Volkswagen AG (VOW3) Earnings Call Transcript & Summary

This was the kickoff sign for me. Thanks for joining us today to our investor and analyst Q&A. Together with me here in Berlin are our CEO, Oliver Blume; and our CFO, Arno Antlitz. Before I hand over to Ollie to Arno some, housekeeping remarks. You should have all received today our press release, the annual report 2022 and the investor and analyst presentation. If not so, please visit our website, www.volkswagenag.com. The session will be opened by a brief summary from Ollie and from Arno focusing on the most relevant topics for fiscal year 2022 and our outlook for 2023. Before we start, I would like to draw your attention to the disclaimer, which you will see now. Please read it carefully because I'm not going to read it to you. After the intro, we will host the Q&A. And would ask all of you to stay disciplined on the Q&A, limiting yourself to, let's say, 2 questions per person in order to give everybody a chance to raise his or her question upon due time. If anything is left answered, the IR team will be happy to take your questions afterwards. With that, I hand it over to Ollie and Arno for the opening remarks. Ollie, the floor is yours.

All right. Thank you very much for your introduction. Dear, ladies and gentlemen, thanks for joining our investors and analyst Q&A session today after our Annual Media Conference. Last year's success were a great team effort. Each of our brands has also contributed to our success, and that's in all 4 brand groups. Let me start with the volume group. And I am particularly very proud of the ID. Buzz. Its success shows that the combination of tradition and state-of-the-art technology is extremely well received by our customers. In the Premium Brand Group, Bentley sold more than 15,000 vehicles in 1 year for the first time in 2022. And looking to the results and operating profit over EUR 700 million with a profitability over 20%. This is a great team effort of which we can particularly proud of. Lamborghini continued to build on its impressive growth, delivering over 9,000 vehicles worldwide last year, a 10% increase over the previous sales record set in '21, and that with an operating profit over EUR 600 million and the profitability over 25%. And in Sports & Luxury, my personal highlights was the Porsche IPO, which a lot of you joined during the last year. The IPO marked a historic day. Porsche is more independent and agile after the IPO. The newly gained independence makes it possible to develop even more speed. And yesterday, we were able to present it on the Annual Media Conference of Porsche. The IPO has shown that we can successful on the capital market. We are now using this experience to sustainably increase the value of the group. Last but not least, coming to TRATON. Also with a positive development. For the first time in history, we achieved over 300,000 units. And that's also driven by Navistar and everything with an operating profit of EUR 1.6 billion. We are confident that we have a successful fiscal year ahead of us. To turn this confidence into reality, we will continue to systematically implement our 10-point plan. Let me touch on some highlights here. Our top priority remains financial robustness. We will use our capital more efficiently and focus more on our financial income and net cash flow. At the same time, controlling our costs and the proceeds generated by the Porsche IPO in September '22 have provided additional headroom. On products, our customers by brands, and our brands are iconic. We will continue to focus on product strategy, design, quality and future-oriented technology profile of our products and will release a series of new models. Coming to China, and I had the opportunity to visit China 4 weeks ago, and I was very impressed because of the speed you can see there in the market in terms of technology. The Chinese market is changing very quickly, and we need the right strategy and the right speed to safeguard our leadership position there. We are naming our approach in China for China, which will center local partnerships, including Horizon Robotics and Cariads, what we announced last year. Coming to Cariads. One of our most present issues, last year was a reorganization of our software activities. Now we continue to develop Cariad with exciting projects and a new realistic software road map. Coming to PowerCo, a stable supply of competitive battery cells, necessary for the ramp-up of e-mobility. That is why we established PowerCo in July. PowerCo is responsible for all activities along the entire battery value chain. Our plant in Salzgitter, which is scheduled to start production in '25, is the blueprint for our global battery offensive. And as we have mentioned, we already announced a battery plant in Canada as well. Sustainability. Last year, we tightened our CO2 target in production and received an award from the renowned science-based targets initiative instead of the previous 30% reduction, we are now aiming for a 50% reduction in production-related CO2 emissions from our passenger cars and light commercial vehicles by 2030. By the end of the year, our European production sites will already be supplied with 100% renewable energy. And important capital markets, our strategic investment planning up to '27 proof that the Volkswagen Group is looking to the future for all our brands. We are, therefore, further fine-tuning virtual equity stories for our brand groups and value drivers in the group. The results will be presented at the Capital Markets Day on June 21. Strong, robust, resilient, digital and sustainable, this is how we will continue to play a leading role in the area of electric and digital mobility. And at the end of my words, I would like comment something about our Capital Markets Day. We have announced for the 21st of June this year, which will take place in Hockenheim, and what you can expect from the Capital Markets Day. First of all, we thought that it will be very useful for you to experience our great products at the Capital Markets Day during a driving event at the [indiscernible] race track. Content-wise, the Capital Markets Day will provide an update of key focus areas and the new steering approach at Volkswagen. We plan to detail the strategy of our brand groups, including the plant EV ramp-up, given update of status and key milestones for our technology business, provides an overview of our strategy in key regions, explain our new steering model, share the group financial targets and framework. And we target that U.S. investors will have better transparency on where we currently stand and how the new team will turn the company into a better one. The Capital Markets Day is planned at the start of a series of events [indiscernible] over the coming years. More to be revealed at the Capital Markets Day. So thank you very much for listening. And now I would like to turn over to Arno. I think this is where the financials come into play. Can you give us a short overview on the results and an overview for the upcoming year?

Thank you, Oliver, and I promise I make a good chart. The Volkswagen Group generated solid financial results in the year 2022 in a challenging environment. At the same time, we made important progress in key areas of our corporate strategy. And thus, rigorously advance our transformation. This again proves the robustness of our business model and the commitment of our team to drive change. Volkswagen Group is well positioned operates from a strong financial position and has a will to continue to transform towards electrification and digitalization also in challenging times. We now look at our financial figures just briefly, I'm sure by now, every one of you had the chance to have a look at them in detail. Our sales volume at the [ weak ] level of the previous year due to various restrictions and distortions in the supply chain and the continued shortage of semiconductors. Wholesale revenue increased by 12% to EUR 279 billion. Asset trend of higher mix and better equipped vehicles from the previous year continued, increased our operating profit before special items to EUR 22.5 billion. The operating margin increased slightly to 8.1%. This strong result benefited from noncash valuation effects of around EUR 1.8 billion on our raw material hedges. On the other hand, we had to absorb write-downs in connection with the closure of our business in Russia in the order of EUR 2 billion, and the costs associated with the very successful IPO of Porsche amounted to around EUR 0.5 billion. Earnings, adjusted for these effects would even exceeded the reported EUR 22.5 billion. Our passenger car business came in at EUR 15 billion, a strong performance given the challenges in supply chains and the burden from our Russian business. [indiscernible] came in at EUR 1.6 billion, corresponding to a 4% margin and really strong results again in our Financial Services business with an operating result of EUR 5.7 billion. Coming to our EBIT bridge, performance in the passenger car division was driven by a convincing product substance across all brands, enabling us once again able to compensate for the negative effect of the slightly lower sales volume through strong mix and better pricing discipline. However, raw material costs steel, aluminum or battery raw materials have become considerably more expensive compared to 2021 for the year as a whole, the resulting increase in product costs had a negative impact of almost EUR 8 billion on the operating profit. Despite the continued high discipline, we were unable to completely avoid an increase in fixed costs due to sales growth and upfront expenditures for new products. Nevertheless, our fixed cost reduction initiatives contributed significantly for the [indiscernible] and to an improved competitive position. Then short [indiscernible] on net liquidity as well as net cash flow, we cannot be satisfied with the reported net cash flow generated of around EUR 5 billion in fiscal year 2022, also reflecting an unstable supply situation throughout 2022 and disruptions in the logistics chains, particularly at the end of the year. As a result, working capital and in particular, inventory to finished goods, raw materials were at the end of the year, significantly higher than expected. In addition, CapEx as well as R&D increased versus fiscal year 2022 as we continue to invest in our future. The liquidity of the Automotive division end of 2022 increased to EUR 43 billion, including proceeds of EUR 16.1 billion from the successful Porsche IPO in September 2022. [indiscernible] for the payout of the net dividend in January, the net liquidity for the automotive business stands to around EUR 36.5 billion at the end of the beginning of 2023. Towards in China, our proportionate operative result of our JVs in China came in at EUR 3.3 billion, well above the 2021 figure, but still under the respective result of 2020. Last but not least, you are aware that we proposed a regular dividend of EUR 8.70 per ordinary share. This is around 16% above previous year and adds to the special dividend of EUR 19.06 per ordinary share. This clearly underpins our conviction that our shareholders benefit from the robust financial performance of the Volkswagen Group. Coming to our outlook. Important core economic indicators such as growth prospects in the individual regions, our expected inflation rates remain challenging. On the other hand, we expect that in 2023, the structural shortage of semiconductors will improve and the supply with raw materials and logistics will gradually stabilize. The latter one is within our clear focus. We have fascinating brands with convincing product offerings in all major segments and an order backlog of almost 2 million vehicles in Western Europe alone. On this basis, we assume that deliveries to customers of the Volkswagen Group in 2023 will amount to around 9.5 million vehicles. For the Volkswagen Group, we expect sales revenue in 2023 to exceed the prior year figure by 10% to 15%, and the operating return on sales to remain between a solid 7.5% and 8.5%. Volkswagen Group expects reported net cash flow in the region of EUR 6 billion to EUR 8 billion in 2023. This implies a reversal of a negative effect in working capital at the end of 2022 mentioned earlier. On the other hand, this guidance takes into account the provision for additional cash effective expenses for the development of our battery business in PowerCo of around EUR 5 billion on top of our current core business. The upfront expenditures for our battery activity are important requisite for the successful ramp-up of electric vehicle production and in our opinion, represents a key success factor in the future so far to our financial figures. And now let's kick off the Q&A.

Thank you, Arno, and thank you, Oli. [Operator Instructions] And we can already see first questions actually queuing up here. And I would like to take a first question here. Tim Rokossa from Deutsche Bank.

Yes. Not to address my 2 questions because they are clearly of financial nature, but at the same time, it's very much about the strategic direction of the company. So when I think about my 2 questions, and I think about your outlook, short and midterm. In the short term, your outlook sent quite a few shock waves through the automotive industry last week, many wondering in particular about the bullishness for the volume, but also how you want to keep pricing while you're growing so strongly. Can you explain why you feel a need to grow as much instead of clearly prioritizing profit after with all that the industry can be much more profitable at lower selling levels? And if Q1 already supports this guidance or if this is something that you have to chase into H2? And secondly, when we think about the midterm, many investors look at your investment plans today, and they wonder if it will ever stop to go up or if you will always find something new to spend money on. Now you say the peak is in 2025. Now it feels a lot of these investments are done just to, frankly, maintain your ability to actually [indiscernible] [ Euro 7 ] and so on and so forth rather than really generating any incremental profits from where you are today. Post the investment peak in 2025, should we expect free cash flow to increase materially from here? Or is the ROI that you are generating with these investments rather in the range of what we are used to from the U.S. today?

Tim, we use the timeline. The first answer will come from Oli. It's on the bullishness of the volume. Second then will be taken by Arno, and the third is a mix of the 2. So Oli, please start.

Tim, thanks for your questions. Yes, about our volume planning, we still have a very strong order bank and a strong order intake. And on the other side, we implemented a program to stabilize our supply chain, which is paying off. So we are getting positive results from our supply network. And when you look back to '22, you have to take in mind that we had to close a lot of our factories because of the Ukraine war and the wire harnesses we are getting from the Ukraine. We were not able to catch up all the units over the year. And therefore, it's very logical for us that we have a strong increase in deliveries in '23, calculating with 9.5 million, and that's feasible because of our market condition. Overall, we won't push the products into the market in terms of pricing situation. And that is my position, that we drive the company more market-driven than production-driven. And then I hand over to Arno for the second question.

Yes, I'll try to answer this combination of questions. You referred to our outlook and also the volume planning, as Oliver said, the volume planning is a combination of great products we have, we sit on an order bank of 1.8 million cars alone in Europe, and we want to deliver this cars to the customers and last but at least, if you compare to 2022 there were like a technical improvement plan since we had specifically the wiring harness topic in April, June. So all in all, we think we can achieve that without sacrificing margin discipline and stay disciplined there. So our auto, as you mentioned, it's a confident outlook. But if you look on our business model, we think we have all the ingredients in hand that we can achieve this outlook. First and foremost, yes, there will be a positive volume price mix, of course, due to the volume planning we have and due to the factors I just mentioned. Also product cost, you -- I think you saw that specifically in Q4, we were hit with a huge amount of -- huge mix instead of product costs. Some of them will look like basically also be relevant for 2023. But overall, the bucket product costs in our EBIT bridge should turn to a significant positive. And last but not least on the fixed cost side, we want to stay very disciplined on the fixed cost. So taking all these things into account, we think, yes, it's an outlook which is ambitious, but we are pretty much sure that we can achieve that outlook in terms of margin. So then our midterm planning. I'm sure you referred to the EUR 180 billion for the 5-year Planning Round. Let me give you a little bit more light into or more details on to that. Basically, technically, it's -- if you'll take the 159 from last -- from last Planning Round, we basically added EUR 15 billion for the battery capacity increase and better the strategy, not only in terms of battery capacity, but also in terms of raw materials, and the significant increase was [indiscernible]. In terms of the R&D CapEx combined over time, we expect the peak in 2025 -- 2024, 2025. And from there on, a significant like reduction a year-over-year. So why is that the case? Look, currently, we are really in a situation where we want to ramp up or we need to ramp up our battery electric strategy, both in terms of products and in terms of basically transforming our factories to electric. At the same time, we expect last expenditures -- last recommends for giving our combustion cars competitive and it's a unit [indiscernible] consideration for us to grow in relevant regions, specifically in the U.S. with the Inflation Reduction Act. So this is basically kind of a double burden we see in the next 2 to 3 years. And based on what you said, then based on our long-term EBIT planning, cash flow should then significantly improve after 2025 and beyond.

Arno, [indiscernible] on the first quarter start.

First quarter to start. We had a decent start into the first quarter in terms of sales, specifically in Europe and the rest of the world. China was weak, but in China, also the overall market was big. It was not only Volkswagen situation. We want to -- and we will be disciplined on pricing and incentives. I talked about a burden from raw materials that might be still a significant factor in the first quarter in a total year. As said, it should turn to a positive. Of course, we cannot predict our hedging results fixed, cost discipline. So all in all, we expect also the first quarter to be within the bandwidth of 7.5% to 8.5%.

Thanks, Arno. Very good. Tim?

Yes, that's very clear. Can I follow up with 1 question on the short-term statement. Come with the second half, you realize China does not bounce back very strongly. Europe is actually weaker than you expect. You have worked through order backlog. Do you prioritize the unit sales targets or the margin target?

Tim, I said we want to stay disciplined, and we will stay disciplined. But on the other hand, look, we -- look, we have this order backlog of 1.8 million to almost 2 million cars. So we really want to deliver these cars to the customers. So our ambitious volume planning is not taking into account the significant increase in incentives. But really, the customers are waiting some electrical cars, customers are waiting for more than a year and also the combustion engine cars have really a long lead time. And we have a strong order intake based on the current price of thing, specifically on the non-EV cars. So the order bank is even moving towards 1.9 billion and towards 2 billion -- 2 million cars. So we really want to deliver this to the customer.

Executing on the order book and staying disciplined on the margin. George, the next question comes from you, from George Galliers from Goldman Sachs.

So the first question I had was just around the incremental investments in the battery business of EUR 15 billion. Could you just confirm how many incremental plants you're adding to the plan today versus what was included in planning around 70? And with the EUR 15 billion as you've identified, is that sufficient to cover this investments by Volkswagen as a whole? Or will you still need or potentially need funding support from external partners, either potentially battery pure plays? Or in the past, you've mentioned potential battery IPO as a means of funding the battery plants. The second question I had was also around the incremental investments, and this is specifically on Scouts. Obviously, Scouts sounds like an exciting venture with a very good history to the brand. But when I look at your portfolio today, it looks like you have an excess of 12 brands, more than 80 different models, which obviously adds a huge amount of complexity to your business. When I compare that to the most valuable car company in the world, operating with 1 brand and 4 models, clearly, they don't have the same complexity. As you think about Volkswagen strategically, do you need to have the complexity you had in the old world in the new world to achieve sales volumes of roughly 10 million units, which you've achieved in the past?

Thanks, George. The first part will be taken by Olive on the EUR 15 billion battery invest. And the second scout, we have a passionate speaker here for the Scout brand that will be taken by Arno.

Yes, George, let me start with your question about the battery business first. It is, on the 1 hand side, important that we see the battery technologies as a core competence for the future. And therefore, we decided also to build our own development and production. On the other side, we always have to leverage what we want to do by our own and where we want to work together with partners and that depends a lot on the cost positioning. We would and will be able to achieve in the different regions of the world. And so it's a make or buy a process behind. What is important that from our planning, what we need all in Europe, by our own 240-kilowatt hours per year. And we kicked off 2 battery plants in Europe at Salzgitter 40:43 and Valencia. And for the upcoming year, we will decide where we want to build new battery plants. And that depends a lot on the industrial framework we are getting in the regions, which support we are getting on the financial level and what plays a big role is the energy pricing. And turning to North America. The decision we have taken for the Canada plant provides all these aspects, very positive industrial framework, a guarantee for energy pricing. And beside of this, the opportunity for cooperation and value chain and energy and raw materials and that makes this decision so attractive. And in Europe, we will take it step by step and always leveraging what we do by our own and what we will do with partners, but also focusing on our core competence.

Yes, George, I will answer the question. As I said, and I will -- based on what Oliver said on the strategy on a battery, a little bit more technical background. In the planning [indiscernible] same, there was basically only the Salzgitter plant included -- we always said, including 1 plant. And now with the planning around 71, we included basically the EUR 15 billion on top for the -- for basically the finalization of Salzgitter, and then basically Valencia the plant in Canada, we just communicated. A small proportion of money if there would be an additional investment. And the remaining EUR 15 billion are basically reserved for investments along the value chain upstream in raw material and then also in JVs, for example, for the [indiscernible] credit mature. So this is basically the EUR 15 billion, we do not rule out that the figure over time will increase. But for the time being, this is included in our 71 figure. Yes, let me talk a little bit about Scout. I'm really excited. I mean, look, a bit related more from a strategic perspective. Given the regulatory uncertainty in the current environment, it's really important that we are strategically more resilient, and we are strong in Europe and we are strong in China, and we really want to keep that strength, but we have the chance and we need to basically strengthen our third pillar in the U.S. This is very clear with more localization, and Scout and electrification also of the typical segment. By the way, one of the most profitable and promising segments in the world gives us the opportunity to enter this very profitable segment with an own brand with Scout. We have the technology. We basically now have also the battery sales there. And that would really enlarge our footprint and also would give us the opportunity to grow in the U.S. market and to grow profitable. Just for a reminder, for you, for years, we made losses, which is basically not a secret. We achieved the turnaround in 2021. And in 2022, we were already highly profitable there, and we want to continue that profitable growth. That doesn't mean that we see also the necessity and the possibility of reduction of our model lineup, specifically in the combustion engine, you will see a significant first [indiscernible] Euro 7 or after Euro 7. And in total, we want to achieve a significant higher sales volume in 2030 with significant less models overall. So if you take the number of models today on ICE and combustion engine, on the one hand and [ PVs ] on the other hand, the model lineup in 2030 will be significantly lower than today.

Thanks, George. The next question comes from Harald from Morgan Stanley.

Two questions, really. Firstly, I mean, I'm sorry to have to go back to this, but I mean all the clients are wondering, we unfortunately have a lot of experience of car companies guiding ambitiously on volumes. And as you well know, that hasn't historically ended incredibly well. So I'm just wondering the strategy, why Guide to 9.5 million? Why not guide a little bit lower? And then I know you've got the order bank and order book, I'm listening to you. But if you guide lower and then you end up higher, tends to have a much, much better result. It now seems like 3 or 4 of the big OEMs are over guiding. And historically, that's led to more pricing. And maybe you can give us a bit of color on the overall market share assumptions you're making because or -- and even IHS global sales growth of 3%, it looks like you're aiming to take 1 million units of market share in 2023, which seems quite ambitious. Second question, strategically, given the increase in the investment plan. And again, I fully understand your ambitions in batteries and it makes sense. But if you're an investor and your company is currently very profitable, right, over EUR 20 billion of EBIT, which has historically peak profitability. You're now spending EUR 180 billion, EUR 360 per share in the next 5 years on transitioning the company. What happens to that strategy if suddenly, we do have a much more difficult market? You saw what happened to the banking system this week. If banks suddenly pull back from lending and the overall car demand starts to fall? What happens to EUR 180 billion worth of investment, which you must understand is the most enormous number we've ever seen, if the profitability in your cash flow starts to fall, you understand that's strategically very difficult, but it's very difficult for investors as well. How would you answer that question, please?

All right. Oli is taking the 9.5, and then also happy to elaborate on the 180. And Arno is adding the additional color.

Harald, about the volume. It's more a consequence about the situation where we do have from the order side and the more stable situation in our supply chain network and the expectations we do have in the markets. But once again, for us, the volume at the end is not a driving key figure. More important, this is our profit margin. And that's the answer. Over the year, we will leverage how the market situation is developing. For example, and already, we are able to see it in Europe that the situation for Volkswagen Group is better than last year and logical and because of the Ukraine war as last year. And now we see a strong signal on the market. And in China, the whole market now is increasing. And especially in China, we're expecting a very strong second half year. And that is the logic behind. We have seen already in Europe and North America. After corona, a lot of people there were rating. We're watching what happens in the community, what decisions will be taken by the governments in March. And so that's the expectation we do have. And at the end, if we see difficult market conditions, we always leverage and prioritize our margin situation.

Okay. So you would agree, so you're not actually looking to take 1 million units, you're more bullish on the overall market volumes than we are. Is that the right conclusion from what you're saying?

We expect plus 8% for the overall market, and that compares to the plus 15%. But we would say -- we would take a slightly higher share. As I said, both on product substance and order bank, but also technically, if you look at how we performed in the last year specifically from the wire and harness topic following the Ukraine war. So it's plausible how we plan the overall market. On the investment, yes, we have very solid financials. We always said the Porsche IPO would give us more flexibility to finance the transformation and the proceeds were always earmarked basically for the battery strategy. And in terms of profitability of the battery business, we think it's also justified. In terms of risk and robustness. Of course, if there were signs that our overall plan doesn't work out the overall industry is not growing as we expect, we are flexible to also react on the EUR 180 billion. There are flexibilities built in, 1 flexibility is obvious if the market would come different, if the battery electric vehicle overall market would be different in Europe. We have flexibility in postponing or shifting some of the investments in the battery business. And so rest assured, the overall target is having at all times, solid financials and robust financials. And we will look at this figure planning on by planning around and look at our volumes we achieve on our margin we achieve, and if necessary, we would adjust accordingly.

The next question comes from Daniel Roeska from Sanford Benstein.

My first question relates to the speed of innovation in the industry at Volkswagen. Now you referenced your China trip several times, highlighting the speed in the markets and in some areas, you highlighted kind of where you wanted to catch up. If you're behind today, how can you increase your speed sufficiently to kind of out-innovate the competitors ahead of you? And what are some of the changes that give you confidence kind of to significantly increase Volkswagen's innovation speeds in the years to come? And then my second question relates to e-fuels where you seem to have a disconnect. You summarized earlier that ships aircraft possibly other regions would greatly benefit from e-fuels, no argument there. But how does that create a need for e-fuels in Europe, where by 2035, the [indiscernible], 100% should be feasible? Or is this kind of a vote of non-confidence for that 100% target by '35? And on the sector level, are you not worried that more delays and more discussions about regulations in Europe and the '35 targets, may drive investments away from Europe and then aggregate actually work against the, let's say, the [indiscernible] targets?

A clear winner for these 2 questions, Daniel is Oli?

Thanks for your questions. And first, speed of innovation. And that is so important for us, having on the one hand side focus and on the other side, speed. And therefore, we have taken many -- many very important decisions on group level. And let me start with our platforms. We audience, very clearly our platforms for the future now to lead engineers. We have the smaller platforms as 0 and 8, and the lead development of Volkswagen, the B and C segment for Audi, and D segment in Porsche, and that brings us in the position to benefit from our scale effects in the group. It's a very clear focus. And what we are doing currently. We already started with the first platform, it just be sports platform to define a clear technology profile, which defines where we want to be 5 or 10 years and also watching the competition in the market in order to jump far enough most with our platforms, and that's driving innovation. And therefore, we are very confident now with the shape of our platforms, that we will be competitive for our intermediate platforms. For example, the MEB and the PPE. We already decided important upgrade, which will come very, very soon, on the level of innovations, but also on the quality of our cars. And then as an important point, it's not about innovation but about attractiveness of our product is a very big design approach to improve design features for the future. And so we have a complete program very focused on products. And there, we are very confident all the products sought from the customers that we will hit the market and speed up the platforms. Talking about e-fuels. And there, the discussion is often that there is a conflict in between electromobility and e-fuels and [indiscernible] a conflict. When you think about climate protection, you have to think in all measures, which are possible. And we are strongly committed on our ramp-up curve on electromobility. And on the other side, and that's only an initiative we are doing in the group with Porsche. All the other brands they don't invest into e-fuels, that's only Porsche, because we see it more as a responsibility. Think about options to reduce CO2 for existing combustion engine cars on the road and ships or in the aviation industry. And there, I don't know any other option to go for -- when to go for e-fuels and every percentage counts. And that might be a big market. And we should come out from the German or the European perspective that the climate changes a worldwide responsibility. And when you look towards South America to Africa to India, for example, we will have combustion engine cars over a decade. And so there is a market. And therefore, from our understanding of sustainability, we tried for it, but it's focused on Porsche. Porsche has a share of the biggest e-fuels company of the world, that's it. And from the augmentation, I hope it will be possible to separate the strong electric ramp-up and the synthetic fuels. For the electric ramp-up in Europe, 35% is ambitious, that is clear. And therefore, we have to provide with exciting products. It's our job. Then we need the charging infrastructure. There, we will support. We have the plan worldwide to achieve around about 45,000 fast-charging points around the world, but it's also a public issue. And on the other side, to build new renewable energy resources is also a condition for the ramp-up. And so in Europe, let's go for it. It's ambitious. But we also have to watch all the other regions of the world. Our investment profile is prepared for this. But we also have to take in mind a bit of flexibility in terms of different speed of the regions, how they are moving towards the transformation.

Thank you, Daniel. So the next question is from Horst Schneider from Bank of America. Horst?

I want to ask them, please, one by one. I want to come back again, sorry, on the top line guidance, but I want to phrase the question a little bit more different. So Arno, you have said this morning, I think, in an interview that the mass market is getting more competitive. So maybe you can elaborate what do you mean by that? Where do you see that? How is the order and price situation developing at the moment?

Actually, this was not only this morning in interview, I said that already several times, and just repeating it. Looking a little bit ahead, what's happened in our industry. The industry was basically supply side driven for 2 or 3 years. We had not enough semi supply. We're still restricted with the semi supply, but that semi supply goal will improve throughout the year. And on the other hand, we have the macroeconomic situation, interest rates, inflation. And so what I expected at, let's say, Q3 that demand is slowing down and the supply is improving. So I expect Q3, where demand and supply will meet and that better supply that will be true for all of the companies. So there will be more competition. And this is what I said, we're preparing for that. We see high raw material prices. We see other price increase, and it will be more difficult to pass on these price increases to the customer. This is what I am preparing or we are preparing our teams for. So we have to refocus on productivity, and we have to have a refocus on fixed cost discipline on pricing and on cost work. That doesn't mean that we want to lose the -- basically discipline on pricing and incentives. But it will be more competition throughout this year. And what I said before, we really prepare our company and our teams for this increased competition.

But that does not mean that 2023 is a kind of one-off event where you catch up with all the shortages. And then we see the 2 weakness in 2024. So ultimate ambition is still you have got now maybe a gap in the model launches, you will have a firework of new models in 2024. And that means that '24 can be even better than '23. We don't have to give you guidance for '24, of course, but just that we are clear about the path that you are aiming for.

Absolutely, Horst. I can't give you a guidance for 2024. We will give -- we will do that on the Capital Markets Day, perhaps not in detail in 2024, but our strategic outlook. And our strategic outlook is very sound. We had our strategic plans discussed before. And it will be not the situation that you will see one good, one additional good year for us in 2023 and not delivering them from there. It will be a positive path.

That's great to hear. And the second question that I have, I still have got problems to understand then the link between the revenue guidance and the EBIT guidance. I mean, if you guide for EUR 10 billion to EUR 15 billion revenue growth, and then at the same time, I assume kind of 20% leverage, that should basically take the EBIT -- should increase the EBIT by something like EUR 6 billion, should take the operating margin to 9%, and you are guiding on 10% to 15% higher revenues for -- at the low end of -- for kind of stable margin. So therefore, maybe you can elaborate again what are now exactly the drivers. There seem to be either there's a safety cushion bridge built into the guidance? Or there are some other compensating factors, let be on the cost side, which could be 1% of sales burden, which you can compensate by pricing. So maybe you can explain that in some more detail.

No, very precise discussion if we are doing it.

Sorry, I'm analyst.

No. But you're quite right. And your figures are not so far away from what we expect them. In the volume, you're right that there will be a volume price mix effect. We will see a slightly negative mix effect, both in terms of region and both in terms of channels and both also in terms of the cars we saw. Of course, in a period where we were very much restricted by Semis, we didn't ship all the cars and the semis to the less promising regions in terms of margin, for example, Brazil and others. The people or customers are ordered better equipped cars, so we didn't offer the entry cars and also different channels. So there will be a slightly negative effect from there. But we want to continue on pricing and incentive discipline. On product cost, as I said before, will be even a small positive year-over-year. Fixed cost we want to be disciplined, but there will be also on the fixed cost side. You saw R&D and CapEx guidance. There will be a small burden. And yes, as always, as a good CFO, there is a small safety cushioning the toll bridge, which fleet us then to the guidance.

The Next one is Patrick Hummel from UBS. Patrick?

Patrick from UBS. Two questions also from my end, please. First one, I want to understand how you think about your BEV profitability longer term. Volkswagen is in the market with an ID. 3, which is, say, EUR 40,000 vehicle and an EBIT that's maybe slightly above breakeven levels. Teslas in the markets with the product today for the same price, more or less, that's way bigger and it's coming with a compact car, whatever it's exactly going to look like in a couple of years with 50% lower costs than model Y and Model 3 today. I really struggle to see how VW is going to have an affordable EV that's profitable to you in a couple of years' time. Can you just update us about price points you're trying to achieve about cost reduction targets you're going to achieve? What -- can you tell us today that makes us confident that Volkswagen is going to be able against such competitors to have a profitable affordable EV offering. And that brings me to my second question. We do hear you on fixed cost discipline, et cetera. But it feels to me other OEMs, especially mass market OEMs, have been much more vocal about the need to take out further costs. They're launching new cost-cutting programs, be it in Europe or be it in North America. And they're preparing for a market that's more competitive and where we'll see more pricing pressure. And costs, you talked about it. But on that slide about your 10 priorities for 2023, it's not even a single item. So I just wonder, are you too relaxed on the need to aggressively take out more cost of the business.

May I start and then I hand over to Arno to -- some information. I will touch both of the questions quickly. First on BEV profitability, on the running site, we count on our platform strategy and the scale effects. And there, especially when we look to the SSP shape, we have decided during the last months I'm very confident that it will bring us in very positive [indiscernible] invest once and using the platform for different brands. And on the other side, we reestablished cost programs for our current business, but also already for the future business with cost this initiatives, because there we have the main levers already in this period for the new platforms. There's one comment on this and Arno can dive a bit deeper and about our cost programs or profitability improvement programs. We host a target summits with all our brands and units in January. And there, we agreed strategic targets for profitability and also being cash flow focused. And that's not only an agreement we did there behind of this. We have very, very clear programs what we have to do. One example, we presented yesterday in the quarter and your media conference and the call we had together is a route to [ 20 ] And for all the other units, we are currently implementing the same. And often spoken, it is to take the current planning round, then towards what's still the delta to get there. And in the case of Porsche to get to the road to [ 20 ] then we defined very clearly what is missing in terms of operating profit, what is missing of profitability. And then we defined clear programs behind in measurable steps year-by-year, how to get there. And that's a very clear systematic how to drive and to improve the profitability in each of our units. And I hand over to Arno to add some comments.

Add a little bit more on the details. Look, first and foremost, Patrick, we have a -- from my point of view, we have been quite successful in fixed cost discipline. Look, we had this program of reducing fixed cost by 10%, 2019 until 2023. And we achieved that program almost in -- already in 2021. In 2022, we had a slight increase in fixed costs, but this is an all-in summary. It's -- we acquired Navistar, we build up PowerCo, we build up Cariad and all of these additional activities are included in that overhead cost initiative. And still, we are below 2019 figure. And if you take the relative burden of the fixed cost, we decreased that by 2 percentage points, which is, yes okay, could have been more. But we are operating in an industry that makes an 8 percentage point margin and 2 percentage point come from that overhead cost broken, so it is working. And quite honestly for 2023, at least in terms of relative burden, basically overhead costs divided by automotive sales, revenue will deliver an additional positive. So -- and going forward, we are very well, well aware that competition will become tougher. So we try to stay as fixed as possible on the overhead cost side, giving all the inflation, giving all the additional activities in the group on the one hand. And the second level is productivity. Look, for, I would say, 2 to 3 years, we were happy that we could build the cars. We got semis from, which led to a lot of the interruption in the factory. So also in an internal [ inner view of asset ] 2023 has to become the year of productivity. And last but not least, we founded the brand group volume, which will deliver a significant positive lever in terms of working together on the sales on the customer side we want to differentiate the cars even stronger, but on the back office side on production, on development on aftersales. So there will be significant positives. The brand group volume wants to achieve, last but not least, as Oliver said already, in that planning, there's also new KPI, we included in our brand group assuming that, that's the breakeven. So it's not only cash flow. We have a strong focus on, but there will be also a clear breakeven target for each brand and group.

And just to confirm. So we are -- are you on track for a 2025-ish launch of an affordable EV that will be profitable to the group. That's still the plan?

A little bit more detail on that. I think we haven't called it so far any view through. But look, it's easier to call it that way. But it will be a car below the ID. 3 with the car from today's perspective below EUR 25,000, although it's too early to give you a specific pricing, and there are a lot of measures. First of and foremost, we will have significant scale by then. It's based on the MEB, but it's kind of a second-generation MEB platform with a lot of customer improvements already. And that will be also then based on our Valencia plant cell factory, which gives us an additional improvement on the cell side. But then hopefully, we also made significant progress in attaining and showing sufficient supply of battery raw materials for Volkswagen. So there are a lot of building block scale, technology, more product integration on the electric engine and converter and cheaper cell supply.

And then coming or adding Arno about scale effects. We do have talking about this platform. We also have the opportunity to add models from other brands like from Skoda and then also from CUPRA, and now we already announced that we are considering a CUPRA Urban Rebel. And with CUPRA, we are increasing step by step also the profit margins. And so that brings us in a very positive scale effect situations with our platform strategy.

We have to watch a little bit of time. So maybe we can take another 2 questions before we have to round it up. And as I said, if there are any questions unanswered, the IR team will be happy to take it. we continue with Jose Asumendi from JPMorgan.

This is Jose. A couple of questions, please. Arno, when looking at the guidance and the share price reaction when you released it, it looks to me like constant expectations clearly underestimates the level of disruption you went through last year. So can you just give us a bit more color at the start of the year on the upper end of the sales and EBIT margin corridor that you have provided. And then, Oli, please, on product. I think it's very important to improve the competitiveness in China. Can you comment, please, on the Volkswagen ID. 3, the refresh you're going to do with a bigger display and improve software, when should we expect this car to be launched? And how quickly can you roll out these improvements across the remaining family, especially across China.

Jose, may I start with the China question. And first of all, for the IDI.3 we are planning different steps for updates. This year, we will come to the market with an update in terms of interior, improving quality, improving material and in the exterior, especially in design in the front and the rear. And then we decided in the last month, an important update for the MEB platform to improve performance to improve range to improve charging time. And that will affect also very clearly the Chinese market, but not enough with this. We have to improve our platforms, especially from the smart car approach in China. And that is what I mentioned when I had the opportunity to visit China 4 weeks ago to be closer to the Chinese customers, to develop in China for China solutions. And therefore, we are aiming for partnerships also with Chinese tech companies. And what we will do there that we will have a clear product program ahead, which we will decide in April, beside of the Shanghai Motor Show, we call the plan. It's our China target for 2030, but very accelerated for all the brands. And the approach for Volkswagen is a little bit different, then Porsche is totally in different position. And that's what we are doing. I think with this approach we will be able to catch up in the electric era, while we are still very strong in the ICE. But what counts in the future, that's very clear -- is the performance on EVs, and that's what we are preparing currently, and we have clear ideas and a clear plan to do it.

I'll try to answer the question. I'm not sure whether I understood you. But look, when we gave the guidance, we expect from today's perspective to be at the midpoint, knowing yes, in the past, there were several phases where we said, look, Volkswagen is a little bit more conservative. But I think we should have an ambitious guidance to also challenge ourselves, ambitions means reachable and feasible, and we are confident that we can achieve this -- achieve it. But for today's perspective, you should expect us to be in the midpoint of the guidance.

Thank you, Jose. So we are coming to the last question for today's session. Henning, the floor is yours.

I was hoping to understand the structural free cash flow a little bit better is my first question. You're guiding for the 6 to 8. I think we understand now that we sort of should be adding back EUR 5 billion for M&A and diesel, I guess, and EUR 3 billion separate for PowerCo. So I guess if you add that back, you get to the like-for-like number that would have otherwise been your adjusted EBIT -- adjusted free cash flow number in the past, I guess, 14 to 16. So -- but at the same time, there's a working capital reversal in that. So if you could just help us understand a bit more what's the free cash flow, the structure of free cash flow going forward? Should we always now keep expecting an envelope for M&A? So the reported number will not go back to a double-digit figure for a while. If you could just give us a bit more color there. And then secondly, it also relates to China on the ID model. I understand that you now start offering the ID. 3 from RMB 175, which in euro terms, I think, works out to about half the entry point for what you're selling in the car in Germany. So I would just like to understand quite how bad that is in terms of how much money you might be losing on the vehicle in China? And what's the path to improvement is there? Olli you already talked about the improvements that are coming with the next update. But if you could also sort of roll in the profitability element into that. Is it getting quite a bit better in the near term?

These are both questions for Arno.

I'll start with the cash flow. Look, yes, of course, it's the free cash flow there is M&A and a small outflow of diesel in it. But if you want to look at it from a more close perspective, the typical cash flow we could expect in the current situation and giving the EBIT guidance, the upfront investment for electrification and digitalization would be EUR 8 billion to EUR 9 billion. And you theoretically should add the reversal of the situation we had last year on the inventory side. So that basically leads to 12 to 13 adjusted. But in that 12 to 13 or from that 12 to 13, we basically deduct an additional of 5 for which is reserved for PowerCo, which comes on top to our current core business. And then that leads us into the guidance of EUR 6 billion to EUR 8 billion. There are certain allowances for M&A, of course, but not in the magnitude that we saw like 2 or 3 years ago, it -- taking out PowerCo, of course.

Sorry. So this is beyond 2023. Are you saying the envelope for M&A, we should think of that as a little bit less so that the number will get closer to a EUR 10 billion level?

I don't want to do a guidance from a -- perspective on free cash flow for 2024 and beyond. But our ambition is, of course, to increase that. We called it clean cash flow in the past and from the clean cash flow we deduct M&A indeed and that's what I would expect, perhaps, we give this at the Capital Market Day also guidance for the clean cash flow, then it becomes more transparent. So we will -- we thought we made it a little bit less stringent and more complex, and we took that KPI from our guidance. But that's -- it's helpful for you, we will [indiscernible] in that.

The question on China and the profitability of the ID. 3?

Yes, in China, I mean, so there's a lot of discussion around whether we are still disciplined in terms of pricing or not for all we can say we are still disciplined. The incentives we are just giving now in terms of cash incentives, they have been given before, but they were like virtual incentives that it could change like in the ID. 3 stores in the virtual ID. 3 stores. So from a pricing point of view, nothing has changed. But the thing is clear, we have to work on profitability and on the cost side on ID. 3,ID. 4, ID. 6 in China, both in terms of material costs, in terms of battery in terms of production cost in order to increase competitiveness there.

Thank you, Henning. And we are now, unfortunately, have to come to a close. I would like to thank all of you for the very vivid discussion. Thank Oli and Arno, actually, for being with us. We meet the one or the other now at the next virtual equity -- virtual roadshows here, we will have coming now running back with virtual equity stories. And Q1 will be due on May 4. And then what we are very much looking forward to is the Capital Markets Day in June, on June 21. Until then, please stay healthy. And whenever there is anything unanswered, please call us in Volkswagen, and we are very happy to take your questions. Thank you very much for joining us today. Bye.

Thanks very much also from my side. Great discussion. Thank you.

Thank you to all of you for joining. All the best.