Volkswagen AG (VOW3) Earnings Call Transcript & Summary

Hello, and a very warm welcome here out of Wolfsburg. My name is Rolf Woller. I'm together with Nicole, I'm the host of this call today. Welcome to the call on the occasion of the potential listing of Porsche AG. Together with Nicole here in the room, we have Arno Antlitz, our CFO; and via telephone line, Herbert Diess, our CEO; and a couple of members from the IR and from the media team. Before we come to the presentation, please make yourself familiar with the disclaimer on Page 2. I will not read it to you, but you can do this yourself. The presentation, as said, will be held by Dr. Herbert Diess and Dr. Arno Antlitz. And after the presentation, we continue with the Q&A. [Operator Instructions] As we have only 45 minutes for this call in total, we might not be able to answer all of your questions. But be rest assured that Nicole's team and my team are very happy to take all the open questions after that call individually. We should also make you aware that we will probably not be able to answer all your questions. This is not because we don't want to, but because of the status of the project, where capital market rules have forced us early on to report share price-relevant information even if the project parameters are not all yet finalized. And just one last technical remark. The presentation will be available for download on the Volkswagen web page after this call. And with that, I hand over to Nicole.

Yes. Just good morning from my side as well. Good morning especially to the media representatives, also to everybody joining us today, and I'll hand right over to Herbert. The team, again, is available all day for follow-up questions.

Thank you, Nicole. Good morning, everybody. Before we speak about Porsche, let me just briefly address the situation in the Ukraine. As one of the larger [ European ] car makers, we are very present also in Eastern Europe, and we are watching the attack on Ukraine with great concern and dismay. We're convinced that the attainable solution to the conflict [ cannot be found ] [indiscernible] [ international call ]. As for Volkswagen, ensuring the safety of our employees in this region is our top priority. When the conflict started escalating a few weeks ago, we already offered our people there in the Ukraine to fly them out of the country. So I set up the task force to monitor the supply situation and we hope you understand that, at this point, it's too early to assess the impact on our business. So let me turn now to last [ night's news ]. Our industry is going through a fundamental transformation, reaching Volkswagen with [ variable ] position. We are making good progress on our participation in the [ European ] market, our technology is good, and we have the right strategy in [ inlaid ] which is material [ is alleging ]. So what do we want to achieve with a potential [ project until ] First, we want to unlock Porsche AG's full potential to increase its agility and entrepreneurial freedom. Second, to strengthen Volkswagen's balance sheet, to accelerate the transformation towards NEW AUTO. Third, we want to crystallize value for Volkswagen shareholders through a separate listing of Porsche AG. And fourth is to create a setup which benefits all stakeholders. So accelerating the change towards BEV and software-enabled mobility solutions, [indiscernible] achieve higher strategic and operational freedom for Porsche and strengthen the Sports brand group and position Porsche as the #1 electric sports car player. All those targets we can achieve and accelerate with this potential IPO. So before Arno will provide you with the overview of the potential IPO structure, I would like to take a moment to put this [indiscernible] in context of our NEW AUTO strategy. Volkswagen today is one of [ market leading brands ] with a leading portfolio of market-leading brands and our technology which is across a variety of segments. [ We still are going to the edges ] to get a vertically integrated mobility company with strong [ rate ] groups and global leading technology platforms. So to reduce complexity, we are ensuring a highly [ independent ] and entrepreneurial program for each of the pillars. Last year in December, we committed ourselves in the [10 around 70 ] investment plan to invest significantly into focus areas of future technologies. We plan to invest around EUR 90 million into the [ theme of ] electrification and software to ensure that we reach our ambitious targets [ and with ] 50% of investments are dedicated towards [ best ]. A partial listing could help us to accelerate the execution of our strategy and provide for additional flexibility on top of planning around 70. An independent Porsche [indiscernible] flexibility to accelerate its plan and ultimately [ enrich ] from the transformation as #1 electric sports car player. Last year, the [ full ] electric Taycan already outsold the iconic 911, proving that Porsche has impressively arrived at the [ electric goal ]. This marks an inflection point and the ideal timing for the potential transaction in order to provide our EV shift [indiscernible]. So Porsche today is already one of these iconic and successful sports car brand, and we are convinced that production in [ cooperation ] with Porsche AG would help to further unlock [ pricing potential ]. An independent listing would [ prefer ] the capital markets like on Porsche. That's a good sign that the iconic brand would enhance and sharpen its position [ with Volkswagen ] to sports car manufacturer. Furthermore, Porsche would benefit from increased [ instrumentational advancement agility ] and achieve greater entrepreneurial freedom. At the same time, Porsche will maintain [ 50 ] synergies all the benefits that come along with it for Volkswagen [ it's a break ]. Ultimately, Porsche will be the focus on delivering continued value creation and growth, not only for Volkswagen but also for our shareholders. With that, I hand over to Arno, who will deliver the [ metrics ] in great detail on the potential IPO structure. Thank you.

Yes. Thank you very much, and good morning to everybody in this call from my side as well. Yesterday, we took an important milestone on the way towards implementation of our strategy, but our thoughts and hopes today are with the people in the Ukraine. Let me now walk you through the envisioned transaction steps in greater detail. I just want to reiterate that we are just initiating a review of the potential listing and that no ultimate decision has been taken yet. In the contemplated transaction structure, we would split Porsche AG share capital into 50% ordinary shares and 50% [ preferred shares with the ] aim to list up to 20% of the nonvoting Porsche AG preference shares via a secondary offering on the stock exchange as early as Q4 2022. We would not list the ordinary shares, however, for we would sell 25% plus 1 ordinary share to Porsche SE to compensate for the negative control rights or veto right that comes with the stake. It is currently foreseen that PSE would pay a 7.5% premium through Porsche AG pref IPO price. Consequently, Volkswagen will remain a majority shareholder of both the ordinary and preferred shares in Porsche AG. Thereby, we will continue to fully consolidate Porsche AG in our group financial accounts. In order for everyone to benefit from the success of the transaction, it is planned that all shareholders of Volkswagen will receive a special dividend as high as 49% of the gross proceeds from the IPO. Equally, the employees of Volkswagen AG would also be able to benefit from the continued success of our group and will receive a special bonus of EUR 2,000 upon successful listing of Porsche AG. The amount for this program would total up to approximately EUR 300 million. Taking all the transaction elements together, we believe that this set up best benefits the interest of all stakeholders. The envisioned transaction structure would generate financial flexibility for Volkswagen to accelerate the transformation towards NEW AUTO. At the same time, Volkswagen can continue to fully consolidate Porsche with positive result on margins and, we are convinced, credit rating. Moreover, Porsche AG would have long-term strategic shareholders with fully aligned interests and strategic objectives. Our shareholders will benefit from the value crystallization of a separately listed Porsche AG and the accelerated transformation towards NEW AUTO and will receive a special dividend of 49% of the gross transaction proceeds. And last but not least, investors in Porsche AG preference shares would have the opportunity to invest into the most iconic sports car manufacturer and benefit from the value creation potential that we see for a separately listed Porsche AG. In summary, this creates a win-win situation for all parties involved. One question that you might ask is how does the potential Porsche AG listing fit into our industrial and brand logic? Let me remind you what we have always said about our brand logic for Porsche. Porsche performs in a league of its own and has shown resilient EBIT margins of above 15% over the past years. Porsche has always maintained a higher degree of independence while being industrially integrated in the group, contributing technology and benefiting from scale and the Volkswagen manufacturing footprint. Reflecting on both arguments, we believe that the separate listing of Porsche AG in the envisioned structure is a logical next step under our value creation and brand group management framework. Ultimately, a separately listed Porsche AG could sharpen its brand image as the most desirable electric sports car brand. We are excited to evaluate the potential listing over the next months. As you can imagine, the transaction of this magnitude requires careful assessment and will ensure all aspects will be [ delightly ] considered before taking the final decision. Following yesterday's announcement, we will focus on initiating the industrial, financial and legal assessment of a potential separation and assess the capital market readiness of Porsche AG. Parallel, we will renegotiate the transaction agreements to assure that once we've concluded the assessment of a potential listing, we are in the position to act quickly on the outcome of the assessment. Needless to say that all agreements need to ensure that we are able to maintain the synergies of Porsche AG with Volkswagen to the maximum extent possible. As of today, we are evaluating the potential listing without an ultimate decision on the outcome. We aim to update you about the progress in late summer 2022. Given the amount of preparation required subject to the outcome of the assessment, any listing of Porsche could happen as early as Q4 2022. We want to thank you for your time today. We thank you for your continued support on us, on our path towards NEW AUTO transformation. And now we are open for your questions, which I mentioned earlier, can be posted as via Q&A box below this call. Thank you very much so far.

Thank you, Arno. As said, it would be great if you can post us your questions via the Q&A box, and some did already so. And we have the first question here from José Asumendi from JPMorgan. I think this is one for Arno. How will have investors the opportunity, invest in Porsche AG ordinary shares, Arno?

The investors will have the opportunity to invest in pref shares of Porsche because the pref shares will be listed in this IPO.

Very good. The next question also from José was what proportion of the share proceeds will be distributed to the workers? So implicitly, how big can the employee program grow? And how many employees are eligible for it?

A portion. I think the number of employees are benefiting is around 130 -- 130,000, right?

Exactly.

And then the amount per employee is EUR 2,000 per head.

So approximately EUR 300 million would be the answer to that question. Very good. The next question we see here is coming from Dorothee Cresswell from BNP Paribas. Does Volkswagen have the proceeds of the Porsche AG IPO earmarked for a certain purpose? Historically, the group has always indicated that it could fund growth in tech transition through its own free cash flow generation.

Yes, that's still the case. We're still aiming for financing the transformation, but the process will give us additional flexibility. I mean I said before the shareholders benefit from the transaction as well. So 49% of the proceeds will be allocated to our current shareholders, and the rest of the proceeds will give us additional flexibility in implementing our NEW AUTO strategy. We outlined already that we have ambitious plans on our battery strategy, for example. So the proceeds will give us additional flexibility, specifically in implementing these new platforms, CARIAD software, then battery strategy charging and energy and the mobility platform.

Very good. And I think it's also fair to say that the proceeds would help us to -- early on help us funding our strategic liquidity target, where we have said that for 2026, where we want to have about 10% of our revenues as net liquidity available.

I would read out the next question from Christoph Steitz from Reuters. He's got two questions. First being the potential structure of the IPO implies that Volkswagen will continue to hold around 75% of Porsche AG's share capital. Would you rule out going below that level in the medium or long term? Second question, can you rule out selling additional shares beyond the 25% plus 1 share, be it ordinary or preferred to Porsche SE, if you decide in favor of an IPO?

Currently our planning to place 25% of ordinary and pref shares. And so this is the step we have decided on currently and that -- so our plan is to still fully consolidate Porsche in the future. So we think this is the best of both worlds. Porsche has more flexibility. Porsche has more renewable freedom. And at the same time, we still consolidate Porsche. We still have the possibility to draw synergies within the group and between Porsche and the other brands. So we think this is an excellent step. And so there are no decisions made or no plans for further steps so far.

And then we have another one from Frank Johannsen at Automobilwoche to Herbert Diess. And I may actually repeat Herbert's Diess answer because I've heard that he might be difficult to understand. So first, the question. Mr. Diess, last year, you stated Porsche's better part of VW and you want to use the high profits of Porsche AG for investments into VW's future. What did change your mind, preferred partly to an IPO, effectively reducing the profit you received from Porsche?

Yes, Nicole, I don't know whether you can hear me. So we didn't change our mind at all because Porsche remains fully consolidated, will further contribute to the cash flows through the dividends of Porsche, we get the synergies. But we get additional access to capital markets. So for additional investment in flexibility and we get higher motivation for Porsche. It's more independent. So it's -- we're exactly pursuing the same strategy.

So just to repeat what Herbert said, it's not a change from the previous statements or strategy. We didn't change our minds because we are still fully consolidating Porsche AG, yet it will give us some additional flexibility and higher motivation for the Porsche employees.

Very good. Then we take one from Tim Rokossa, Deutsche Bank. Were there any other material concessions given to the labor unions other than the EUR 2,000 per head? Any guarantees on more jobs in Wolfsburg?

Look, we think this transaction is really a win-win situation for all of that -- for all our stakeholders. And yes, they are the -- the participation of our Volkswagen AG people of EUR 2,000 per head, but the transaction also helps the overall workforce because we think, as a company, we will become stronger. We will be able to finance our NEW AUTO strategy to finance our transformation and to become even a stronger player in the transformation of our industry. And ultimately, that also means that, basically, it leads to secure [ the premise ] of jobs and more competitiveness of our companies. So basically, all the people will benefit from this transaction.

Very good. Then we have another one from Daniel Schwarz from Stifel. Why no spin-off, Arno?

Yes, I think we indicated it on one exhibit. Basically, on the one hand, you could think of a spin-off. And on the other hand, you could think of a minority IPO. In the spin-off, of course, you could achieve back a separate listing of Porsche, more motivation of the team and all the shareholder would benefit. But we would get no proceeds in order to finance the transformation to get more flexibility. And on the other hand, on the minority IPO, we will get all the proceeds. And we think the combination of an IPO with 49% of the proceeds distributed to our shareholders via a special dividend is the best construction of both worlds and a great combination of these 2 concepts, so that all the shareholders benefit and all the stakeholders benefit and the company benefits from this transaction.

Very good. Nicole?

We have the next question from Chris Bryant from Bloomberg, asking also about the win-win that we are describing the potential transactions as. This transaction is presented as a win-win for everyone, but it seems primarily to benefit the Porsche [ PS ] families. Why is it in the interest of institutional investors for the families to acquire a blocking minority? Shouldn't the 7.5% premium be higher?

No. As said before, we think that the transaction we presented is in the best interest of all stakeholders, all the shareholders of the company, also of our employees. And to the certain -- to the specific question of the 7.5% premium, well -- of course, we've accompanied in the transaction by experts -- market experts from Goldman Sachs, and we've got a lot of support and a lot of documentation on the premium and benchmarks, and we got a lot of market insight from this team. And this -- so the 7.5% is at arm's length and is backed by our advisers. So this is how we came up with the 7.5% premium.

Yes. Maybe the next question from Dorothee from BNP Paribas again. It's a little bit specific. So maybe I take it in answering because it's about how will Porsche SE fund the acquisition of Porsche AG [ works ]? Will Porsche SE sell some of its Volkswagen ordinary shares and so on and so forth? I think, Dorothee, you might understand that we don't want to talk on behalf of a third party. So how Porsche SE is financing the stuff, I think, is something which we definitely have to address to the relevant spokespersons there. Another one I got from George Galliers which -- from Goldman, which goes in the same direction as previous questions, what was the rationale behind the 25% structure, Arno?

Yes. The rationale of [ the band to ] 25% was, as said before, we would like to get proceeds to the IPO -- through the IPO. But still, we want to have -- fully consolidate Porsche in the long run. And we want to have a stable shareholder structure. On the other hand, we wanted to place IPO -- the shares so that we get the proceeds. And this is how we came up with the structure of 25% of the prefs, giving through the IPO and 25% plus 1 share selling into PSE at the premium 7.5%, as discussed before, which reflects basically the control rights that the PSE will have in the future in the Porsche.

We have 1 question from Joe Miller with Financial Times. Can you explain what you mean exactly by greater flexibility? Do you need these proceeds for battery plants, for example? Or are you expecting to go way beyond planning around 70 on EV penetration in the near future?

No. As I said before, we have ambitious plans in the transformation, and we invest 6 battery -- 6 giga factories in Europe. We always said, one, we foresee as CapEx in our books, [ 5 if we want the ] -- for the time being, like finance together with partners. So yes, the proceeds will give us more flexibility to invest some of these batteries at the first step on our own. But as always said, we don't rule out that we will IPO also our battery business in future. There are other opportunities in the area of software, other opportunities in the area of mobility, but no decisions are taken yet. So as said, in general, the proceeds will give us a greater flexibility in pursuing our ambitious transformation.

Very good. Then I have the next question coming in from José again from JPMorgan. How does the current pref shareholders in Volkswagen benefit from this transaction, Arno?

Yes, they benefit in this transaction because they are invested in a company that will be even more stable and robust. They are invested in the company that will be able to basically pursue this transformation with even more consistency. And last but not least, they will benefit in terms of the special dividend we pay out of 49% of the gross proceeds.

Okay. There is another one from Frank Johannsen at Automobilwoche. He's asking about the expected value of the IPO. Obviously, there has been a lot of speculation and he now wants to get our assessment.

Yes. I think we would all agree, Porsche is a great brand, Porsche is a iconic brand. Porsche successfully entered the battery electric in the market with great products. Porsche Taycan even more successful than the 911. So Porsche proved that it will be also successful in the new world of battery electric vehicles. So basically, we are very convinced that Porsche is an icon brand. But to give you specific numbers, it's too early. We are at the beginning of the process and there are a lot of factors that depend -- that determine the value. So we will give you more information later on in the process. Please just have understanding that it's too early. It also depends on external factors, so this is really too early.

You might get a flavor when you look at the analyst research, yes, there are huge ranges, and they all agree it's a very, very valuable asset. And we are going from 2-digit billions to 3-digit billions. But as Arno has said, from our side, currently, we make progress as the timetable proceeds, and then we will let you in late summer. I have an additional one from Tim Rokossa from Deutsche Bank. Arno, how do we make sure that this additional cash available to us does not reduce the spending discipline you have established in the recent months and quarters in Volkswagen Group?

Tim, thanks for this question. That's a very good question. But you can be sure that we will go our way at the path we restarted in CapEx discipline, in fixed cost discipline. You remember we promised that in 2023 our fixed cost base compared to 2019 will be 10% lower. Fixed costs base 2019 was about EUR 40 billion, and we are on a very good way to achieve this target. We also promise CapEx discipline. So rest assured that we will keep that path.

Very good. Then we have another question coming in. The question is, what else can happen that the transaction does not take place?

Yes. As said before, the final decision on the IPO has not been made yet. There are details on the feasibility of the projects that will be examined in detail. The actual feasibility on IPO depends on the large number of different parameters, market conditions. But as I said before, I don't see any roadblocks from today. But yes, there are a lot of factors or several factors that we have to take into account.

Another question from the audience is, will shareholders of Volkswagen preferred shares receive a special dividend in the same amount? Or will the EUR 0.06 difference still apply?

The EUR 0.06 difference will also apply in the special dividend. So to make it very clear, the special dividend goes all shareholders of Volkswagen AG, and the EUR 0.06 dividends will also apply to the preferred shareholders.

Then we have Markus Klausen from Dow Jones. He is asking about the effects that the Porsche IPO will have on the close cooperation with Audi. So I assume between Audi and Porsche. And this is from Markus Klausen at Dow Jones.

No, I don't have a list. [indiscernible]

I'm afraid we lost the...

Okay. Herbert?

Yes.

Do you want to answer this question or should I take it?

Sorry. The question was -- yes, yes, sorry. The question was whether the potential IPO of Porsche would have an impact on the close cooperation between Audi and Porsche.

No, not at all. We are -- Audi and Porsche are sharing platforms and Porsche is aiming at increasing synergies with the group. Porsche will have access to all the [indiscernible].

So just to repeat this because the quality of the call is a bit poor, he's saying there's no impact on the cooperation between Audi and Porsche. They are working closely together and will continue to do so. Maybe to add one question from Daniel Schwarz at Stifel. Do you see this transaction as a role model, blueprint for a possible IPO of either the battery business or CARIAD?

Yes. As said before, specifically on the battery business, where we found it -- where we are in the process of founding a company that will consolidate all of our battery activities, not only the running and the ramp-up of the running of the 6 giga factories in Europe, but also activities in the area of [ cultured ] material and other initiatives. We said we are open for third party, but we're also open for strategic investors, and we don't even rule out an IPO of the battery business. So yes, this might be an example. Of -- on CARIAD it's too early to say. But definitely, for the battery business, it might be an opportunity.

Maybe one question we have from Stephen Reitman from Societe Generale, going in a similar direction. Arno, is this the starting signal for further IPOs of other brands?

I would say we are just in the stage of [ examining ] the Porsche IPO. That's our course now. Everything else is currently not up for discussion on the brand levels.

And there is another question we have. Does the Annual Shareholder Meeting or Annual General Meeting of Porsche SE or Volkswagen have to approve the project? And do the preferred shareholders of Volkswagen AG have to approve it?

The project does not require the approval of the respective annual general meeting, either at the level of Volkswagen AG and also not on the level of Porsche AG. The approval of the preference shareholders of Porsche AG is also not required. However, you have to take into account or have in mind that we were talking about a special dividend and the Annual General Meeting of Volkswagen AG must decide on the distribution of this special dividend for preferred shareholders as well as for ordinary ones.

Very good. I think we are approaching now, rather but steadily the time line of this call. Maybe there is another one we get here. Why is Porsche AG not receiving any money from the IPO? Arno, again, for you.

Porsche, yes, I mean, to start with the other statement, I'm quite sure that Porsche AG will also benefit from the IPO in terms of motivation for the team, more entrepreneurial freedom for Porsche, but this is possible IPO of Porsche has planned a so-called secondary replacement. So it's Volkswagen as a owner sells existing Porsche AG preferred shares in the capital market, and these proceeds will flow to Volkswagen accordingly and not to Porsche.

Okay. That was good. There is one from José Asumendi, again from JPMorgan. Will existing Volkswagen shareholders in the pref [ standing ] get a preferential treatment in the IPO, Arno?

I think this is too early to say. We are -- no, this is -- there will be -- no.

No, there will be no preferred. That will be according to the existing rules, obviously. I mean, first, as said, we have to get there, but then it would be the normal book building process from other transactions, and the preferential treatment is not planned apart from what we have laid out in the presentation. Okay. Very good. Nicole, any other questions from the media we should address?

I don't think so. As mentioned before, we will be available all day for follow-up questions, both on the media and analyst side and from the [ general ] side. I think we can conclude here.

Very good. Then -- I don't know if you have recognized, but we're 9 slides in the presentation. We had a presenter actually for the first 4 pages, that was Herbert, and then another one presenter actually for the last pages. So one would come to the conclusion that this is displaying 911 for the iconic brand, but that was not done by intention. Arno, any last words on today's call?

We're really looking forward to great opportunity for our company. Great opportunity for pursuing our transformation. And yes, we really look forward to the next step. Thanks very much for listening.

Herbert any last statement from your side? Okay. I think now we lost him finally.

No. I mean, I'm really [ enthusiastic ] about this first step. We [ really need ] to make it possible. The IPO, I think it will really release additional motivation, not only in Porsche but with the group. And I think it's a very important structural step for the group to make it is more agile, more robust, more future-ready.

Very good.

Just to repeat those last words in case you haven't got it. So Herbert is really, really enthusiastic about this potential step we would be taking. It will release additional motivation not only on the Porsche side but also on the Volkswagen side. And ultimately, it will make the group more agile, more robust and more future-ready.

That's good. Okay. With that, we conclude today's call. We thank you for staying with us that early in the morning. And as Nicole has said, if there are any follow-ups, the teams will be happy to assist you and will be available here in Wolfsburg and take your calls. Many thanks, and have a good rest of the Friday and hopefully a restful weekend soon.

Thanks very much for participating.

Bye-bye.