Volkswagen AG Management Discusses H1 2013 Results Earnings Call Transcript… — Volkswagen Lavida

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Volkswagen AG Management Discusses H1 Results — Earnings Transcript

Christine Ritz

Dieter Pötsch — Financial Officer, Head of Accounting and Member of Management

Christian Klingler — of Management Board and Member of The Board of Management for Sales

Martin Winterkorn — of Management Board and Chief Officer

Stephen Reitman Societe Generale Cross Research

Jochen Gehrke Deutsche Bank AG, Research

Michael John Tyndall Barclays Capital, Research

Horst Schneider — Research Division

Jürgen — Metzler Equities, Division

Philip Watkins Citigroup Inc, Research

Fraser Hill — Merrill Lynch, Research

Laura I. Lembke — Stanley, Research Division

Biller — Landesbank Research Division

Philippe — UBS Investment Bank, Division

Volkswagen AG (OTCQX:VLKAY ) H1 Earnings Call July 31, 8:00 AM ET

Good day, and gentlemen, and welcome to the Volkswagen publication of results of the first 6 of 2013 conference call. For information, today’s conference is recorded. At this time, I like to turn the conference to Christine Ritz, Head of the Investor Relations for Volkswagen AG. go ahead.

Christine Ritz

and gentlemen, welcome to Volkswagen’s call on the results for the period to June 2013 based on the yearly financial report we this morning. Joining me on conference call are Hans Pötsch, Member of the Board of Volkswagen AG, responsible for finance and and a Member of the Board of Management, AG, responsible for group sales and Christian Klingler.

The webcast can be via our website at www.volkswagenag.com/ir, where you also find the charts to download. We will take from analysts and then journalists after the presentation. Let me now you over to Mr. Pötsch.

Hans Pötsch

Yes, thank and a warm welcome from my to those of you joining this today. Our results for the first 6 came in fully in line our expectations, driven by strong in China and supported by the new models out under MQB. The Volkswagen delivered 4.8 million vehicles to a plus of 5.4% across our car and divisions. Sales revenue, at EUR billion, was up 3.5%, a good performance in a tough European especially considering that from our Chinese activities are reported through our joint Operating profit came in at EUR 5.8

While Q2 was up on last year, the starts to the year in Q1, as we ramped up of our new models and the difficult European environment, in particular, meant earnings for the first 6 months in below the first half of year. Profit before at EUR 6.6 billion, includes strong from the equity accounted in China. Automotive liquidity of EUR billion remained at a robust strengthened by the recently issued convertible notes and provides a foundation for future growth.

Let me now you over to Mr. Klingler to take you the sales performance.

Christian

Ladies and gentlemen, I’m pleased to welcome you once to the conference call and to take opportunity to present the first sales figures to you. chart shows half graph of the world car market and deliveries to customers in comparison to the period last year. The car market advanced by 3.5% in the half of 2013. But as expected, the has clearly slowed over the 12 months. The growth was driven by the positive development in North and the Asian markets, while in Europe were still impacted by the prolonged economic and crisis.

From an economic of view, the year 2013 is challenging than last Taking a look to our deliveries to the Volkswagen Group was again to outperform the overall car market in the 6 months of this year. it is increased by 5.5%, with coming up from China, the States and United Kingdom. the risk in the total market high, which we continue to very closely.

Let us now move on to the of the Volkswagen Group in direct to the total car market on a regional in the first half of 2013. As you can the Volkswagen Group had a successful half year in 2013 by the total car market in many We have continued to expand our out further despite some in South America. In a decreasing European market, the Volkswagen was able to gain market in the first 6 months of this As already mentioned, the main for the sales decline in Europe is above all, in the challenging situation, in which some have fallen to new lows and at a very low level.

In particular, the markets, France and Italy, by over 10% against the first of 2012. Germany and Spain are as well by 8% and 5%, respectively. The challenge now is to successfully against the prevailing trend given the market We are convinced that we can defend our market position. Although our in Central and Eastern Europe affected by the change of several key models, especially of ŠKODA it performed better than the market. We also observed volatility in South America. The in this market, in particular, is characterized by trade restrictions, barriers and increasing competitive from manufacturers with new production facilities. However, we are that with a wide of local and import models, we are in the to successfully compete in the challenging

Our development in Europe and in South has been compensated by strong in North America and Asia where our deliveries to customers shown double-digit growth one The positive sales trend in America was especially driven by the business outlook continuing in the States. In addition to this, market crosses further, driven by Asian markets as China and Japan, where for our products remains high. we’re looking for further and potential to continually improve our in all regions to build on our long-term

Here is a look at how each of the Car brands of the Volkswagen Group in the first half. Nearly all of our achieved an increase in terms of And for the group, total deliveries to including Commercial Vehicles, last year’s level by Volkswagen Passenger Cars rose by 4.4% compared to year to over 2.9 million mainly due to the strong performance in Mexico, South Africa and Kingdom. This increase among others, from our volume model Golf, will be rolled out to the further over the next few months. increased its deliveries by more 47,000 cars due to a strong not only in Asia but also in the and emerging markets such as ŠKODA suffered from markets in Central and Eastern and the change of its volume models saw its deliveries decreased by 5.8% to units. SEAT deliveries up by 11.5% to over 182,000 driven by new products and strong in Germany, Spain and Mexico. deliveries reached nearly units in the first half of Bentley has managed to significantly deliveries by 8.9% to over units, with strong in United states and the United

Now we turn to the situation of the Commercial brand of the Volkswagen Group. The of Volkswagen Commercial Vehicles at the level of last year, a slight increase of 0.2%. the financial crisis in Europe and a weaker market in Germany affected sales in this However, growth, in particular, in the segment in South America, Brazil and Argentina, as well as compensated the decline in Europe. The truck market above 6 declined by 4% in the first half of influenced by the negative trend in and the slowdown of the Asian market. The Europe truck market by 13% and in Central and Eastern Europe by 7%. On the the major market in South Brazil increased by 4%.

In this challenging environment, MAN suffered a in its deliveries of 5.2%. This is largely related to Europe major Western European and Russia experienced the largest decreases caused by the difficult situation. Bus sales, on the other showed a positive development.

The half of the year, Scania was to significantly increase sales by Especially in Brazil, Scania has the heavy-duty subsegment development and increased sales. Despite market trends, Scania was to also increase sales in European markets, including Underlying sales in Power where we are represented by MAN, by 7% and reached EUR 1.84 billion.

Let us now a look at a few model highlights in the quarter of 2013, which support our sales performances in the coming months. With the GTI, Golf GTI and Golf GTD in May and June of this year, the rollout of the new Golf family Both models provide an driving pleasure, as well as the combined with distinctive design and new features. At the same they continue to offer the for daily use of the Golf. In addition, the new Estate and Golf BlueMotion be launched the next — on the next month and will to drive sales further.

The Volkswagen Gran Lavida is the new to the very successful Volkswagen sedan in China. With its yet elegant design, it offers a combination of comfort and versatility to the The Volkswagen Gran Lavida had its premiere at the Shanghai Auto in April and hit Chinese roads month.

The Audi RS6 Avant is the combination of an everyday Audi concept, intelligent performance and driving dynamics. Besides and high quality of — and the quality of Audi, this provides a sporty and unique which arouses enthusiasm and The now third generation of this was presented at the Geneva Motor this year and was already in the market last month.

The new Superb comes with an face lift, which completely new front and rear elements from the brand’s new language, as well as improved efficiency. Comfort, roominess and these are the main attributes defines ŠKODA’s flagship. in April at the Shanghai Motor it reached its first customers at the end of

Christine Ritz

Thank Mr. Klingler. Now let’s look at our performance in more detail. Mr. please.

Hans Dieter

Yes, of course. And let’s at a high level. For the period to June 2013, the Automotive reported revenue of EUR 87.5 that’s up 2%, while operating was down at EUR 5 billion, a minus Influences here include the effect from the full of Porsche, while weaker as European markets remain restrained earnings. Sales which excludes cars by our Chinese joint ventures, in almost flat at minus 1%.

on to the financial result. The proportion to the equity consolidated companies slightly, as our Chinese activities well, more than the technical decline from consolidating the earnings of Porsche AG. The operating profit of the Chinese ventures was up 1/3 at EUR 2.4 billion. The other result was broadly flat at EUR 1 billion after adjusting for EUR 2.6 of measurement, gains on Porsche-related put and options in the first half of

Turning to the group operating performance in more detail. mix, price contributed a EUR 0.5 billion in improvement from the EUR 0.9 negative reported for Q1. Weaker mix and sales outside of China partially compensated by the full of Porsche, which is included in position. This position includes a contingency reserve in the million range arising the recollection initiated in relation to a DSG gearbox in the Asia-Pacific region. rates after hedging flat. Product cost came in at a plus of EUR 0.6 billion, offsetting the increase in fixed startup costs, which the growth in our factory footprint the associated higher fixed as well as the related higher

Despite flat earnings at our Commercial Vehicles brands, the market in Europe, in particular, on earnings in our Commercial Vehicles, Engineering division. In addition, in Q2, MAN [ph] to contingency reserve in Q1 relating to a large order to turnkey dealer [ph] plants. In total, the division’s slipped to EUR 78 million.

The Financial division, including the financial activities of all our brands and also of Holding Salzburg, lifted earnings by just short of EUR 100 In total, operating profit in at EUR 5.8 billion.

Let’s now take a look at the financial performance of our brands. The Volkswagen Passenger Car reported an operating result of EUR 1.5 in the first half, reflecting sales volume and weaker as well as costs for new technologies. at ŠKODA were held due to costs related to importing products, as well as the tough market conditions. SEAT a positive result for Q2, benefiting from the success of the new Leon, offsets model start-up With a 10.5% margin Audi posted robust of EUR 2.6 billion despite the tough conditions, as well as costs both to new technologies and to the expansion of production footprint. Porsche to post strong earnings, an operating result of EUR 1.3 billion and a of over 18%. Bentley steady progress. Altogether, brands made up around 2/3 of our results, highlighting the difference in the of the markets for premium in comparison to the for volume cars.

Scania slightly lower earnings, MAN slipped to a loss after the of project-related provisions in difficult conditions. Our Light Commercial brands was able to grow slightly on the back of positive and mix effects.

The increase in the Others reflects, in part, the full of Porsche, which has led to a higher of intercompany profits. Volkswagen Services booked 2 million new That’s up 8.2% on the first of 2012, growing earnings in a tough market, underscoring the of Financial Services to the Automotive arm of our

Let’s now turn to cash in the Automotive Division. Operating flow increased from EUR 6.8 to EUR 8.4 billion. Working capital by EUR 2.1 billion, around EUR 1 billion than last year. At of Automotive revenue, CapEx was in with our guidance of between 6% and 7% for the year, following the usual pattern. Capitalized RD of EUR 1.6 billion just below 30% of all RD spent, in line with guidance and the higher capitalization ratio of the consolidated MAN and Porsche brands, as as ongoing model development on our Toolkit architecture. New cash came in at a strong EUR 3.1 billion considering equity investments, in particular include EUR 1.7 billion for the of the 50% share in LeasePlan from our Services Division in the first as I reported on our last call.

As of 30, net liquidity stood at EUR 11.3 in the Automotive Division. It’s recalling that the recent included the annual dividend to of Volkswagen, as well as to the minority in Scania and MAN. Liquidity was by the successful placement of a mandatory note to the value of EUR 1.2 billion, of EUR 1.1 billion is booked within net

And so to conclude my presentation today, let me now to our outlook statement, which is in full in our half yearly report. We anticipate that in growth in the global market for cars is likely to be weaker in 2012 and that the overall in the market for light commercial trucks and buses that are for the Volkswagen Group will at the same level as in 2012. for mobility-related Financial Services is to rise further. We expect the Volkswagen Group will the market as a whole in a challenging and that deliveries to customers increase year-on-year. We expect the Group’s 2013 sales to exceed the prior year Given the ongoing uncertainty in the environment, the group’s goal for profit is to match the prior level in 2013.

Christine

Mr. Pötsch, thank you very We will now take questions analysts [Operator Instructions]

Session

[Operator Instructions] We now take our first question Stephen Reitman from Generale.

Stephen Reitman Societe Generale Cross Research

Stephen Reitman Societe Generale in London. of all, question on the capitalization which rose quite in the second quarter versus the quarter. Could you comment on was behind that? And secondly, you to the impact of further footprint at Audi for a slight decline in the between Q1 and Q2. Was that referring to Hungary and Mexico? And could you us sort of like roughly how that would have

Christine Ritz

Okay, you very much, Stephen. You 2 questions for us. The first question to the capitalization ratio in Q2, which was than in Q1. So you would like to some more details, is behind that. And the second refers to Audi and the margin in the second quarter, the reason we the impact of the footprint expansion, and you are in some more details, is behind that and how much is So Mr. Pötsch, please.

Hans Pötsch

So first of all, on the ratio. In terms of RD, here, very clear that added by full consolidation mainly MAN and Porsche, which on a higher level of capitalization as to the average of the Volkswagen Group. You to take into consideration the business model of these is different, and to that extent, it influence the average capitalization So clean off these effects, the would have gone up 23% to some maybe 26%. And the difference is clearly to be explained by the level of RD going forward, the reached, which will to quite a significant number of new introductions in the next month and to come. On the Audi margin, I we can be very pleased with the shown in the second quarter. is committed to continue to operate in a of 8% to 10% of operating margin, and we clearly already at the beginning of the year we believe that Audi be able to continue on the upper of that range, which succeeded with in the second So I think there’s nothing to about at this point. there were some by the new expansions of the footprint already execution on different levels. If you have picked up by the newspapers, the in Hungary that was opened with the production of the A3 sedan started, there will be big step taken by starting of the TT successor because that’s far advanced. And of course, also in Mexico are proceeding. Still, in another time window so but we will see also some going forward on that I do not want to give a number the effect was concretely because is going to change in the upcoming here and there. But it definitely carry Audi into a new which is, according to the strategic of Audi, therefore, it’s necessary. Otherwise, again, to this, we’re absolutely with the performance of Audi.

Stephen Reitman — Generale Cross Asset

If I may just also ask on Porsche, the 19.2% margin in the second was extraordinarily high. Is the guidance for Porsche for the full year to be in the 14% to 15%

Christine Ritz

Okay. you. So one further question on the of Porsche, if we can give there an for the full year.

Hans Pötsch

We do not want to change our which is in the market so far. We to maintain at least a 50% level for the reason that we should not what is in the forefront for the second of the year on the Porsche side to these 2 milestone projects: one is the 918 Spyder, the first plug-in in this segment of cars; and the Macan SUV, which is a new on Porsche side in a very market. That’s, of course, a number of upfront investments and an lot of RD activity also. So there to be some burden to the Porsche PL in the half, which should not be as any pessimistic statement from my but we do not want to change the guidance so

We’ll now take our next from Jochen Gehrke Deutsche Bank.

Jochen — Deutsche Bank AG, Division

Two questions on my side. of all, on MAN, obviously, disappointing performance, with substantial charges here by the company. Now you have finished domination agreement. Is there any changes, be it either changing changing reporting lines this company, that we be expecting from MAN going Or do you regard the further EUR 300 million in the as a one-off and actually are pleased the underlying way they are running the And then secondly, on LatAm, one of your competitors was relatively on the second half. I wonder you could share your on the market development, whether you the government will ever cut the IPI tax that we’ve seen now for a of months and quarters. And thirdly, very briefly on MQB and how we should be about your bridge you present in the presentation pack. I now we have roughly the same cost savings as we have cost increase, is that going to be positive? Any change in the half of the year or should we wait until 2014 any sizable MQB effects will be

Christine Ritz

Okay. you, Jochen. So you have 3 for us. The first question refers to If we do intend to do any strategic changes or can we expect there in the future? question refers to the market in What is our expectation for the second of this year? And the third refers to the MQB impact. What do we for the second half or for the full Would the MQB impact will be in a way, also in comparison to costs, and you are interested in some details here. I will that Mr. Klingler starts Brazil.

Christian Klingler

So as you know, the Brazilian market has since more than a this IPI tax advantage which has reduced a little bit over the months, starting in January. Of a lot of the market development depends on IPI tax structure, which is, by the way, in both the cars market as as with another structure, the market. How and when this IPI be changed, we don’t know We expect that the global which means the total car market, in Brazil stays or less flat to last maybe smaller decline. So we are not in the to believe that there is very positive in terms of market there. I would like to add that it is — not a very positive sign the market is not growing strong normally, if you have an incentive as you have today in the market, should be dealt a more situation. Brazil is, as you have as well in the press, under social tensions. There’s discussions, some political as well, and we are extremely sensible on is going on. And we are following very the political and economic situation. On the side, we see that a lot of competitors are stronger and more aggressive the market. Some of them new plans and then, as a consequence, new And we are there to follow up that thoroughly.

Hans Dieter

Okay, so let me continue, first of with the question on MAN. at a first look, we are disappointed the performance. The markets are continuing to be weak. Nevertheless, I think worthwhile to have another at the performance because it’s not all There are a number of entities, the in Brazil, to keep its company which do perform quite I would say. And then the part is that on the basis of a of decisions taken in the past, I the team is making good at the truck and bus side. Also, we had this one-off situation regards to power plants in the on the diesel and the turbo side, is burdensome as we had to accept. But I think is some good starting built now to take further then. Now important here is we were able to get the domination registered. So everything clear on side. And it’s very that the teams at MAN and also people in the group are looking at possibilities to find ways to efficiency and productivity. I should not to say, at this point, the truck market seems to be a bit more supportive in the last of weeks. Hopefully, this on. You’re well aware in the forefront of the introduction of EU6 next for the trucks, we always said we do expect some pre-buying. And these are the signs pointing that directions. If we are going to anything further on in terms of structural things, it’s which we will give the and certainly, we’ll inform you forward. On the MQB side, let me, first of say that there is nothing to be as compared to previous statements by the company. Maybe we could add the that the first MQB models are well received by the market. And the direct response in a challenging they also do contribute to stabilizing prices, which is one of the important things in this Now clearly, and again, just to this quickly, in consistence former statements, we will see the of vehicles built on the MQB platform upwards in the second half of year. So there should be slight effect, more in the fourth quarter, which be — should create the to visit that effect. And clearly, the number of vehicles, year basis 2014, be significantly higher, in total, 2 million cars. If we take out, it’s already 1.5 outside of China roughly so we’re looking forward to be to see these effects in our PL also.

Gehrke — Deutsche AG, Research Division

Sorry, if I may follow on, on MAN. I mean, the problem is not spread all around the but at least in my view, and I think shared also yesterday by on the call, the company sits on overcapacity isn’t part of the Should we be thinking that forward, Volkswagen should see as an opportunity as VW keeps on growing to some of that capacity on and maybe retool a plant therefore, take these off the shoulders of MAN? Or is this a thought as one example for a corporation?

Dieter Pötsch

Let me simply at this point, without anything, but it is clear that the conclusion of the domination agreement, we all the options open. And that’s I meant, actually, when I that the teams of MAN and Volkswagen sit together to develop a clear plan how to go forward in the best of the company.

We’ll now take our next from Michael Tyndall Barclays.

Michael John — Barclays Capital, Division

It’s Mike from Barclays. Two, if I One, if I just think the second half in terms of Mr. Pötsch, you mentioned at Q1, that I you were running at something 4x your normal average in of launch costs. I would thought that a lot of that is now us in terms of the major launches. If I about MQB costs, a lot of that is us. From what I can see, you need to do what you did in the first to reach your target. So wondering, are there any other that we’re missing in of what the second half like? Because it feels your momentum, if you like, is to accelerate into the second And then the second question, going to be a bit greedy here and ask next year. Consensus is sitting at EUR 14.1 billion, a way ahead of your EUR 11.5 target for this year, a bit the scenario we were in last I wonder if you could just, give us — I know early. You’re not in your round yet, but maybe color as to how you feel about consensus number for next at this point, given a lot of the that you’ve been should start to reap next year.

Christine

Okay, the first question to the second half, if we see any headwinds in the half or how do we — or what do we of the second half and our performance And the second question refers to the 2014. What is there, our our expectations in terms of performance. And we can talk also a little bit the market environment in ’14, and also you asked for the dividend. So I suggest that Mr. Klingler start with the markets year and then we — or half next year, and we will add the financial performance.

Klingler

Okay, with So as you know, we are — in terms of markets in — on a world on a positive way. So maybe we go the good things and talk afterwards with the, say, chances of not so good as you like. We believe that the market in North America has potential for growth. This is due to several reasons. One is, of course, the situation, which is recovering slowly but surely, as well as the prices are getting, let’s better confirmation and therefore, the are going for further possibilities of Of course, they have now again, to very low interest Personally, I don’t hope come back to the situation the crisis because this was one of the of the crisis. And we see as well that the age of the cars is pretty high. One of the in the developed countries. And it’s logic that you replace a Particularly strong across is in the market due to a lot of new launches and the passenger car will not grow as fast as the market. So the first 6 months, to give you a feeling, the passenger car in United States, growth was 4%, something like this, and the market was something like 9% to So we believe there is continuous sign in total market We see as well a positive situation in Of course, economical situation is not the as it was 1 or 2 years ago. But still is positive and we believe, up to the end, it be there. We are on a situation where we end of the year for South America, is more or less stable. And as I before, this is not a very feeling due to the not-so-strong impact of scheme given in Brazil. So it should be even stronger. So we are, in general, follow closely what’s happening in America. India is a very case. There is since a negative development driven by uncertainty. As you know, there be elections, as well driven by cost of interest rates. And is changes in taxes, particular in of petrol taxes and defaults. So we believe the situation will not Russia is going to be stabilized. is maybe some risk of us in terms of total market. And in we believe that the situation, has been developed over the — I would say so about 2 that even in the long continue to be there. So we are not believing the crisis in Europe is over. So I outlook then to 2014 on a level of market, we think there’s potential further on a worldwide level, again, by the Asian markets and, to a low by North America. We believe as that in Europe, we will not a positive tendency on the high So in our feeling, we believe, in the best it’s something like a orientation, which means could become a little bit But let’s be honest, we are now in July, about 2014 in July the before is very, very But that is today’s reading so we see what’s happening over the years — next sorry, to come. And for the other I would prefer to wait a bit. So [indiscernible], we need to what’s happened with the development. In Russia, we need to what has happened with the of petrol. And in South America, we to wait a little bit what is with the political and economical particularly in Argentina, as well as in So this would be my answer.

Dieter Pötsch

Okay. So I can continue on commenting on the situation regards to the financials. Just in line with Mr. Klingler’s of the economical framework. It’s clear that going into the second half, we have to recognize that are continuing uncertainties in the markets, in Europe. And therefore, it’s — and it remains quite a to produce the same, more or operating result in the second as compared to the first half in But we think we can perform in this I need to say that for the third it needs to be taken into that it will be influenced by effects, like always, the period, of course, and the factory Now looking into 2014, evidently clear that the we look forward, the more it is to really do a proper forecasting. At point, uncertainties are increasing. As Mr. said, we feel more We talk about Asia, North America, the most area to do a proper forecasting as Europe. Now clearly on that we have to stay cautiously maybe that’s the right There will be clearly some limited growth But as I’ve said, uncertainty and as we stated in the Annual Report, the target for operating profit in is to match the 2012 figure. And in we go for exceeding the 2012 figure. I say exceeding, it’s clear under the circumstances, expectations remain on a realistic level.

now take our next question Horst Schneider from

Horst Schneider — Research Division

It’s from HSBC. Just one follow-up on the question from Tyndall, just regarding So is it fair to assume that sales in H2 will be higher in H1, and we can also expect that the x China will grow in H2 Then the second question I have related to China the dividend payment from Maybe you could give us a what is the total dividend we can expect this year China and how much has been actually in Q2? And the last question relates a little bit to the cash Because it’s the first that we talked since you the mandatory convertible bond, I be interested to know what is the — the policy going So how should we think about capital raising measures in to the free cash flow? So you confirm that we are now completely with this instrument convertible bonds?

Christine

Okay, Horst. So we have 3 The first question refers to What is our expectation for sales in the half? This year, the sales be higher than in the half? And what is the sales China? How would that be in the half in comparison to the first Second question refers to the — dividend payment from our joint ventures in What do we expect for the full and what was — what did we receive in the second quarter? And you asked on the — you have a about the convertible. Is there any measures to expect another or other, let’s say, measures? Thank you. I suggest that Mr. Klingler with the sales question.

Klingler

Okay. So of course, always complicated to answer very precisely. The tendency is the second half of the year, in of sales, would be slightly than the first half of the And this is both true by the with China and by the sales China. So that is, I think, the of the question, what I could you.

Hans Dieter Pötsch

So on the First, dividend with to the received dividend from the joint ventures. We did receive EUR 2 billion so far. And there is payment which has not been yet, but is booked as a receivable in the of EUR 600 million for the second half. In of the question on our policy with to the convertible bond, I can say there no decisions taken, also no under consideration. And maybe at point, I should also as we position to the whole transaction, we did see as a clear opportunistic move, was a certain time window with regard to the first which we did last year. So is no basis for taking any conclusion this would be any kind of procedure going forward.

Ritz

Sorry, but may I remind you to stick to 2 questions because we are out of time.

We’ll now take our question from Jürgen from Metzler.

Jürgen — Metzler Equities, Division

Yes. I have 2 questions. The first one on North you already commented on what’s on the but your own business, how would you it so far with Volkswagen sales down recently and Audi and being up? And would it also be the probably in the second half? And if I look at your PL for the second your selling costs up by just 3.6% which is unusual in the business that are — they grew so slower than the revenues. Can also be continued in the second from your point of

Christine Ritz

Okay, You have 2 questions for us. The first refers to North America. And if we can also a little bit about the of the Volkswagen brand, what do we for the second half? And the second refers to our PL in the second quarter, the cost, what do we expect for the upcoming quarters? And I’m Mr. Klingler will be happy to with North America.

Klingler

Okay, maybe we of course, talk about America, but I think your particularly, is focused in United of America. America, the tendency’s by the way, for all of the brands. So let’s back a little bit what is the of — I think particularly, going for the Volkswagen issues in If you go back to Volkswagen about 3, 4, 5 ago and today, it’s a totally world. So we have achieved strong growth rates the last 3 years in nearly the volumes. And we have brought on the the all new Passat, with our plant in the States, which is performing strong. We have, as you know, before 10,000 cars or less a year. Now, we more than 10,000 a month. So is it abnormal that growth rate is not coming at the level this year? The is no. It’s not abnormal, it’s which seems to be not unusual as we no additional further strong being launched there. We as well that, over the this will be the case. So is more a structural thing something else. And I think needs to be as well, very kept in mind, what I in the beginning, even though the market in the United States is up by rate close to 10%, a bit lower, particularly strongly is to truck market. So the passenger car is not on the same growth rate. And as you the Passat and all of our models, more or with the exception of the [indiscernible] and the is playing in the passenger car markets. So we in United States, a ratio of in terms of growth for the Volkswagen which is maybe on the same in terms of total volumes last year. The other we see a good performance in terms of We see a good performance in terms of We see, as well, a good in terms of Bentley, and the other So I think in general, our performance in States is good. But it’s, as if we go for the total North American in general, positive because we see we have other growth like in Mexico, for example, or of course, in Canada. Okay?

Dieter Pötsch

The question on the PL in of the distribution expenses, is, of course, by the consolidation of Porsche. I should say at this point that normally, it’s not apples-to-apples With others normally, for us, the should stay at about the which is stated in the first of 2013 now.

We’ll now our next question from Watkins from Citi.

Watkins — Citigroup Research Division

I just if I could do a follow-up on the China point. It sounds a healthy than I was anticipating. But is this that you anticipate will proportionately as China makes profits? So could it be more EUR 2.6 billion, for instance, next And secondly, it’s really I was wondering what you could say current inventory levels.

Ritz

Okay, thank Philip, for your 2 questions. So the question refers to the China If we can give their forecast for the year, can that be even And the second question refers to levels. And Mr. Klingler is happy to with that question.

Klingler

So maybe we’ve to the current inventory level. In we feel that we are in a good that we have, in general, a performance. End of June, of course, we some, let’s say, some brands, some levels which is due to essentially to the of some of the plants which is the summer break, as we have, for in China, as well as we have particularly in Europe. So we believe we are continuing to be in a very good very good track of a very healthy stock in

Hans Dieter Pötsch

So again, on the China dividend. I first of all, without any performance, no dividend, that’s simple. And as you’re well we have embarked on a very investment program to be able to or even build up our market in China. It’s important to say we do fund these investments by either existing liquidity in or ongoing cash flow, is being produced in these ventures. So it’s obvious by taking the resolutions on the dividend together with the partners in we need to reflect this So on that basis, I think been a big step from year to this year we’re able to increase the from 2 to 2.6. And then we to see if net cash flow production on, on the level which we actually I would not rule out that are even possible on that but, again, in the framework I explained before.

Our next comes from Fraser from Bank of America.

Hill — BofA Lynch, Research Division

Fraser Hill from of America. Just 2 questions. One on the flow. There’s some today in the market regarding one of working capital lines in the if you look at the change in other obviously, that was negative EUR 884 I think, for Q2. Can you just confirm that was not effectively a relief the PL, into the EBIT, as in there was no PL And also confirm that, was in relation to annual bonus which I think was my understanding of topic. And I think we saw that year as well, but maybe some color from you be useful. On the second question, on Interested to hear your on synergies with Porsche. I obviously, I think you’ve your synergy target this year from EUR 700 to EUR 1 billion. And as of May, I think the was there was still EUR 620 million or so of synergy outstanding. Where did do we get to by the end of the quarter? How should we think these synergies in H2? And in 2014, the run rate going to be of harvesting synergies?

Christine Ritz

Thank you, Fraser, for 2 questions. The first question to our cash flow statement and the in other provisions. If we can explain a little bit because we got there questions. We got some questions on that position, also in of bonus payments and what are the major factors behind it. And the question refers to Porsche and the We do — we have achieved or we do see to so what is our assumption there for the year? How much can we achieved year? And also maybe we can some details for the upcoming over next year. you.

Christian Klingler

So first of as far as the bookkeeping is concerned. On the question of the you already made the appropriate It’s very similar to we were doing last and also the year before. It is the PL effect proceeds already in the 2012. And then there is a covering the bonus payments. And regards to the payout, this is being consumed. That’s it, is no benefit to the PL out of this position. And on the synergies of Porsche. Clearly, as we are talking in our last conference we’re on a very good there, that’s why we’re to step up the target from EUR 700 to more than EUR 1 billion. And it, of does have to say with the execution of projects. And there, one of the which I was talking about does play a key role, the Marcon car. And of course, is a very important project, is realizing synergies between and Porsche. So on that basis we are very well on track. The which we think we can realize for the year 2013 will be at EUR 400 million.

Our next question from Charles Winston Redburn Partners.

Charles — Redburn Partners Research Division

Charles Redburn here. Just 2 for me as very, very quickly. Can you the dividends from China, China? In other words, are actually in bank accounts I ask the question surely because are some issues about cash out of China. I just to confirm that you guys can do And then my main question is on trends. I was wondering if you could give us an update as to the pricing you’re seeing in Europe perhaps at the Audi level, the level, and at the mass market And if there are any growing pricing in some of the weaker emerging such as LatAm, Russia, et cetera, that would be

Volkswagen Lavida

Christine Ritz

Okay, you very much, Charles, you 2 questions for us. You have a question for Mr. in terms of pricing trends, if you can here some more in Europe and how we can differentiate between and premium segments and also the in the BRIC markets. And the second refers to China, if we really received the money, or if we managed to get the out of China, if I got you right. So please, Mr.

Christian Klingler

So I will try to your question about the situation in terms of pricing. So if you go to the market and the decline of the market, is now happening since years, it is normal that the pressure on is going up, and this is the case. So you see as well that the markets are and some of the competitors are suffering, it is not that the situation is occurring. So is, by the way, true, of course, for the volume brands than it is for the brands. But as well on the premium the pricing pressure is increasing. We see tendencies over the next to come as well. As a general for the markets, as you know, the Volkswagen and its brands try to be always prudent in of the pricing pressure. We have, as of course, the obligation sometimes when we think it’s But in general, we believe that the will not give us a situation this pricing pressure decrease over the next if not, over the next to come. This is what I like to answer to your about the pricing tendency in

Hans Dieter Pötsch

then a quick one on the China It’s in our bank account in


We’ll now take our next from Jose Asumendi JPMorgan.

Jose M. Asumendi JP Morgan Chase Co, Research

I would like to dig a little bit production. And if you look at production for Cars, x China and, if x Porsche, is it fair to assume the is starting to turn the corner in the quarter, i.e. was production flat in Q2 year-on-year? And could you any comments around production into Q3 and Q4 and, if possible, x And then second on CapEx, basically what are your assumptions for the second half, if on absolute values? Otherwise, happy to hear as percentage of

Christine Ritz

Okay, you, Jose, so we have 2 The first question refers to If you can give a figure for the first production x China and x Porsche. And if you can an outlook for the second half, so Q3 and Q4 x China. And then the second refers to our CapEx assumption for the half of this year, number of CapEx ratio, do we expect for the second half?

Dieter Pötsch

So first of on the — to the production site. in total terms, first 2013 was 4,868,000 cars, a plus of 4.4%. Without it’s been 3,408,000 That is a minus of 0.7%. We do not the detailed numbers with on hand. But if you assume a rough figure for Porsche, that is the production on the Porsche side. quite normally, due to the summer in the third quarter, production go down. So this clearly that in the fourth quarter, move production substantially up to be able to serve the markets and to maintain ideal inventory towards the year-end on the basis of our to beat the 2012 volume in 2013. And then on the CapEx First of all, as we did report for the half, we’ve been on a basis of roughly 4.5% ratio and we stick to our target for the year to come out between and 7%. Clearly, we need to say here quite normally, we would below our budgets for a good of the year. Until then, in the quarter, there is some booking. But again, we have to confirm our target of below 7% for

We’ll now take our next from Austin Earl Marshall Wace.

My one question is on the EBIT bridge, Slide 11. you just explain on the volume mix how that — the swings in the quarter of minus EUR 0.9 billion to EUR 0.5 for the half, giving a plus EUR 400 in play for the second quarter? Can you explain why that swung minus EUR 900 million to plus EUR 400 from Q1 to Q2 of this year?

Ritz

Okay, thank Austin. So we have the question the EBIT bridge and the column volume price mix, the in Q2 in comparison to Q1.

Hans Dieter

So a very quick one. At point, first of all, able to perform better on the side. We’re able to through some price and the product mix, country was also better as compared to the quarter. That brought us in the together with what I said, which needs to be into consideration that came up with a quite performance to reduce the distance as with last year’s

Can I follow up and just sort of I mean, did mix and price go from negative to positive?

Hans Pötsch

No, it’s still but to a lower extent.

Our next comes from Laura from Morgan Stanley.

I. Lembke — Morgan Research Division

I actually 1 follow-up question on China. I saw your profit per vehicle in the venture has actually now reached a level, so I was just wondering if were any special effects in the quarter or if you would say that is actually a sustainable level of going forward or if you could maybe — or if you believe you even exceed that forward?

Christine Ritz

you, Laura, for your on China. So you are wondering if the profit per in China, if that is a sustainable we will see or if there are any special we have seen in the second

Martin Winterkorn

There no special effects in China in of financial performance in the second Dare to say that this is the level of profit per car. We it’s on a very high And as Mr. Klingler pointed out also in of course, there are always a of uncertainties. That’s why we’re watching what’s going on. But of all, to say this very there were no special or effects in the second quarter.

Our question comes from Hull from Berenberg.

Hull — Berenberg, Division

It’s Adam from Berenberg in London. the 1 question. On the VW brand margin, you had a margin in Q2, up from 2.4%. Now I know whether there some one-offs there for DSG in Q2. But just broadly speaking, are still extremely tough in the European market, as you say, just getting going on the When we look back at your highest margin for VW for a full year, was a 4.0% in year 2011. I don’t whether you can give us some of feel as to, even in these conditions, is exceeding 4% feasible soon? Just give us a bit more feeling of — as to the of those benefits that are to really, to come through in on the VW brand side?

Christine Ritz

Okay, you, Adam, for you question on the brand then the financial So you would like to have a bit more color on the potential of the brand, also in the future, and can we and you expect from the Volkswagen

Christian Klingler

Well, I first of all, it’s quite a reasonable performance, the brand turned out within in the second quarter. Let me very recall for you that we are still in process of introducing [indiscernible] on the MQB So there is quite a significant load still on the company. the spreading out the MQB into the regions is a which already got started, and a cost we’re undertaking. as I also said, there be very significant returns back. But market performance was as Mr. Klingler pointed out. And on basis, I think it’s quite, as I’ve said, a performance. Is it possible to pass the 4%? Yes, of course, and the target at Volkswagen passenger car vehicles is higher than the 4%. But to get there, we to have the full installation of the MQB in the regions. So that’s a process will take into And that’s why this certainly is not a exercise. Secondly, again, to you to that point, it might a little bit odd when I say, so we can say that we did all the things right in of installing the new platform, introducing the new on this platform, it is that we are successful with the new models. But currently, there is limited by the markets. If we have a slightly framework, then it’s that the incremental volume over-proportionally contribute to the performance of the Passenger Car brand. Now it’s not we do forecast for the near-term, but I think I have made this just to make sure again, all we can carry responsibility for is on track, and now we’re going to see the markets continue to stabilize

Adam Hull — Research Division

Could I ask what the DSG charge because I you took another and you’re in VW brand as well in Q2?

Hans Pötsch

It was another 3-digit hit on the Passenger Cars brands by building a provision on top of the one built in Q1. We that most probably be it now. But clearly on a clean that would even that the result of Volkswagen Cars brand would be slightly better.

Our next comes from Frank from LBBW.

Frank — Landesbank Baden-Wurttemberg, Division

Frank Biller LBBW. This week, we something about Suzuki that are going on. Maybe you can us an update on the current situation

Christine Ritz

So thank Frank, for your question on It will be a short answer.

Klingler

Okay. On Suzuki, is still no comment to be made for the reason that, as you know, are arbitration proceedings on the horizon. And why both parties are subject to agreements. And hopefully, you’ll this. But for this reason, we not be commenting on the matter.

Frank — Landesbank Baden-Wurttemberg, Division

And the timeframe, maybe?

Ritz

I’m sorry, but we comment on that further. Frank.

Our next question from Philippe Houchois UBS.

Philippe Houchois UBS Investment Bank, Research

I just wanted to know, continued to do very well in the Japanese OEMs have a share and struggled to regaining it. Are you a change in competitive behavior on part using either or focus on some regions would be kind of changing or a bit more aggression on their to try to regain the loss share? And briefly, if I can squeeze briefly on should we be ready for an eventual to PPA and MAN to clear the deck since we some more difficulty on other acquisitions? It would be nice to get rid of the PPA.

Christine

Okay, thank you, So you have 2 questions for us. The first refers to China and the competition Mr. Klingler will give you a few insights. And then the second refers to MAN and if there are any possible or write-downs on MAN.

Christian

So if you allow me to answer the question China. China is a very market. And it is in respect of competition, one of the most competitive in the world by the not only by international but, as by a lot of local brands. As you know, wants to take and wants to get a of the cake at the level of the plans. So it is there are some differences We see that the Japanese manufacturers lost some of the market but we actually as well at the same that the Korean manufacturers increased some of the market So is there any particular strategy the Japanese or from other in terms of getting additional in China? Of course, each has its own. Some want to a bit more in the south, other a little bit more in the bigger other wants to be more in the cities. At the end of the day, what for us is that we defend our situation on 2 On one, of course, market and volumes and second, certainly in terms of pricing. So therefore, we to have a very good and products, which we have. We to have a very good which we have, with our 2 in the north, in the south and our input in Beijing. We need to have a value of our brands, which we as well, and a higher level of satisfaction which we have as So at the end of the day, what it means is we need to continue to really every day of the business forward. And to work on what we have over the last 20, 30 years, with the Chinese partners and to be and to when we’re not in all aspects, the there in the industry.

Hans Pötsch

Okay, on the second with regards to MAN and whether is any potential write-downs. Necessary to and say that there is no scenario where this would be in Clearly, I need to say not talking in MAN, but in principle terms, on the of the current interest rate impairment testing is relatively

Christine Ritz

Okay, you very much. So thank you much for your questions and for to our call. Enjoy the rest of the Goodbye from here in

That will conclude conference call. Thank you for participation. You may now disconnect.

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Volkswagen Lavida
Volkswagen Lavida

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