Volkswagen AG (VOW3) Earnings Call Transcript & Summary

Hello, and welcome back to our Q&A session now for media.

And on my list, I see Frank Johannsen from dpa. Frank, do you want to kick it off? Frank, we can't hear you. I don't know if it's on our end or it's your end. [Operator Instructions] And Frank, we still can't hear you. Okay, I would suggest to circle back and try to figure this out. Christian from FAZ, do you want to kick in, please? Unfortunately, it doesn't work either. So let's give us a couple of minutes to find out -- try to find out what's happening here. Because with the analysts and investors, it worked. So give us 5 minutes, please. [Technical Difficulty] Okay. Christian, do you want to try again?

Can you hear me now?

Perfect, loud and clear.

Okay. Perfect. So just a question on the engine topic. Just could you give us some more details why the -- why you have some trouble with the V6 and V8 engines at Audi? And another question on the severance program. You will make [Foreign Language] sorry, I don't have English word, of EUR 900 million in the second quarter, is that right?

Yes, I'll start with the easy one, the provision will be EUR 900 million in the second quarter, that's right. But as I explained, the provision will be in the second quarter, and the cash-out then will be then eventually second and third quarter. On the V6 and V8 engine, there's a certain specific part that it's -- that we don't have enough capacity. Audi is in the process of adding capacity, adding a second supplier. What I would like to ask you, Friday is a call at Audi, Jürgen Rittersberger, and he will really do a really in-depth explanation of that effect, also how it's resolved and how it affects then basically a more positive mix effect and volume effect going forward. And I would rather refer you to Jürgen's call on Friday because it's a very specific Audi topic. But as said before, we expect an improvement in the second quarter already, and then specifically also in Q3, Q4.

And can I add one more one, too?

Yes, go ahead.

Looking on the European BEV business, it does look very good at the moment. What's your perspective looking ahead on the European BEV market? Do you see upside? Or will there be a prominent problem in that segment for the next months and maybe years to come?

That's a very good, very valid question. Let me start from 2030 backwards. Our plans and our forecasts haven't really changed due to the ramp-up of BEVs. And eventually, the future will be electric. This is our conviction for various reasons, CO2 emissions and others. And so we still plan until 2030 to have 50% BEV share. But the way from, let's call it, today until 2030 will be not linear. It's really -- it will be different speeds of development in different regions. China will develop very fast. U.S. and Europe will develop also, but not as fast as we have originally planned and expected. That's part of the truth. On the other hand, you have to also take into account that we don't have electric cars in all models. Look, we add great modeled this year, E-Macan, Q6 e-tron, eventually E6. This will open a whole BEV model range in the premium segment. Then 2026, I must say only by 2026, we bring in the ID.2 and the ID.2 family, EUR 25,000 car, basically in the segment of T-Roc and T-Cross. So it also takes a little bit of time until all the segments will electrify, first and foremost. Second, charging infrastructure will evolve. Then we work on also implementing LFP battery technology in ID.2, which will bring down the cost and eventually also the prices. So it will take a while until the BEV penetration will increase. It will increase quarter-by-quarter, year-over-year, but not as fast as we have expected. And secondly, what I also must say in terms of specifically our situation, look, we are in a situation that we spend considerable amount of energy, time and resources to keep our, let's call it, last generation of combustion engine cars competitive. We bring great combustion engine and plug-in hybrids, Passat, Tiguan, T-Roc, also new cars at Audi. So in between, we are rather flexible and that this -- we have great BEVs. We ramp up our BEVs. And don't get me wrong, we are fully committed to ramp up our BEVs, but we're also flexible and have great combustion engine, MPV and PHEV. So -- and this flexibility is also a strength of the Volkswagen Group.

Thank you, Arno. Frank from dpa, do you want to try again?

Yes. Can you hear me now?

Yes, perfect.

So just a couple -- only 3 questions. The first question, just to make it clear, did I understand you right, Mr. Arno, that you told that you had another order intake of 730,000 in Western Europe in quarter 1? That's, if I heard correctly, 60,000 less than your deliveries in the same time. So your order book shrinked by 60,000, if I heard you right correctly. Second question, you said EUR 2 billion of the EUR 6 billion investment in PowerCo will go into M&A. Can you tell any more details? What's planned? Is it all for this year? Are there already plans, what you -- that you can state what to buy other companies, which you may state now? And third one, picking up the last question to the BEV share. Next year, in Europe, the fleet target for CO2 emissions will increase -- or will decrease. Your plan was to reach a target by a higher share of BEVs. So have you already have a plan B now? What to do if you sense that it will not work due to those BEV sales in this year lower than you expected before? Will you increase prices for the ICEs? Or what will you do to solve the problem?

Okay, Frank, that is very comprehensive questions. I try to come up with solid answers to all of them. Look, our order book is -- stands at 1.1 million cars, which is basically on prior year level, but it's -- on last quarter's level, but it's very healthy, and specifically, since we increased the order intake of BEVs by more than 100%. So why are we more confident going forward? Our order intake was 730,000 cars, although a lot of very exciting cars and very popular cars, you couldn't order at the beginning of the year because of the model changeover. Look, the new Passat, new Tiguan, they had a model changeover. And we were not able to open basically the model book or the configurator for all of the variants. And despite of this situation, we increased -- we achieved the 730,000 order intake. So this is why we are confident that both the order intake for combustion engine cars and BEVs will further increase. At the BEVs, as said before, E-Macan, Q6 e-tron and the Tourer will hit the, basically, order book and the showrooms, which will drive then also the incoming orders further. And 1.1 million cars is a rather healthy order book. It's still above pre-COVID levels. This is important to note. Yes, to the PowerCo, I think there's a lot of -- yes, I would like to clarify that again. In -- what we said, in our cash flow guidance for this year of EUR 4.5 billion to EUR 6.5 billion, we foresee, let's call it, foresee about EUR 6 billion cash outflow for the ramp-up of our battery business. We explained that specifically because it is ramping up a business where we don't have business today, so no turnover, no sales. It's really on top so that you can also reflect a little bit what our real cash performance is. It's a cash flow of 5.5 -- EUR 4.5 billion to EUR 6.5 billion, plus an additional EUR 6 billion we foresee for PowerCo. That EUR 6 billion is in total for PowerCo. And if you divide that, roughly, it's about EUR 4 billion for the ramp-up of our business in terms of CapEx throughout the world. We are ramping up in now 3 plants in Europe. In 2 plants in Europe, we have the ramp-up of Salzgitter plant. In parallel, we ramp up in Valencia plant. And in parallel, we ramp up Ontario, Canada. And we foresee about additional EUR 2 billion for strengthening our value chain in terms of having more control of the value chain, lithium, nickel, cobalt. And here, I must ask for understanding, it's too early and we can't really tell you specific transactions here. But rest assured, we will move onto that topic as well because it will always only make sense if you ramp up a capacity of battery that you have also secured your raw materials. We don't want to run into the situation that we have capacity on hand and have not competitive supply of raw materials, specifically lithium. In order to have a safe and secure and also cost competitive supply, you need both. You need capacity, but also you need to have the raw materials secured. This is the story behind PowerCo. And in terms of, I think, the first -- the third -- for 2020 going forward -- 2025 onwards, yes. Look, we expect to be 100% compliant 2024. The compliance in 2025 will be more challenging due to the new, like, targets. From today's perspective, we strive also for being compliant in 2025. What gives us confidence here is the new cars that hit the road. I talked about the Tourer. I talked about E-Macan, Q6 e-tron, also E6 is then hitting the road. But on the other hand, we see a very challenging pricing environment in the BEV, specifically in Europe. And we also embarked on our strategy that we say value over volume. We want to find sound compromises between pricing, basically, margins and volume. And this is we have to also take into account. So it's too early to give you specific guidance for 2025 because we don't know how the market conditions will be by 2025. We work on the cost side. But what I can say from today's perspective, we, basically, we work on achieving the target for 2025 and we strive for achieving the targets also for 2025.

Okay. I can see on my list next would be Christina Amann from Thomson Reuters.

I hope you can hear me.

Yes, perfect. Wonderful.

Well, the first question, I guess, Mr. Antlitz has just answered was the outlook on 2025. That's 2 issues, on the one, the CO2 regulations and the other question was on the overall market. You're expecting a better market in the second half. Will that last into '25 or not? The other question was on the BEV orders, you said they were more than double in Q1. How do you think -- where do you think you'll end up at the end of the year? How is that going to keep on? And can you say also something on Audi and Porsche who are both having issues this quarter? Is that approach on the -- or is the luxury market or the high-end market still intact? And what does that mean for your value-over-volume approach?

Yes. Thank you, Christina, for your 2 questions. For the BEV orders, we have a very good order intake. Right now, we expect the level of order intake per month to basically more or less stay on that level until summer. And then summer, the new models kick in, as I said, Q6 e-tron, E6, the Tourer, and also they're fully available. And with the new models, we expect then also then even stronger order increase then from there going forward. The question on Audi and Porsche, it's really the situation that led to the margin of Audi and Porsche in the first quarter are really explainable by technical factors. First and foremost, I referred to the availability of 6- and 8-cylinder models that at Audi, this is a specific part that it's -- we can't -- have not enough supply. Audi worked on it. And we are confident as soon as the supply is ramping up, starting with the second quarter, but specifically done in the second half of the year, availability will increase, and then Audi will come back to old strengths. And Porsche also well-flagged already in the year-end result call. They have a huge number of model changeovers in 2024, which gives us more strength, even more strength in 2025. If I remember it right, Oliver Blume had talked about the transition year 2024. And it's not unusual that if you have model changeovers that both in terms of costs that are incurred due to the ramp-up costs, preparing of the new production and also in customer behavior, this -- the period where you ramp up the new models, they are slightly under pressure. But then you could expect, after the new models are all in place, it could be even a more positive momentum then. This is why we are -- both for Porsche and Audi, we are still very confident about their future trajectory and success.

Okay. So from what I can see, I have one more caller. It's Lazar Backovic from Handelsblatt.

I hope you can hear me.

Very good.

Okay. One quick on the V8 and V6 motors. There was a similar problem at Mercedes in the first quarter, which had problems with turbochargers. It was due to a supplier called Hasenclever that's also supplying other premium OEMs. Yes, the question would be, yes, is Hasenclever the reason for the specific -- for this specific situation that Audi is currently in? I think as they filed bankruptcy last autumn, so yes, it would be interesting to know if it's this specific company. And the other question would be on the free cash flow, which was negative. So maybe you can give me a bit more details which were the biggest tickets that really, yes, put the cash flow down? And what makes you confident that you are in line with your goals for your cash flow this year?

Yes, Lazar, thanks for the questions. Although I said I would like to really to leave the technical details to my colleague, it's not the same case you just mentioned. It's a different situation. And it's not that Hasenclever. And in terms of free cash flow, let me explain it a little bit more in detail. Look, kind of we are kind of a victim of our own success. Last year, we had supply constraints in the delivery of our finished goods throughout the year. If you remember, we were missing trucks, trains, people at the ports. And so we really set up a comprehensive team on that, and this team was very successful. It was so successful that we debottlenecked the whole situation. In Q4, we achieved a very good cash flow. But that was due to that basically, most of the inventory was sold to the customer. And our inventory pipeline was rather empty, but which also led in terms to a free cash flow of, I think, 10.7 -- EUR 10.8 billion last year, so very successful. So -- and now we started this year with our pipelines, basically -- sorry to say, not, of course, not empty, but with a much lower inventory. So -- and now we have 2 effects. First and foremost, we are increasing the inventory throughout the whole world. Look, we produce cars. We have to get the parts for it and then we ship them to U.S., to Japan, even Australia. So there is a lot of pipeline. And second, since we prepare for a huge model launch at Audi and at Porsche, it's also not unusual that in -- before this new model launch, you have more, you build these cars already, they sit already on the yards and on the books and you deliver them to the customer. So these 2 factors were planned and anticipated. But in total, that led to a buildup of -- finish of inventory of about EUR 6 billion, so basically EUR 6 billion more inventory. 2/3 of that are finished goods and 1/3 of that unfinished goods. And so if you reflect then now our negative free cash flow of EUR 3 billion, so EUR 6 billion of -- minus EUR 3 billion, minus EUR 6 billion of that is due to the inventory. And so part of it, that will somehow be reserved throughout the year. Because at the end of the year 2024, again, we ramp down the pipelines, use all the parts we have. So this is why we are confident that we achieve our free cash flow target in 2024.

Okay. So if I'm not mistaken, we -- I think we diligently worked through the question queue. It leaves me only to thank you for your participation in this joint call for both media as well as investors and analysts. I want to thank you, Arno, for hosting this call, and Rolf. I'm looking forward, we are looking forward to get in touch with you again maybe during -- or around the Annual Shareholder Meeting. We wish you a wonderful week, and stay safe. Thank you.