business in South America and also India. But overall, we are very pleased with the development in South America. Don't get me wrong, teams are doing very good job on the way to breakeven. Great cars are hitting the road, good mix. So it's more like an overall country mix that it's burdened us a little bit.

We'll now take the next question from Philippe Houchois at Jefferies.

My question was on the China recovery. It is happening nicely sequentially, and we expected it, but it's relatively soft still, and I appreciate the difficulties you have at site now. My question is, we see the same situation at GM, which is also a large market share in China. So I'm just wondering if -- how we should look at the Chinese market, say, over the next 5 years? We have much more competition, the more innovative carmakers determined to regain share of their domestic market and offering, to some extent, a different value proposition, more software-driven, more customer interface. So I'm just trying to understand how you look at China. Is there scope to go back to the peak years a few years ago? Or do we have to live with lower profitability? And what that means in terms of your reinvestment and the payout ratio out of China because we used to getting pretty much 100% of the equity contribution of cash. I'm wondering if that's going to be more limited in the future?

Actually, we are confident with our China business. We were predicted to lose market share already many years ago, but we are, by far, the strongest player in China. Volkswagen is most successful brand in China, about 13% market share. Recently, we lost a bit, yes, because we are in a disadvantage when it comes to semiconductor supply. It seems to be that the Japanese brands are better set with the semiconductor. So we lost a little bit of market share against Toyota, Honda, which I think is not too much of a concern, but we have to watch it, and we have to get back into momentum. We have good product momentum there, full rollout of the SUVs. Now China North, China South, fully geared up for electric cars hitting the road. So we think that we can define our position. Also Jetta is a success story. We introduced that entry-level brand against the local brands, which we are defending our position. What you've seen in the first quarter is not what we are continuously aiming for. So we want to get back to our strength, and there's very good likelihood and plans behind that.

We'll now take the next question from Charles Coldicott at Redburn.

I also wanted to ask about the regulatory credits you're purchasing in the U.S. and China. Can you tell us the cash cost of those purchases this year? And do you expect to buy credits in the U.S. until 2023, like you mentioned for China? And also, finally, specifically, are you buying them from Tesla?

So we have to -- let's say, I don't have the disclosed information -- the detailed information, neither for China nor for the U.S. I only can tell you that by coming '23, we will be self-sufficient in both regions. That has to do with the ramp-up also. If we do something, it's a transitional measure, which is not of -- let's say, which is not structural. We are always aiming to be self-sufficient in EVs. The ramp-up will lead to a situation that for the next 2 years, we still have to -- buy relatively little money credits in both regions.

We'll now take the next question from Henning Cosman at HSBC.

I was hoping we could talk a little bit more about the Audi and Porsche margins. I appreciate, Arno what you said about the country mix, but presumably, that's a little bit less relevant for Audi and Porsche. So of course, in contrast to BMW and Mercedes-Benz cars, sequentially, the margins came down quite a bit. So I was hoping you could just share a little bit more color where these are normalizing now, considering that pricing should still have been very strong. So have you been front-loading a lot of the costs for the digital and EV transformation into these margins? If you could just give a little extra color what we should expect on Porsche and Audi specifically, where these are normalizing now and if it gets a lot worse before it gets better? And also, in the context of CARIAD, thank you for the additional disclosure. With what you said of more R&D now shifting into the others' line out of the brands, do you think you'll have to revisit the 9% and 15% margin targets for Audi and Porsche, respectively, in the context of R&D going out of these margin levels?

Yes. Thanks for your question. I mean, if you look at the margin in the first quarter, Audi 10%, Porsche 16.7%, we think these are still pretty strong margins. Look, we don't want to give too much guidance and outlook because these brands have their own press releases and press conferences, I think Helen, too?

Yes. Arno, we have Audi conference call tomorrow at 15:30 Summer European Time. So you will get more detail there.

Yes. So if you find time, please join their conference call. I'm sure they will give like the guidance on these topics. But as I said before, we are pretty happy with the margin at Audi in the first quarter. Talking about CARIAD, you're quite right, we will have a view on that during the planning round. We basically -- we allocated R&D in the CARIAD. And you saw it basically EUR 500 million in the first quarter. We wouldn't be surprised for the full year, if you take that times 4. This is about the ballpark figure of what we can expect from CARIAD. And yes, some of that has been in the brands before. But on the other hand, there's also additional on top, which we haven't spent in the past preparing our new software stack, preparing for Level 4. And we will revisit our targets within the planning round and also potentially come back to you on that topic.

Thank you, Arno. Charlie, just a small statement for you. We will get back to you with a little bit more detail around the credits for CO2.

We'll now take the next question from Tom Narayan at RBC.

It's Tom Narayan, RBC. Mr. Diess, could you comment on component in-sourcing with respect to your BEVs? Last week, a key supplier stated that it currently surprised -- supplies the inverter, battery coolers, AC unit, AHV, electric heater and battery chiller for the VW ID.3 and ID.4. And we've heard from other OEMs that they're doing a lot of these components in-house on their BEVs. Just curious as to see your thoughts on component in-sourcing.

Yes. As a general rule, we use that transition into EVs also to really rebuild and optimize our supply chain. And as you have probably noticed, for instance, we get out of the seat business. We put our assets into a joint venture with Brose which also then will be consolidated with Brose which will reduce our commitment and also our, let's say, improve -- will help us to get the company sleek and more focused. On the EV side, there are few components, which we think we can do better. It comes to -- think about the electric engines, we will have the biggest platform for electric vehicles probably in the world. And it just -- and this is highly automated. It's very low labor cost. It's a lot of machinery, and it's standardized all over the world. So we thought it's probably good idea to do that in-house. It needs also to reshaping some of our plants because it requires less labor, no higher automate. And so it gives us a chance to transform and speed up the transition into our internal supply chains. Same applies to some of the components for the electric cars and steering, for instance, some of the axle components because we foresee for the MEB really the leading electric platform, which we also will supply to some of our competitors. Ford is using the same set of components, and that should create economies of scale. And those are technologies where we know that we are competitive in-house, not like in seats or, let's say, more traditional components, but those are components. On the inverter side, there is a question of who should do the inverters. We will be capable to design the inverters ourselves. We don't want to go into inverter manufacturing, power electronics, but we have to be able to design those and then have them manufactured, probably not in the current first year structure, but lower down in the manufacturing structure. Batteries, yes, we think we need to understand batteries very well. They are decisive for the scale-up, for the quality of the vehicles, also for the cost position. So we need to be able to define the batteries. We need to know how to manufacture the batteries. And this is why we are also investing ourselves. But then for scaling, we think should be of our balance sheet, and we do it either with suppliers or even IPOing some of our activities. And then there are some minor components on the EVs, which we think we can do better, but this is always a question of who can do it better. We have economies of scale. We have probably investments done, but this decision is basically taken on a technical basis, who can do it better and cheaper worldwide. And this is about the best probably.

[Operator Instructions] We'll now take the next question from Daniel Schwarz at Stifel.

Yes. I have a question actually on the visibility that you have. The initial guidance that you gave mid-March was that Q1 is probably closer to the lower end of the guided range due to the chip shortages. Now in reality, it was above the upper end of the range, so more than 50% better than what you expected. Could you again say what explains this massive gap? I would have thought that by mid-March, you pretty much know how much chip you have available and how much cars or how many cars you're going to produce? And could such a surprise, again, happen in the second quarter?

Yes, we are aware of that. Back then, when we gave that guidance, we thought that the majority of the shortfall of the chips will be in the first quarter. But due to the good work of our task force teams and all the efforts and the experience of our teams, we significantly improved in the first quarter. But now we see the risk shifting to quarter 2. So this is basically the technical explanation of that. But as far as I know, this happened in the whole industry, but I must say also, our teams did a very good job on that. And from today's perspective, we expect a major shortage in Q2 and then try to catch up in Q3 and Q4.

Operator from where we see now, we don't have any more analysts or investors in the queue. So we'd like to wrap up for today. And again, just a reminder for Audi's conference call tomorrow at 15:30 Summer European Time. Of course, we thank you for your participation today. We thank the colleagues within the IR team and also our other internal colleagues for their preparation for today's event. If you have any further questions, feel free to get back to me or anybody in the team. And last and most importantly, we hope you stay healthy, and we wish you a good day. Thank you.

That concludes today's call. Thank you for your participation. You may now disconnect.