Volkswagen AG (VOW3) Earnings Call Transcript & Summary

Good morning, and thank you for standing by. Welcome to the Volkswagen Group 9 Months 2026 Results Conference Call. [Operator Instructions] Please be advised that this conference is being recorded. I would now like to hand the conference over to your speaker today, Pietro Zollino, Head of Corporate Communications. Please go ahead.

Good morning, everyone, and a warm welcome to our call about the 9 months results of the Volkswagen Group. As usual, this is a joint call for both the media as well as investors and analysts, and moderated by Rolf Woller, our Head of Group Treasury and Investor Relations; and myself, Pietro Zollino, I'm the Deputy Head of Group Global Communications. With us today is also as usual, Arno Antlitz, our CFO and COO. A few remarks before we start, you should have received the press release, the interim financial report and all other related materials, which were published this morning. If you do not have them yet, you can find all documents on our website or if you have any issues, give us a call or drop us an e-mail, and we will send them straight to you. Now let me hand over to Rolf, who will give you a brief run-through of the next about 1.5 hour.

Thank you, Pietro, and good morning to everyone on the call. Let us have a look at our agenda. Arno will take you through the 9 months results and the full year outlook for 2026. Following his presentation, we will first conduct a Q&A session for the investor and analyst community, which is moderated by myself. And after this session and the short break of between 5 to 10 minutes, where you will hear no music, we will continue with the media Q&A moderated by Petro. Since our call will include forward-looking statements, the safe harbor language and other cautionary statements, on the slide will govern today's presentation. As usual, I encourage you to read the disclaimer carefully as all forward-looking statements are qualified by this language. And with that, I hand it over to Arno. Arno, please go ahead. .

Thank you, Rolf, and a warm welcome to everyone on this call. Ladies and gentlemen, the third quarter has once again shown how demanding our environment remains China's market is contracting sharply, driving further export growth into other regions, various geopolitical tensions and unprecedented competition add to the pressure. Europe's shift from combustion engines to electric vehicles has accelerated. All these factors weighed on our volumes, mix and margins. We are managing this environment with discipline. At the same time, we are moving ahead to our strategic initiatives. We are ramping up our attractive new electric and combustion engine vehicles. We continue to reduce investment spending and overhead costs. We are making progress on workforce reduction as planned and deliver on automotive net cash flow, EUR 4.4 billion year-to-date is a strong achievement. However, even before special effects, our operating margin stood at 3.8% after 9 months, which shows the clear need for action. We must accelerate and broaden our efforts to structurally lower our cost base. This is essential to earn adequate returns and deliver on our financial ambitions. For this, we need lasting structural improvements across the group, means lowering vehicle costs without compromising product substance, lowering overhead cost and substantially improving efficiency in our plants. It also means faster technology development and decision-making. These are all areas addressed by the group target picture 2030. What matters now is swift, disciplined and consistent execution. The development in our industry show we have no time to lose. With that, let's dive straight into the presentation. Our product momentum remains strong. The launch of our electric urban car family was an important milestone. All 4 models, including their entry-level versions are now available to order. Customer interest is strong with around 150,000 orders received so far. At the Paris Auto Show, we also unveiled new ADT and electrifying one of the group's most successful models. In the United States, we started production of the next-generation Atlas. Audi is strengthening its premium SUV offering with the all-new Q9 developed specifically for U.S. customers, it will read showrooms in the coming weeks. Alongside this strong product momentum, we continue to advance the strategic transformation of the group. In early September, the Supervisory Board approved the group's target picture 2030. The objective is clear, a stronger, more competitive and more effective group and brands. We also advanced our active portfolio management in the third quarter. Following the announcement of sale of a majority stake in Everllence, we sold a further stake in Sinotruk, divested MHP and sold our remaining stake in Bugatti Rimac. Together, the completed and announced disposals are expected to generate cash proceeds of around EUR 10 billion. Active portfolio management also means selectively opening our business to strategic partners where this creates additional value for Volkswagen. PowerCo and Gotion have agreed to accelerate the development of a regional battery supply chain for Europe. Gotion will contribute up to EUR 1 billion. Building on their long-standing cooperation PowerCo and Gotion planned 3 joint ventures at Valencia, Šurany and Kenitra in Morocco. This will cover industrial production of LFP battery sales and cased active material. The partnership is strategically important for Volkswagen Group. It will give access to competitive LFP technology and diversify our supply of critical battery materials in Europe. The partnership combines PowerCo's capabilities and European footprint with Gotion's LFP technology and industrialization expertise. The partners will share investment requirements and industrial responsibilities. Before we turn to the numbers, let me briefly comment on orders announcement from last weekend. Audi plans to establish its first U.S. production site in Peach County in Georgia. The brand intends to invest around EUR 4 billion in a plant that is designed for renewal capacity of up to 200,000 vehicles. Construction is scheduled to begin in 2027 with production planned to start in the early 2030s. The focus will be on premium SUVs tailored to the North American customers and build locally. The final decision still requires approval by the relevant committees. We, therefore, ask for your understanding that we are not yet able to comment on financial implications. This step would be fully consistent with our regional strategy in U.S. for U.S. as part of our global strategy to broaden our regional footprint, especially in one of the financially most attractive markets in the world, the U.S. In North America, we are closing portfolio gaps in the most attractive segments specifically large SUVs and pickups. Together with the Volkswagen plant in Chattanooga and the Scout plant under construction in Blythewood. New sites, would be an important element to create a targeted and resilient local for local footprint in the U.S. This would reduce our exposure to trade barriers and currency movements. With that, let's now turn to our deliveries in the first 9 months of the year. Global deliveries declined by 9% year-on-year in the first 9 months to 6 million vehicles. The decline was driven by China, where volumes fell 30% amid the sharply contracting market and the weak consumer sentiment. Our combustion engine volumes, in particular, remained under significant pressure as a result of the increased gasoline prices. Outside China, deliveries to customers were broadly flat. In Europe, deliveries rose by 1.7%. In the first 9 months, EV demand grew strongly while demand for combustion engine vehicles weakened. North America achieved 4% growth rate year-to-date. Contract deliveries in North America declined by 4% year-on-year in the first 9 months due to lower BEV deliveries and model changeovers, particularly the new Atlas. Turning to electrified vehicles. The regional picture remains mixed. Strong growth in electric vehicles in Europe in the last months only partially offset the market pressure in China and U.S. Globally, we delivered 679,000 fully electric vehicles in the first 9 months, down 5.4% year-on-year. Nevertheless, the global BEV share rose by 40 basis points to 11.3%. In Europe, electric vehicles accounted for 20% of our deliveries, up from 18% a year earlier. And the main success of our electric arm car family has contributed only modestly so far as deliveries have just begun. Our order situation in Europe remains robust. In the first 9 months, order intake increased by 4%, about 3 million vehicles. At the end of September, total order book in Europe stood at 1.1 billion vehicles around 11% higher than at year-end 2025. The increase was driven above all by BEVs with particularly strong demand for the electric urban car family. Based on this development, we are increasingly confident that we will meet CO2 fleet targets for 2025 to 2027 compliance period since our BEVs now account for roughly 40% of the order book. At the same time, the shift in mixed at BEV is still dilutive to our margins in the short term despite the clear process make on the BEV cost side. We have already seen some of this negative mix effect in Q3 and we expect the BEV ramp-up to put greater pressure on margins in Q4 and the first half of 2027. Let's now turn to the group financial and operating performance in the first 9 months of 2026. Lower vehicle sales reduced group sales revenue by 2% to EUR 233 billion. The operating result was close to breakeven at EUR 0.1 billion. This was mainly driven due to significant special effects in the South China business. Our 9-month result was burdened by special effects totaling EUR 8.7 billion, EUR 7.8 billion of which were recorded in the third quarter. The main items within the EUR 7.8 billion are a post goodwill impairment of EUR 6.4 billion, an impairment of assets of fully consolidated companies in China of about EUR 1 billion. And before special effects, operating result came in at EUR 8.8 billion with a margin of 3.8%. This is slightly below our recently revised full year expectation of around 4%. And just as a reminder, these operating results before special effects contain burden from tariffs paid to EUR 1.2 billion in the first 9 months of 2026. For the full year, we expect the U.S. tariff to impact our results with about EUR 2.8 billion, and it contains roughly EUR 500 million related to early retirement schemes in the Volkswagen AG. Profit before tax declined to EUR 0.5 billion in the first 9 months. This was mainly due to the lower operating result. The financial results turned out positive for the 9 months period. This was largely due to the further sale of Sinotruk shares. Share sales reduced our stake to below 20%, triggering a reclassification of our remaining holding. Total book gain from the sale and reclassification contributed to around EUR 2 billion to the financial result. After tax, we recorded a loss of EUR 2.7 billion. This is due to the unusually high taxes, mainly because some of the special items booked in Q3 are not tax deductible particularly the goodwill impairment. In addition, no deferred tax assets were recognized on tax losses incurred in Germany in the current year as these losses are not expected to be utilized within our planning period. Nevertheless, the resulting tax loss carryforwards have not been permanently profited. Our cash flow performance shows that the processes we made and established to strengthen cash generation at Volkswagen Group are delivering lasting results. Automotive net cash flow improved to EUR 4.4 billion in the first 9 months, improvement was supported by lower investment spending as well as net inflows from M&A. Net inflows from M&A amounted to EUR 0.6 billion. The EUR 0.9 billion investment in Rivian was more than offset by the cash in from other portfolio measures,; proceeds mainly included EUR 0.7 billion from TRATON,, Sinotruk stake sales and EUR 0.9 billion from the remaining Bugatti Rimac stake. Bosch AG used some of the proceeds from the Bugatti Rimac disposal fund pensions totaling EUR 500 million in the first 9 months. Cash flow performance supported a solid net liquidity position. Automotive net liquidity remained at EUR 33 billion at the end of September, some EUR 1.5 billion below the level at year-end 2025. We fully offset dividend payments and pose additional pension funding. Let me now turn to the performance of our divisions in the first 9 months. Passenger cars recorded an operating loss of EUR 2.6 billion, largely as a result of special effects and our performance in China. Commercial Vehicles delivered a solid operating result of EUR 1.7 billion and a margin of 5.2%, roughly on par with prior year period. Financial Services remained robust with an operating profit of EUR 3.0 billion despite higher residual value risk. In a passenger cars profit bridge, volume and other effects resulted -- reduced the result by EUR 1.1 billion year-on-year. Mix impacted the result by minus EUR 1.8 billion. This reflects an unfavorable regional and product mix, particularly driven by higher mix of electric vehicles and a negative segment mix. High incentives more than offset the positive pricing effects, resulting in a net burden from price of EUR 0.6 billion. Product costs reduced the result by EUR 0.4 billion mainly due to the higher raw material costs, favorable hedging positions provided a partial offset here. Fixed and other costs made a positive contribution of EUR 0.4 billion with a sizable contribution from lower overhead costs. Special effects, year-on-year headwind of EUR 3.1 billion. This mainly reflects the Porsche port goodwill impairment, partly offset by lower restructuring costs and the absence of last year's burden related to the realignment of Porsche product strategy. Our overhead costs benefited significantly from consistent implementation of the 2024 and 2025 agreements future for Volkswagen. These include the accrete head count reduction of around 50,000 across Volkswagen hourly portion carried in Germany. Since at the end of 2023, about 19,000 employees have left Volkswagen AG and around 25,000 have left Volkswagen Group in Germany. Over the same period, our global head count has declined by around 40,000 or 6%. Automotive overhead costs fell by EUR 0.7 billion in the first 9 months from EUR 33.8 million to EUR 33.1 billion. Our savings more than offset the ramp-up of new businesses such as PowerCo and Scout as well as inflation in the current year. Turning to the brand groups, the platforms and financial services. Renk Group Corp delivered vehicle sales and sales revenue broadly in line with the prior year. Operating profit declined by 8% to EUR 4.3 billion, corresponding to a margin of 4.1%. Renk Group progressive operating profit declined to EUR 1.2 billion and a margin of 2.7%. This was driven by a market decline in volumes in China and the U.S., cost discipline and lower overhead provided a partial offset. Renk Group port luxury vehicles sales fell 11% and sales terminal declined 7%. Operating profit, nevertheless, rose significantly to EUR 1.5 billion with margin of 6.7% lower special effects compared to prior year, a better mix and cost improvements more than offset the weaker top line here. Let's take a closer look at the brands in the Renk Group Corp. Volkswagen brand reported an operating profit of EUR 0.8 billion and a margin of 1.3%, 1 percentage point below the prior year. Even before special effects, the margin stands at 2.6%, which is clearly not where we want it to be. Skoda continued its strong performance in a challenging environment. Vehicle sales rose by 3% and and sales revenue by 4%. Building on a highly competitive cost base, the operating margin increased by 30 basis points to a strong 8.3%. Skoda again shows what can be achieved based with first-class products based on Volkswagen platforms when operating on a right cost base even in a challenging market environment. [indiscernible] sales revenue increased by 31% to EUR 1.3 billion on the back of higher volumes on the 1.1 and the 1.2 software stakes. The operating loss improved by EUR 0.2 billion to EUR 1.3 billion, supported by higher sales and continued execution of the transform program. [indiscernible] EUR 1 billion despite the production ramp-up in [indiscernible]. Construction in Valencia and St. Tomas increased investment and net cash outflows. [indiscernible]region. Industrial operations maintained the improved momentum in the third quarter. Sales revenue in the first 9 months increased by 2% to EUR 31.9 billion backed on higher volumes. Operating profit was EUR 1.1 billion with a margin of 5.2%. Operational improvements offset higher tariffs, input costs and restructuring charges. Volkswagen Financial Services delivered a solid operating performance. Contract volumes rose by 1.5% to almost EUR 28 million and residual value risk also increased particularly as the European market shift towards battery electric vehicles. Credit loss ratio remained solid at 0.41%. Operating profit EUR 3.0 billion below the prior year period. We are taking early actions to address growing residual value pressure. We have, therefore, adjusted the Financial Services division's full year operating result outlook to now more than EUR 3.5 billion. Our investment discipline continues. Automotive investment in the R&D and CapEx fell by almost EUR 2 billion to EUR 22.4 million the first 9 months. This is equivalent to an investment ratio of 10.9%, some 50 basis points below the prior year level. For the full year 2026, we continue to expect an investment ratio of 11% to 12%. Part of the group target picture, we target 9% of sales in 2030, which equals EUR 135 billion over the next 5 years 2027 to 2031. The planned Audi plant is not included in this figure. However, our aim is to compensate as much as possible of additional investment within the upcoming planning round through stricter prioritization and further efficiencies across our intent portfolio. For us, investment discipline and targeted growth is in attractive markets are not a contradiction. They go hand in hand. In China, the automotive market remains under severe pressure. Market volumes are down 21% year-to-date, changes in subsidies and tax policies, higher fuel prices and weaker customer sentiment are driving the decline. Competition remains intense. In this environment, our unit sales declined by 35% to 1.2 million units with combustion engine models particularly affected. Significantly lower volume and costs for new NAV models ramp up weighted on the proportionate operative result. The step-up cost -- the step-up cost measures could only partly offset this pressure. In addition, Volkswagen Group China recognized impairments on legacy MEB-related assets in the third quarter, which reduced the proportionate operating result by about around EUR 0.2 billion. Before impairments, the proportionate operating result for the first 9 months amounted to EUR 110 million. For the full year, we now expect proportionate operating result from our Chinese joint ventures before impairments to be around breakeven. However, there's a significant risk that Q4 will push the full year result even before impairments into the negative territory. Nevertheless, we continue to implement our China for China strategy with full force. We are continuing our NAV model offensive rigorously and our cost reductions and capacity adjustments. This brings me to our financial outlook for the full year 2026. We expect sales revenue of around EUR 315 billion annual reported operating margin of up to 1%. Before expect special effects of about EUR 10 billion, our full year margin outlook is around 4%. Our current run rate is 3.8%, and we expect a higher BEV share in Europe in Q4. So please keep in mind that around 4% means that we are more in line with the run rate for the first 9 months. Building on the performance in the first 9 months, we expect an automotive investment ratio of 11% to 12%, and we continue to expect reported net cash flow of EUR 3 billion to EUR 6 billion, but we are confident that net cash flow in Q4 will be positive, adding to the EUR 4.4 billion we achieved in the first 9 months. We expect net liquidity of EUR 32 million to EUR 34 billion, but also here, we see a good chance to end the year at or even above the upper end of the range. Importantly, these KPIs exclude any effects from the sale of a majority stake in [indiscernible] or from group target picture 2030. Ladies and gentlemen, we are delivering on our strategy and the agreements reached in 2024 and 2025. Yet the world has changed fundamentally since we launched our group-wide efficiency programs. We faced tariffs, a sharply contracting Chinese market and intense competition in Europe from new Chinese entrants. The market success of our electric cars also weighed on our margins in the short term. Against this backdrop, incremental cost measures are not enough. We must fundamentally reshape our business model and deliver a decisive improvement in cost competitiveness. This requires a substantial reduction in complexity across the company. The group target picture, 2030 provides a framework for these changes. Now it's our task to implement it swiftly and with discipline. Our financial performance leaves no room for delay. Thank you very much. And with that, I hand over back to Rolf.

Thank you, Arno. And with that, we conclude the prepared remarks. And let us now enter into the Q&A session.

[Operator Instructions] So with that, we are expecting the first question and the first question comes from Patrick Hummel from UBS.

Hi, good morning. Can you hear me? .

Very good and loud. .

Two questions, please, for me. The first one, I'd like to double-click on your comment about the BEV mix dilution. You said it's going to be larger in the fourth quarter and even more so in H1 2027. Now it has already taken a toll in the third quarter. And looking at the whole complex of EV mix shift and with that also lower CO2 compliance costs on the other hand. How much of a headwind is this going to be in 2027, if the current trend continues or to take it even on a higher level. If we look at the big picture, all the puts and takes that you see from today's perspective, I guess, significant [indiscernible] inflation. But on the other hand, substantial cost saves that you're also working on. Can you just elaborate a little bit on the largest building blocks for the EBIT bridge going into next year, starting off that, say, 3.8% clean run rate basis that you're basically endorsing for 2026? And my second question, how important is China still from an earnings standpoint? JV proportionate results now guided breakeven or slightly below. We've got a pretty decent idea about what Porsche still makes in China. Can you give us an idea about the consolidated results within Volkswagen Group ex portion, meaning predominantly, I guess, Audi, that's still contributed by China, including all royalties and spare parts, parts, et cetera. just to get a sense of the remaining downside risk related to group numbers coming from China.

As always, and hopefully, you're not disappointed, I have to start with, it's too early to give you an outlook for 2027. This is what we typically do it, as you know, in March next year. but still some of the building blocks. And you mentioned them basically already. Look, the BEVs are still margin dilutive, but over time, they improve. This is the positive news, for example, from the new electric car family, the ID. CROZZ, there's already, I would say, an 80% margin, 70% to 80% versus combustion engine because the smaller cars like ID. Polo are still weaker. What happens over time is, of course, we bring also cost-down measures into the BEVs and improve our cost there with LFP batteries with more integrated drivetrains, but they come only over time. And what happened now is due to the fuel prices, specifically in Europe. And I would say also the great performance of our new electric car family, the ramp-up of our BEV share is much faster than the ramp down of the costs. Ultimately, we expect margin parity and also cost priority towards 2030 with the -- but now we are faced with a mix in order book of 40%. Just to give you an indication, 40% was the BEV share. We was planning for 2029 -- and in Europe. So this is what we are facing. This is one of the headwinds. In terms of raw materials, yes, there might be a headwind. But here, we have a lot of hedging and a lot of long-term agreements on energy and also Rolf and his team does a lot of hedging aluminum and other raw materials. But yes, there is steel price and there's also a certain risk for semiconductors. In terms of momentum, we bring fantastic models to the market, specifically Audi with the Q7 and the Q9 and later then also Q8. So there should be also continued product momentum and the biggest building block in that equation is obviously our restructuring program. The group target picture is an immense cost program of more than EUR 30 billion. And from that, the overhead cost reduction, we want to achieve is EUR 11 billion. And here, we want and we need to get really a step down in 2027. It's not our plan that we linearly reduce overhead costs and reduce them linearly by EUR 11 billion towards 2030, but rather a step down with certain measures we're just discussing and working out with tariff partners and with our internal partners. And this is really the picture step we are planning for 2027. And this is really too early to give you an indication on that. But this might be the building blocks. And in terms of regional development. China, that stays very competitive in markets in Europe. We expect the competitive pressure to stay, although there might be first effects from the agreement the European Union reached with the China that might give a small relief, and we expect a product momentum in U.S. despite the tariffs by the new cars from Modi and also the new Atlas and the new [indiscernible].

If you don't mind, Arno, just a follow up on China. Basically, the idea is really to understand what's the remaining downside risk to group earnings related to China, if China remains on a constant decline path. Another way to ask the question is, do you think the volume share that China still has in the group context for you, for Volkswagen Group is representative of the profit share you have in China? Or would you say by now it's -- the volume share is actually higher than the profit share because the JVs are profitless.

Patrick, we are reluctant to disclose these combined effects from China due to competitive reasons. But what I can say, you see the proportional opposition result which is already basically at breakeven and there's a certain risk that it turns negative this year. So we don't expect any further contributions from dividends in the cash flow next year. So this is basically factored in, in our guidance. And also from the volume, it's a much smaller part than in the past and also the profitability, specifically in the premium market is lower. So that all is factored in. and also Porsche give some indication on what they expect in China. So overall, the dependence on the China's market in terms of profit has significantly decreased over the time. And I think, Rolf, you want to add a comment.

Yes, put it positively. We have successfully diversified our group profits from China. And you know in history, I think the contribution on group level was close to 50%. And in the meantime, I think it's very fair to say that we should be well below 25%, yes, in the meantime, patrick, if that helps. .

It does.

Very good. Then we continue in the Q&A row with Tim Rokossa from Deutsche Bank. Tim?

I have 2 questions as well. The first one is there is always a lot of moving parts with you guys, Arno. But when I think about two of the absolute key elements outside of China that determine our immediate and midterm future, it's: a, the union negotiations about the plan, obviously, and then the future of Audi. Can you update us on what you're thinking is about the two of them? Will the negotiations likely be done before year-end? Is this something that could very well drag into next year? And secondly, should you not get the Audi deal, which, by the way, does it include tariff relief potentially? Or is this just a CapEx deal? What's really the plan to turn around Audi. I hear you on the Q7 and Q9 but arguably someone like Mercedes has an even better product momentum currently, and they really struggle as we are on yesterday. And then secondly, perhaps also when we think about modeling the next 2 years, those elements that are pretty loss-making like PowerCo, CARIAD, Scout also -- how shall we think about the loss-making contributors going forward? Will you cut these losses more slightly? Or should we continue to model that as a track?

Yes, Tim, thanks for your for your questions. First and foremost, obviously, we want to close the deal with the unions or the negotiation with the union as as fast as possible. And if you look at our results, yes, we need urgent contributions on that, but we don't have it in our own hands alone. So I cannot now predict whether we get an agreement at the end of this year or early next year. What I can say, I really ask everybody to remind him of the responsibility of we have for this company and for a broader picture for our also suppliers and partners. So we need the contribution of the EUR 11 billion and part of the EUR 11 billion obviously is the head count reduction by 50,000 of indirect worldwide. So we have started in some areas there already, but we need the contributions, definitely. In terms of Audi, yes, Audi, first and foremost, has certain product momentum. The RS models are doing very well. RS5. And now with the Q7 and Q9, we will see some very mixed strong cost, but let's be -- let's not forget, also Audi has a huge job to do on the cost side and on the productivity side in their plants. So it's not only brand Volkswagen or Volkswagen AG that has to discuss with the unions and have to reduce headcount. It's also Audi that has to do the job there. And yes, in terms of U.S., it's -- what I can say, I said it would be a huge step. In terms of localization, U.S. is one of the most profitable markets and the most promising markets. In the long term, our share is basically limited so far, our market share -- and it's really -- it's a long-term strategy. If you remember, Tim, back then [indiscernible] 2023, remember my presentation. We said, look, we want to defend Europe. We want to turn around China and we want to grow in U.S. And this is a long-term plan we're pursuing with Scout, with more local for local tailored to local segments products for Volkswagen. And also for more localization for audience now with the tariff scheme and the regulatory uncertainty, it's the local-for-local strategy is even more important, which we pursue for Europe, for U.S. and China. In terms of the loss making, we have basically 3 to 4 loss-making areas. One is PowerCo, which we are very transparent also CARIAD, obviously Scout. And there's a fourth loss-making element. It's our fully consolidated unit in China. It's -- another also make losses upfront losses today. And what I gave you already is an indication that the losses are 1.5 to 2 percentage points currently, and we want to turn them at least to breakeven by 2030. And here, more or less, the combined effect would be linear over the next years. And as we discussed in Paris, the turnaround of this loss-making units is planned to contribute also by 1.5 percentage points, almost 2 percentage points for the turnaround plan towards 2030.

Thank you, Tim. And we continue with Stuart Pearson from Oxcap.

Just China and the joint ventures and just the path forward from here. I just wonder if you're considering, obviously, you have quite a patchwork of joint ventures and alliances there. I'm just noticing what the consolidation with [indiscernible] GAC and the VW JV. Is that something that is possible for Volkswagen Group in China? Or are there just too many moving parts and different interests that make that impossible. So I just wondered whether the China positioning could be streamlined. And then the second question, just quickly on the Urban BEV orders. I get that it's margin dilutive. I just wonder as you're kind of answering it in terms of the percentage of your order book. But I mean, is it really -- how much is it cannibalizing orders for Polo and the ICE cars in that segment? Or is it incremental volume that's coming into the group? Or is it really cannibalizing the ICE, almost one for one?

So, look, it all starts with the volume protection. And [indiscernible] was very clear about that interview, he just gave some some days ago. And we had in our market in China -- Capital Markets Day in China, we are expecting some 2, 3 years ago, 30 million vehicles in China in total market, and we reduced that to 27%, 25%. And now we have an expectation of more than EUR 19 million to EUR 21 million. So let's count with EUR 20 million. And a total market. And if we keep our market share protection of 11%, that definitely would reduce our volumes to more like EUR 2.2 million. So there's one missing element in that. As other Chinese manufacturers, we have the chance to increase that volume in the local production by export. So we are already planning a significant amount of export 200,000, 300,000 cars to -- we call it Global South. We will start first deliveries to certain regions, Mexico, also South America, which might then add to the EUR 2.2 million -- 2.2 million units, I just derived from the math of the total market. So we need to do the math then and definitely, when we have to do more restructuring and that more restructuring starts with looking at the manufacturing footprint. So you have to further reduce our manufacturing footprint. It also is the classical cost work of our units in China, more synergies. We have a huge holding there. So they have to do the cost works as well. And then we look into the chance of export. And at the end of the day, we need to also look at the question you just raised, how many partners and how many entities we have there, but this is much too early to give you an answer there, I can probe seasons, I cannot comment on that topic. But at the end of the day, it has to start with a realistic volume assumption and then work back from then, and this is what the team is doing. Yes, new electric car family. It really -- segment by segment, it comes on top. The Polo is -- in Polo orders is running on previous year. And so it really adds significantly to the volume and our order intake and order bank speaks for itself. So this is a very, very, very good news. And as always, I must say, yes, they are -- the cars are margin dilutive, but there's also a very positive signal in that whole topic. Look, Volkswagen was always strong when we delivered on 3 virtues. First, great products with -- second, great quality and affordable prices. And the good news is once we deliver on these 3 dimensions, we are very successful. Unfortunately, it's more like an upfront investment in terms of margin because currently, we give affordable prices to the customers, but our cost base is not there so far. And this is what we have quickly aligned now. The good news is our winning formula still works and in order to make that on a long-term success, we have to lower the cost base because you can only provide affordable prices if you have a competitive cost base. Everybody in the company is aware of that fact. And so this is what we set up now for the -- in the group target picture, align the cost base in order to have enough margins to invest significantly into future products and technologies, but also living up to the promise of Volkswagen, which also stands for reprices.

Okay. And just quickly to follow up on that. Does that mean if there's a headwind coming from these cars, we are not cannibalizing that it's fair to assume that at least for now in the start-up phase, the loss-making at the EBIT level?

So far, they are still loss-making at EBIT level, yes. .

But it's clear, but I want to say, of course, we have a clear positive contribution margin. That's clear. .

Thank you, Stuart. I like winning formula. We continue with Daniel Schwartz from Metzler. Daniel, please .

Three quick questions. Firstly, who needs to approve the Audi plant? Does it need the 2/3 majority in the Volkswagen Supervisory Board or is it the Audi Supervisory Board that could approve the factory? And a follow-up on China is, the JV would start to burn cash, would you potentially transfer cash to China, i.e., you could see JV contribute negatively to cash flow? Or is 0 dividend from China really the downside risk? And lastly, financial services, the equity that keeps going up every quarter. It's now EUR 48 billion. And the return on equity is quite low if you apply the full EUR 48 billion. It seems overcapitalized. What is the target here? .

Yes, Daniel, first and foremost, for obvious reasons, and I hope you have understanding for that, I cannot give certain details on our internal processes on the approval of that plant. I think there were some information already given on that process. The China, the downside risk is really 0 dividend. But yes, to be very honest, if our proportionate or result, this year is negative with a certain risk that I mentioned, then we are on that situation in 2027. And we have to factor in, in our cash flow guidance for 2027 that there might be no or very limited China dividends. And the return on equity on our finco, we are heavily regulated in the finco business. There are certain capital markets rules on core capital. And and other elements of the capital, you know them very well are there to disclose very well. We are aware that we are slightly above this capital scheme -- but on the other hand, there's still some room for growth. And what we expect over the planning round that we need not to increase the capital, but rather with the growth of our finco, they will be more and better utilize this equity scheme they have currently so far. This is our planning going forward. And if you -- if it's well disclosed what -- where we stand and what our capital right now is and then we expect at the end of the planning round that we are exactly in terms of capital need on what we need for -- from a regulatory point of view. This is what we factored in now in the planning. .

And sorry, could you remind us what the dividend inflow is in '26 from China? .

Roughly on the -- the proportionate operating profit we did in 2025. That's the logic. So very prudent approach on the equity within the Finco, meeting the requirements we expect from the growing business by 2030, and the Volkswagen Bank obviously heavily regulated. With that, we continue with Henning Cosman from Barclays.

I just have one question really, which is on the free cash flow for next year. I appreciate you don't want to go into the guidance for next year too much, but just conceptually, and I understand the China dividend could be down, but you seem to be tracking very well against your free cash flow guidance for this year, and you have this very big step down in CapEx next year. There should also be less M&A outflow to Rivian, seems like there could be -- everything else equal, it could be EUR 8 billion, EUR 9 billion free cash flow next year. I'm just wondering if I'm missing anything there conceptually right, not to hold you to a certain number. Where I'm coming from is consensus isn't remotely at that level. So I'm just wondering if I'm missing anything. And related to that, if you could just remind us what sort of capital requirements you've previously said you have to sort of threefold approach to cash allocation. If you could just remind us on the balance sheet, what you're aiming for before more of that super strong cash flow that should be coming very soon before you can allocate more of that to shareholder returns. If you can just remind us of how much you want before you can look into that. In fact, actually, one quick clarification. I'm not sure if I didn't hear, but I believe Tim asked earlier about the potential tariff implications related to the Audi plant. I think all you always made it very clear that you wanted some sort of tariff offset in exchange for committing to incremental investment in the U.S. was -- I think there was something in the media, but could you just confirm that that's still the case, that it's a precondition to actually go ahead with that investment that you get a tariff offset that's equivalent to the investment?

First and foremost, free cash flow, it's more important that we wait until March next year. For the guidance, there are some obviously moving parts. It starts with the operating result. And the cash conversion rate, yes, we want to be more even more disciplined on R&D and CapEx combined. And we are a very good trajectory there. On the other hand, I said operatively, we see a headwind from the margin dilution effect of the BEV specifically in the first quarter and the first half of the year, order book. And it depends very much also on M&A, but don't be afraid, we are not planning to spend significantly the amount on M&A. I just see that this year, clearly, we had some positive effects from from disposals as promised, not Sinotruck, Bugatti Rimac, [indiscernible] and others. And yes, we want to continue on that path, and we haven't discussed about [indiscernible]. -- but it's not very clear that next year, we will do the next significant steps. We have to look at the entities that we want to sell. And is it the right time and are they in the right shape. And we do it when it's best for the for the company and our shareholders and us and in terms of value creation. So we are not desperate. So it very much depends, as I said, also on M&A and as a disposal next year, which we will give you an indication. Yes. The -- in terms of our net liquidity, first and foremost, you know how important the rating is for our companies and how we strongly look on rating. We need that for the refinancing capacity and the competitiveness of our finco. And so there's this one element, obviously, next to margin, net cash flow, it's net liquidity. Our policy is more than 10%. But we're also aware that some of our competitors are much stronger in terms of balance sheet, and they have much better rating look at some peers that it's more like act in 20%. We haven't changed more than 10%. But obviously, in difficult times, a strong balance sheet is an asset and we want to increase that. And -- it's too early to give you the combination of the 3 elements we set a strong balance sheet. Second, obviously, diverse policy with more than 30% payout. And the third element of that as we look at our hybrid bonds, how to cautionally reduce the exposure there. And this is where we stand. It very much also depends on on Evolent, whether we close the deal this year or next year, just to give you a reminder, this would be another cash inflow of EUR 7.2 billion which is also a strong signal. But again, it's too early to give you a concrete number. But we carefully balance these 3 dimensions in the best interest of all the stakeholders, including our shareholders. And as I said before, we cannot -- we cannot comment on any potential agreements on the Audi deal. .

Thank you, Henning. And we continue with Philippe Houchois from Jefferies. Philippe .

My question is on the -- we have, again, a very, very strong performance in financial services, and we've seen positive surprises yesterday, Ford and Mercedes. I'm just trying to understand what is driving such upside and how we should think about it next year in terms of we know [indiscernible] values might be a headwind, rates are headwind -- do we still have kind of a momentum of all those values that will carry us into 2027? That's my first question. The second one, possibly, if you can maybe give us a bit of visibility on what will drive -- I mean, I think clearly, Q4 cash flow will be good again. We know capital spending is going down, but is it going to be more of a working capital benefit as you end the year with low inventory? Or what is driving the positive cash flow in the fourth quarter. .

Yes. Thanks for your questions. The fincos -- basically, it's a lot of elements. First and foremost, it's a very stringent process of managing the risk, including residual value risk. I mentioned that before, we see some risk on the combustion engine cars, but it's still from our perspective, well managed. In the finco, we also started a significant cost and improvement and efficiency program because at the end of the day, in provides lease rates, and they are partly subsidized by the groups. And so we have a huge performance program, which includes the finco. And third, we look at optimizing refinancing in certain areas. For example, in U.S., we have a cooperation with Wells Fargo to optimize refinancing. And we look at other areas where we could potentially optimize refinancing, which then also would improve performance. So it's really managing the risks, manage down the overhead costs, and we have really a stringent overhead cost ratios. -- given our Finco and optimize refinancing. I would say these are the elements of the performance of our Finco so far. But to be very transparent, as I said, -- we see also risk there, and this is why we adjusted our outlook with this caution. And cash flow, Q4, yes, I mean, obviously, there are some elements where we think we should expect on top of the cash flow we achieved so far, a positive one in Q4. First and foremost, some kind of seasonality on the working capital on inventory. It's even that despite some of the -- a lot of processes in the [indiscernible] capital management back really very well, and they are continued since months and years. There's a slight burden currently on the working capital due to the ramp-up of our electric car family. And that there's even a more chance to once these cars flow into the market. So working capital then, obviously, a positive operative business. Everything starts with operative business. We expect a positive margin and operative business in in Q4. And then the very stringent investment discipline currently so far, we are EUR 2 billion below last year in absolute terms and ow as a percentage point wise, we have some basis points below last year, and there's no reason why we shouldn't continue that performance throughout the year because we have to reduce and CapEx anyway, target wise for the next year and for the EUR 135 billion. And so I would say this should be the major contribution to a positive net cash flow in Q4. Rolf, do you want to add?

No, I think everything well explained.

If I can squeeze another one...

Are you happy Philippe?

I'm happy that your cash flow remains positive.

Very good.

Can I maybe squeeze another one is your hedging on raw materials seems to be delivering impressive results, but usually it's a timing difference. We get bad news from GM, we get bad news from Ford overnight on commodity and DRAM, et cetera. How are you measuring that? Or is that -- is there a step that should worry about in 2027 where your hedging kind of runs out? .

I would propose that I hand over to Rolf because he's responsible for the whole process. So I would ask Rolf to answer.

Philippe, as I always said, we started until the year well hedged, yes. On those raw materials, actually, we can hedge. We always have to say that there's obviously certain raw materials like plastics or oil-based components, where it's obviously difficult to hedge or also steel is something actually which we don't hedge. But in particular, on the battery raw materials, we have also some reasonable good hedge positions left actually for the remainder of the year, which makes us confident that the impact in fourth quarter is not is limited. . And we recently saw, in particular, lithium hydroxide as well as lithium carbonite coming down quite significantly. And we obviously used the opportunity to increase our hedge ratio, particularly for 2027. Cobalt also recently came down in our favor. And we still have a very reasonable position hedge of our 2027 exposure on the aluminum side. So yes, that's similar to what Arno has said to the building block, where we are refraining from giving already an outlook for 2027 on the profit bridge, but we are using the optionalities, which are offered by the fluctuation in raw materials to mitigate the issue as much as we can and do this reasonably successful for those raw materials, which we can manage. Then we continue with Frank Biller from LBBW.

it's just one remaining on the dividend strategy here. So you are targeting more than 30% payout ratio. So on what basis are you calculating this more than 30%, is this including or excluding the one-offs or only the noncash one-offs? Or what is your thinking behind that? .

Frank, yes, absolutely have understanding for that question. But currently, it's really -- we have, as I said earlier, we have a lot of building blocks. We have our reported operative result in all transparency last year, we said we won't take into account the write-down of force goodwill impairment. We haven't said that so far because we have too many building blocks. We have to write-down impairment, which is not basically cash relevant. On the other hand, we don't know whether we achieve the closing of the Everllence deal this year or next year, we are absolutely confident that we will close it. But it's not in our hand, we depend on a lot of authorities worldwide for the agreement. They have to agree on the deal and that the agreement we get potentially this year or next year, we don't know whether we so far achieved a major breakthrough in the negotiation with the unions and in the head count reduction, which might incur also burdens on the result this year or next year. So we have a lot of building blocks, and I really must ask for your understanding that, currently, we cannot reliably communicate and forecast what the basis of that 30% -- and yes, this is where we stand today.

And you're not going to include the share price here or the dividend yield? .

If we include the share price for the dividend, yes, you mean that we want to take into consideration the share price?

Yes. If it's attractive or not, if share price is very low. So it's a very high dividend yield and maybe you incorporate this.

This is only one element of one reasoning of that. We really -- you need to be patient. Once we have all the building blocks together in this year, as I said, perhaps we get an agreement with the unions, which might also burden our result. And then from there, we decide what is the right dividend for next year and also takes into account what our dividend policy is, we really also look at all the stakeholders, including our shareholders, look at the, for example, dividend here as well.

That's okay. So you feel comfortable with this more than EUR 4 on consensus basis for this year? .

I think we see less than EUR 4 currently on the consensus basis. But as I said, if you would now comment if we feel okay or not, then would [indiscernible] . And best for last, Jose. Jose Asumendi from JPMorgan with the last question.

Couple of questions. I know you're back to the building blocks. Can you comment a bit on cost savings for 2027 in -- and if you cannot obviously give us a number, at least directionally in the building blocks, like where do you see the cost savings efficiencies coming through, which pockets you see will be bigger? Is it purchasing? Is it labor? Is it any other category that we should have in mind in terms of supporting our mix here? And then second, I was wondering if you could give us any comments. When you are having discussions on the finance front and you're comparing your manufacturing footprint in China, the work you have done there with the suppliers, then who is the and you look at, let's say, manufacturing costs of an e-motor or transmission, how does this compare China versus what you have in Europe? And which opportunities do you see you have there to make cost footprint if you are more efficient? Any numbers you could provide? Or any examples?

Yes. If you jump back to the building blocks of our -- of the cost program in the [indiscernible] 2030. Just as a reminder, I know you have all the facts and figures in your head. It's around EUR 30 billion, EUR 31 billion, about EUR 20 billion of that is operational and EUR 11 billion should come from overhead costs. And from the operational side, we talked about material costs, we talked about incentives. Material costs over the 5 years, the magnitude of 10% incentives and then productivity in the plant. So obviously, to optimize material costs, it takes some time. Included in that is LFP and NMC switched in the battery front. So -- and we said we want to use the material cost reduction to offset potential mix effects in the margin side of the BEVs. And that's -- we have to compensate as much as possible, but they will basically come over time. We expect another step down in terms of productivity in the plants. The process we just launched and the discussion we just had with the 4 plants in Germany, which don't have allocation so far and the transparency we give on factory costs and the competition we put on the plants was very healthy in terms of motivation for the teams. So there should be improvement there. And as I said, the biggest cost improvement should really come from overhead costs. It should not be a linear -- we need a step down in both in terms of head count and ideally also in terms of labor cost. This is too early to say, but this is what I would expect and what we need in order to stay competitive. And this is what we are negotiating for so far. So these are some of the building blocks. And in terms of, yes, what we utilize, our knowledge in China, but I'll make you one example, we have achieved significant cost down in China on the whole electric platform on engines, on electric engines, of course, on battery, but also on conventional components like steering, like seeds, structures and so on. And in setting up our new SSP toolkit for 2030, we take basically benchmarks from our Anhui factory, which is 100% Volkswagen-owned entity and compare them where we stand in China, what potential costs are in Europe, and we do some of, like, I would say, a walk, if you localize in either we take the components from China as well, like the the ID one, ID -- everyone will get an electric engine from our 100% engine plant in China, electric engine plant in China, which is significantly cheaper. Or if we localize, we do kind of a cost work, say, look, -- these are the costs in China. These are potential higher localization in Europe and then have very stringent targets for each component. And the teams in Europe work against these targets and we are not closing and we are not giving the approval of the component if it's not close or on par on that target. So we really utilize the knowledge and the experience we have in China by designing our new components first; and second, also use our China manufacturing base for potential exports of component into the next-generation platforms. Of course, that might conflict with the European EAA regulation. And so we carefully balance that. And in most of the times, we have basically 2 sources. We have a potential component we have in China and the potential component will be localized in Europe, and then we are very flexible. These are -- this is very specific on the process, we mention how we manage that.