Volkswagen AG Management Discusses Q1 2014 Results - Earnings Call Transcript

Apr.29.14 | About: Volkswagen AG (VLKAY)

Volkswagen AG (OTCPK:VLKAY) Q1 2014 Earnings Call April 29, 2014 8:00 AM ET

Executives

Christine Ritz

Hans Dieter Pötsch - Chief Financial Officer, Head of Controlling & Accounting and Member of Board of Management

Christian Klingler - Head of Sales & Marketing and Member of Board of Management

Martin Winterkorn - Chairman of Board of Management and Chief Executive Officer

Analysts

Michael John Tyndall - Barclays Capital, Research Division

Horst Schneider - HSBC, Research Division

Charles Winston - Redburn Partners LLP, Research Division

Jose M. Asumendi - JP Morgan Chase & Co, Research Division

Fraser Hill - BofA Merrill Lynch, Research Division

Jürgen Pieper - Metzler Equities, Research Division

Stephen Reitman - Societe Generale Cross Asset Research

Adam Hull - Berenberg, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Volkswagen AG 2014 First Quarter Results Live Audio Webcast and Conference Call. For information, today's conference is being recorded. At this time, I'd like to turn the conference over to Christine Ritz, Head of Group Investor Relations for Volkswagen AG. Please go ahead.

Christine Ritz

Ladies and gentlemen, welcome to Volkswagen's conference call on the results for the period January to March 2014 based on the interim report we published this morning. Joining me on today's conference call are Hans Dieter Pötsch, member of the board of management for Volkswagen AG responsible for finance and controlling; and the member of the board of management Volkswagen AG responsible for group sales and marketing, Christian Klingler. As usual, the webcast can be viewed via our website at www.volkswagenag.com/IR where you will also find the charts available to download. After the presentation, we will take questions sourced from analysts, and later from journalists. Let me now pass you over to Mr. Pötsch.

Hans Dieter Pötsch

Thank you, and a warm welcome from my side to those of you joining this call. In the first quarter of 2014, the emerging car markets, with the exception of a strong performance in China, declined. Europe witnessed a stabilization as North America continued its expansion [ph] after a slow weather impacted start to the year. This challenging global diversity is reflected in our performance. U.S. revenue was up 2.7% at EUR 47.8 billion. Excluding exchange rate effect, the increase was closer to 7%. Operating profits, benefiting from the continued rollout of models based on our toolkit strategy, as well as positive mix effect, in particular, came in at EUR 2.9 billion. This is up nearly 22% on our performance in the first quarter 2013, which was partially impacted by the building of contingency reserves. Strong earnings from the equity-accounted investments in China supported an increase in profit before tax was EUR 3.4 billion. Automotive net liquidity [indiscernible] by the successful placement of a hybrid note increased to EUR 17.7 billion, providing a strong foundation for future growth.

Before I complete my opening remarks, I would like to add the word with you on Scania. The acceptance period for the offer to Scania's shareholders to acquire all Scania A and B shares ended last Friday on April 25. The settlement agent is still examining takeup of the offer. Final results and further decisions will be available shortly and will be notified separately.

Let me now pass you over to Mr. Klingler to take you through our sales performance.

Christian Klingler

Ladies and gentlemen, I would like to send a warm welcome to you all here today for the conference call. The present chart shows a graph of the world car market and group deliveries for customers of our passenger car brands in comparison to the previous years. In spite of a moderate overall market recovery, the second half of last year, the current environment in the first quarter 2014 remains challenging. The total car market shows widely different trends between regions. Beginning of this year, we can observe the pricing stability in emerging markets. Currency turbulence is increasing current account deficits, great interest rate spikes and economic slowdowns has had an adverse effect on the current market development, especially in Argentina, Brazil, Russia and Turkey. A response to this difficult economic climate was felt in the automotive sector. Above all, increasing uncertainties in central and eastern Europe, largest market, Russia, are posing through the challenges to slowing economic [indiscernible]. This scenario at present requires a new pricing strategy more adapted to this outlook. However, be aware that these negative effects could impact volume and market share. In contrast, they were the first [indiscernible sign for a gradual stabilization in the rest of European markets and [indiscernible] from a very low level. Positive development in the first quarter of the world car market was particularly due to strong markets throughout China, Japan and United Kingdom.

Turning to our own performance. The Volkswagen Group again outperformed the overall car market the first quarter of 2014. Our deliveries to customers in China, Germany and United Kingdom, in particular, made a major contribution for our positive development.

Now let us take a closer look at the car market development in the region in the on the [indiscernible] with the performance of the Volkswagen Group in the first quarter of 2014. For the first 3 months of this year, the Volkswagen Group delivered almost 2.3 million passenger cars to customers, representing an increase compared to the previous year of 6.2%, thus, once again continue to develop that and the market as a whole. Nevertheless, we see diverse developments to different regions. In particular, the South American market was not able to escape the overall downturn. Our sales declined in South America and they attributed it to the market's weakness and the forthcoming upgrading of our new modeling. Turbulences in the current market [indiscernible], as well as more competition are creating challenges, especially in Brazil and Argentina. Introduction of the localized Volkswagen app, as well as further product related measures in South American region will improve our position going forward. Although the North American market was slightly above last year in the first quarter, auto sales, especially in the United States, that hampered the first 2 months was the unusual harsh winter weather. The first quarter, we could not reach the sales results of the previous year, mainly due to the model changeover of the Volkswagen Group. For the remainder of the year, however, we are confident [indiscernible] strength in our position, with the introduction of new model. By contrast, we recorded lots [ph] in other regions, such as Europe and Asia-Pacific. Our deliveries even outperformed the general positive market trends in the first quarter of 2014. The western European market was able to recover slightly. In addition to the growing markets of Germany and the United Kingdom, we've also seen the first positive signs in France, Spain and considering this good base, our sales of passenger cars rose by 8% and outperformed the overall market.

Volkswagen Group recorded a similar performance in the central and eastern European markets, where our deliveries were up by 12.3% in the first 3 months of this year. Nevertheless, the current situation in Russia, especially due to the ruble depreciation, the [indiscernible] dispute remains faint and is putting pressure on the market. Therefore, we will need to follow developments there with close attention.

Volkswagen was again particularly dynamic in Asia-Pacific, where we increased our deliveries by almost 14%. This applies in particular to China where we have once again been able to increase our sales significantly over the previous year.

We look at the performance of the Volkswagen Group brands for passenger cars for the first quarter of 2014 [indiscernible]. I am pleased to report this [indiscernible] for each brand worldwide inside Volkswagen. The Volkswagen passenger car brand expanded deliveries up to almost 1.5 million cars, mainly due to strong demand in China, Germany and the United Kingdom. An essential contribution to the results was the Golf which is one of the Volkswagen's highest volume vehicle and has satisfied our customers for more than 40 years.

Audi deliveries were up by an impressive 11.7% to more than 410,000 cars, driven by a strong position within the premium market and greatly increased demand in the Asia-Pacific regions, such as China and South Korea, as well as Germany, the United Kingdom and United States. Audi deliveries rose by 12.1% compared to the same period last year. Thanks to the success of its new model offerings, which had positive effects especially in Germany and United Kingdom, in the Czech Republic and Poland. The brand has now returned onto a strong growth path. Over the coming months, Audi will continue its large new model rollout in additional countries such as China. Their deliveries were up by 7.3%, more than 90,000 deliveries, led by strong sales growth in Germany and United Kingdom, the Spanish brand remains well on track. Particularly the new Leon ST has moved SEAT into the compact [indiscernible] which provides a good base for further profit.

Porsche increased deliveries by 4.5% with strong demand in United States, China, the United Kingdom and Japan. With almost 17%, Bentley posted a double-digit profit for the first quarter, driven, in particular by high demand for the Bentley Continental GT. Bentley enjoyed strong demand in United States, China and the Middle East region.

Now let me turn to the situation of commercial vehicles brands for the Volkswagen Group. The deliveries of Volkswagen Commercial Vehicles decreased slightly by 2.3% for the first quarter compared to the same period in 2013. This development was mainly caused by the decline in Brazil. In addition, sales in Russia and Turkey were primarily affected by the already mentioned difficult economic environment and the turbulence in the currency market. However, the sales decline was partially offset by very strong sales in Western Europe, Asia Pacific and in Mexico. The global truck market for the last 6 months [ph] was slightly above last year's level. Western Europe outperformed the prior year, which was on a low level due to the effect of macroeconomic environment, as well as the ongoing registration of the Euro 5 trucks. However, the Brazilian market declined, as mentioned earlier. In this highly competitive environment, MAN deliveries reached over 26,000, but we are below last year. Sales in Europe and South America, with the lead market Brazil, decreased. However, MAN was able to increase sales in some Western European countries, such as Italy and Spain, thus business of MAN suffered, decline in deliveries as well. The first 3 months of the year, Scania was able to increase sales by 11.3% to nearly 19,000. While sales in South America declined due to the negative total market. Deliveries in Europe, especially in Germany and the Middle East region showed strong gain. Underlying revenue in power engineering where we are represented by MAN declined by 7% and reached EUR 0.8 billion.

Let me now introduce to you a few model highlights which will support our sales performance for the coming months. In February 2014, the locally produced Volkswagen Up now available in Brazil and the entire South American market. By introducing a remarkable design, accessible mobility, combined with best-in-class product [indiscernible] within the Mini segment, this car will make an important contribution towards innovative branding of Volkswagen in South America. This also involves the adaption (sic) [adaptation] of the car to customer need in Latin American market. Initial successes are already visible. The Up is the very first vehicle in Brazil which achieved the maximum result of 5 stars [indiscernible] and became the benchmark in passenger safety. Furthermore, the new technology of the Volkswagen 3-cylinder engine won different prizes such as the Engine of the year 2014 award. Audi is riding the next step in the A3 Cabriolet success story with the launch of the new model February this year. This compact 4-seater convinces with its innovative design and sophisticated technology which is at the top [indiscernible]. The new Audi A3 Cabriolet is the perfect example of sportiness, elegance and versatility which offers uncompromising luxury. SEAT plans its Leon family with the new Leon Cupra, which is the fastest SEAT vehicle ever. This new model underlines what makes them special [indiscernible] perfect balance between emotion, performance, dynamics for the highest driving fashion [ph], as well as exclusive elements for individualization. Following its world premiere at the Geneva Motor show this year, the Leon CUPRA was launched as a 3- and 5-door version last month. Porsche Macan is the true sport car in the segment of compact SUVs. It offers an additional entry into the Porsche group by combining best-in-class driving performance, high everyday usability and Porsche design DNA. The Macan had its world premiere at the Los Angeles Autoshow and was introduced on the market this April.

Christine Ritz

Thank you, Mr. Klingler. Now let's hand back to Mr. Pötsch for a look at our financial performance in more detail. Mr. Pötsch?

Hans Dieter Pötsch

Thank you. Allow me to focus first at the high level. The first 3 months, the Automotive Division recorded revenue up 2.2%, at just over EUR 42 billion. Operating profit for the division was up significantly by 25.8% at EUR 2.4 billion. Although one must recall that last year's result was impacted by the building of contingency provision. The bulk of the equity result reflects performance of our Chinese joint ventures which continue to perform very positively recording a proportionate operating profit of EUR 1.2 billion, that's up 7.4%. Help back in part by the relative strength of the euro. The other financial result came in flat year-on-year. Group profit before tax of EUR 3.4 billion equals 7% return on sales, bringing us one step closer to our 2018 goal of a sustainable 8% profit before tax margin.

Let's now turn to the group operating results performance for the first 3 months. Volume, mix, price contributed EUR 0.8 billion, reflecting the positive trend in pricing and mix as European markets improved. Exchange rates came in at negative EUR 0.4 billion, driven by the weakening of emerging market currencies which are, in many cases, prohibitively expensive to hedge. This position was a positive EUR 0.1 billion in the first quarter report last year, which predates a decline we have seen since in the value of many overseas currencies versus the euro. Our continued focus on product costs, including the effects of increased volumes within models based on our toolkit strategy recorded positive EUR 0.4 billion. Fixed costs were up EUR 0.5 billion. Depreciation was a core factor alongside higher R&D costs as we continued to develop new product and more fuel efficient powertrains as we work towards our 95-gram CO2 target in 2020. And of course with the performance of Porsche is now split across passenger cars position in the graph in front of the costs for the Macan and the renewal of the product pipeline at Porsche to our [indiscernible] 2. Earnings in our commercial vehicles and our engineering division were up EUR 0.3 billion at EUR 224 million, reflecting improved market conditions and building of industry provision at MAN last year. The next [ph] service division lifted operating earnings slightly to EUR 438 billion. Total operating profit came in at EUR 2.9 billion.

Let's now take a closer look at the financial performance of our main brands. The Volkswagen Passenger Cars brand reported an operating result of EUR 440 million for the first 3 months. This reflects an overall slightly lower sales volume by an improved performance in Europe. Remember that the increase in sales in China is in the main not included here. The South American markets of Brazil and Argentina, as well as the Russian market, were a significant burden in terms of both sales volume, as well as deteriorating exchange rates for the brand. Earnings each quarter improved to EUR 185 billion as the product renewals in early 2013 drove global deliveries to a record high. SEAT improved slightly, Audi posted robust earnings of EUR 1.3 billion, posting a 10.1% margin for the first 3 months. [indiscernible] cost for the launch of the Macan Porsche continued to book strong earnings growth with a margin close to 18% and an operating result of EUR 700 million, that's up 22% on Q1 last year. Bentley booked a double-digit margin, too, of around 10% with earnings up 2/3 at EUR 45 billion. Scania's earnings grew to EUR 254 million, while MAN booked a profit of EUR 68 billion. Volkswagen financial services booked 1.1 million new contracts, an increase of 17% to reach a total of 11.1 million contracts under management by the end of the quarter. Earnings grew slightly to EUR 430 million.

Let's now turn to cash flow in the Automotive Division. Operating cash flow for the division came in at EUR 2.3 billion. Within this, driven by higher production and sales, working capital increased. In addition to the usual seasonality pattern of rising inventories in Q1, the head of the European sales [indiscernible] in Q2, the improving European market rates raise a higher inventory requirement as we respond to rising demand and the associated rise in the order bank. This was an impact to payables and receivables too. In addition, within receivables, we'll also see a decent increase due to the declaration of a EUR 1.4 billion dividend from one of our equity-accounted joint ventures in China. As the dividend was declared in the first quarter and like in 2013 when it was declared later, but not yet paid, this was booked as a receivable with cash expected for the next 2 quarters.

Let's turn to CapEx now. Now our CapEx ratio for the first 3 months was in line with the prior year. [indiscernible] of capitalized R&D rose to 37.6% reflecting our product development cycle, including next-generation powertrain and the ongoing impact of the inclusion of Porsche. In summary, net cash flow came in at a slight negative of EUR 0.1 billion. This includes positive impact of the sale of the financial service activities of MAN to Volkswagen Financial Services AG on the first half of January. With regard to net liquidity in the Automotive Division on one hand, during the first quarter, net liquidity was reduced by a capital increase of EUR 2.3 billion to strengthen the equity of Volkswagen Financial Service AG. On the other hand, the automotive liquidity was strengthened by successful placement of hybrid bonds to the value of EUR 3 billion. At the end of March, net liquidity in the Automotive Division stood at EUR 17.7 billion.

And so to conclude my presentation today, let me now turn to our outlook for 2014. We are expecting trends in the passenger car market in the individual regions to continue to be mixed in 2014, with growth probably coming in below the rate we saw in 2013. We anticipate a slight recovery in demand for cars in Western Europe. In contrast, the central and eastern European markets coming in clearly below the price. While the upward trend in North America will probably weaken, the South American market is expected to be significantly below 2013. In a continually challenging global market environment, we expect the Volkswagen Group to moderately increase deliveries year-on-year. We expect 2014 sales revenue for the whole group and its business areas to move within a range of 3% around prior year figure. In terms of group operating profits, we are expecting an operating return on sales of between 5.5% and 6.5%, and the same range also applies to passenger cars business area. Commercial Vehicle's power engineering business area is likely to moderately exceed the 2013 performance, while the operating return on sales for the financial services division is expected to be between 8% and 9%.

Christine Ritz

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

Question-and-Answer Session

Operator

[Operator Instructions] And we'll now move to our first question today, which comes from Michael Tyndall of Barclays.

Michael John Tyndall - Barclays Capital, Research Division

It's Mike Tyndall from Barclays. Two, if I may. The first one just relates to your working capital. The run-up in inventories. If I'm not wrong, that's associated with your order book activity. I just wondered if you can give us some color about order intake, the rise in order intake and what's supporting, I guess, your confidence around the building of inventory? And then the second question is in relation to the EBIT walk. We're in a position where the product cost savings is less than the run-up in fixed costs. I realize that's not the guidance for the full year. I just wondered if you could talk a little bit about which of those lines, if you like, is going to go up and down over the remainder of the year, such that we'll end up in a net positive by the end of the year? That's about it.

Christine Ritz

Thank you, Mike. You have 2 questions for us. The first question relating to our -- is relating to our working capital. If we can give you some more color on the inventory situation or about our order intake. Why we are confident in building up inventories. And if we can give you some details about the situation with regard to the order intake. And the second question refers to the EBIT which you are interested in 2 columns: The product cost savings, the other the fixed cost amount. So -- and you were -- would like to have a better understanding for the full year. How will this develop, both the broader client savings versus the fixed cost savings. So if we can give you some more details.

Hans Dieter Pötsch

If allow me to try to answer the first question about the inventory. As you know, we are very keen in terms of policy and inventory. We're always trying to be best in line with that what are the expectations of the following months in terms of sales and in terms of delivery. I think to have -- concerning the increase of inventories, there's several effect. First one is clearly a seasonality effect, which is always in the end of the first quarter. If we push up a little bit our inventories for second quarter is pretty important in terms of delivery. The second one is just a very basic one. We sell more cars. So we sell more cars in general, so we need to have a more cars in stock. So this is something which is directly reflected. So if you want to come about the percentage of growth we had and you put on the percentage of growth we have on the stock already, you would immediately understand that there is at least, from our point of view, no issue which is negative. Then we had some new models where we needed to fill the order bank. And finally, of course, is that our order book, in general, is on a more consistent and in better shape than it used for the last. So we feel very, very good in terms of our working capital and we've optimistic that we keep on going on a very controlled level in terms of increase.

Christian Klingler

On the second question, referring to the EBIT walk and the ratio between the fixed cost development and product cost savings. We remain committed for the full year to turn up with a higher number of product cost savings as compared to this improvement on the fixed cost side. Now the reason here is while on the fixed cost side there are some items included which will not completely disappear, but are somewhat front-end heavy. We are forecasting that the run rates on the savings side should increase during the coming quarter.

Operator

Our next question comes from the line of Horst Schneider from HSBC.

Horst Schneider - HSBC, Research Division

It's Horst here from HSBC. Just briefly, when I remember today what you said, Mr. Pötsch, at the full year numbers, you said that Q1 will be the trough in terms of operating performance in 2014. I would be interested if you can make a similar statement now on the second quarter. So what we should expect from Q2 here? So will Q2 be up in terms of operating profit versus last year? I think the bar I see a little bit higher than it was in Q1. And in general, I want to know why you again assumed that H2 will be stronger than H1 in terms of profitability? And then the last question from my side is, I'm a little bit puzzled about Porsche. I mean we had this Porsche Capital Markets Day where the company said that they intend to increased sales and want to keep the operating profit at least stable. So today we get excellent results from Porsche, and I just want to know what I should think now about outlook for Porsche in terms of profitability this year?

Christine Ritz

Okay, thank you, Horst for your 2 questions. So the first one refers to our expectation for the remainder of the year. So especially what is our expectation in terms of EBIT for the second half, but also for Q2, what can we expect there. And then the second question refers to the very good performance of Porsche, also in terms of EBIT, but also margin-wise. So if we can give here some guidance for the full year. Thank you.

Hans Dieter Pötsch

So first of all, on the first question. If I may, I would like to a little bit elaborate on the profit picture of the first quarter is composed by quite different developments. On the one hand, as we tried to point out also in the little presentation, it should be very clear that there is a significant burden created by the developments in the emerging markets, mainly in countries like Brazil, India and not to speak about Russia or Argentina. So this hold true for the volume development, but also the impact on the currency side is very significant. Fortunately, at the same point in time as my colleague, Klingler, pointed out, we can point towards slight improvement in Europe. And as you're well aware, built on based off our strong position in Europe. This is then creating profit potential, which can absorb even these negative developments. On that basis, I would say, Q1 came in reasonably okay. Definitely not fantastic. And that means going forward, the major trends which we saw in Q1 will not go away, but on the other hand, as you're well aware, we have certain seasonality patterns. So Q2 normally is pretty strong quarter in terms of sales volume. And on that basis, we think we will see a more normal development in Q2 on the basis of hopefully a continuing trend of a very slight, but stable recovery in Europe taking place. Now on the Porsche side. You might remember one of the other comments we made during the road shows or both what you heard on Porsche that they -- which was that I think it's been possibly 2 very key messages. One was the company is absolutely on a success road, on its way. The second message was don't expect too much because what we should not miss here is that within just 4 or 5 years period, we sort of had doubling the volume of Porsche which means a significant amount of infrastructure investment, an enormous step-up in headcount. The introduction of new processes, new models, we're entering new markets, a new dealer structure. And everything which is related to this. And this is not for free. And that's why we were trying to keep the expectations on a reasonable level. I think we need to wait a little bit going forward how this plays out. But at the end of the day, we are firmly committed to deliver more than 15% operating return on the basis of a continually growing company which should not necessarily be a bad message.

Horst Schneider - HSBC, Research Division

But you cannot give any precise reason now why we should expect that the margin should come down in the next few quarters versus Q1. I mean, in Q1 we didn't have the full Macan ramp-up but the depreciation was there, the personnel costs have already increased. I cannot get to any argument why I should expect now any further burden in the coming quarters.

Christian Klingler

But you made the point already. I mean, we have to walk through the Macan ramp up, and I think it's not necessary to say this. Top priority is top quality, and that means even to the disadvantage that we potentially, relatively slowly ramping up production. But this means that there is a disproportion between the costs occurring and margins created in the first instant. Now don't get me wrong on this. The Macan is going to be a real success model for Porsche, that goes without saying, but we're talking about 2014, and the point we are trying to make is, it's not only chances, it's also a few risks in place. And then 3 months of the year are just too small basis to judge on the full year.

Operator

Our next question now comes from Charles Winston from Redburn Partners.

Charles Winston - Redburn Partners LLP, Research Division

Two questions. Firstly, just in terms of pricing, could you perhaps give us a feel for the sorts of aggregate price moves that you've been able to put through in the quarter. Obviously, I'm mindful of what you've been trying to do in the emerging world to offset FX, but perhaps if you could give us some color in pricing in Europe as well. And secondly, just in terms of your attitudes to Europe. You've highlighted this -- what I think what you called a slight but stable recovery in Europe. Clearly, the world outside of Europe in the emerging world has got a bit trickier than perhaps you thought at the beginning of the year. Would you say that you are, in any way, more confident about Europe now than you were at the other -- at the beginning of the year? In other words, has perhaps Europe's improvement offset in your minds the slightly more difficult emerging world?

Christine Ritz

Okay, thank you, Charles, for your 2 questions. The first question is about pricing. You are interested in some more details how is the pricing situation in Europe, but also, what can we probably do in the emerging markets. And the second question refers to Europe, the situation there of the European market, if we feel now more confident about the market's development in Europe than before, and if that is probably a chance to offset the weakness we see at the moment in the emerging markets world. Thank you.

Christian Klingler

Please allow me to start with the second question. It is definitely true that we see a -- it's a positive situation in terms of conditions in Europe if you compare it to last year. But we see that, not only now, our business, but as well as in the general economic world -- environment, with the exception, of course, of Ukraine and Russia, of course. But we should maybe not pick into this European element. We see there that the positive tendencies of stability are there. The general markets are recovering. There's -- they're still not into the -- where they used to be in 2007, but what we can see is that more and more customers are coming back and buying cars. We have a positive tendency in Germany. We see as well in Spain, the let's say, positive feeling about the situation we used to have over the last few years and that we believe that could something be installed in Italy, as well on a level of positive trends, all, of course, depending if the government this time stays a bit too long. At least, that's what we see is the positive as well.

U.K., also very good last year and still is very good. And in France, we see, let's say, some stability issues, which is positive. But in general, if you ask us are we more confident on the development of Europe? The answer is yes, we are. The only smaller, if you want so, negative impact is coming from some of the countries in the eastern part of this, which is essentially due to the crisis on a political level. Western Europe, definitely, it's a yes. So the comment to the pricing, I think we need to take some time and -- to differentiate clearly by region. And I will try to give an overview what is our position, our feeling, which might not always be the same, of course, of one another competitor. In Europe, it's clearly that the high competitive situation is the -- continuing to be there, but we see not a further, let's say, negative impact in terms of pricing. This is a general remark. This can be seen by the majority of our brands. There might be one another, a little bit up, one another a little bit down. And -- but in general, it's just the usual. As you know, we try to be extremely sensible on price.

If you go to China, we continue to have, let's say, a thorough price positioning there. We are continuing to enjoy a good position and we continue to have, I would say so, the possibility to defend our prices on a satisfying level.

United States, I would say so that we've come to a situation where pricing gets a bit more complicated. We see some first signs of overheating in the market. This is easily to be understood if you're go into the general incentives, which has increased by all competitors in the first quarter. And you see as well, that the stock, which is in the yards of dealers in general now, not at our level, has increased.

So here, we see some pressures in terms of prices. If we now come to the other question, what do we do when we have foreign exchange issues. So first of course, we analyze it in all details and try to understand what is the best way for us and to find the right balance between getting the maximum back out of the increase of prices concerning the currency exchange increases. But as well on the other side, you have a situation where we are not going into too big risk in terms of market share. So for example, in Argentina, when the depreciation has happened in January of this year on a very [indiscernible] that I would say the strong level of a bit more than 20%. We have increased very fast our prices by nearly the same level. Of course, we take with this the risk that we lose market share. But we believe, and I believe, for the long-term, this is something that we need to accept some time. There might be other countries where we might have another strategy and not going to the same logic as we've done in Argentina. So the message for me concerning the emerging markets is, first, we are very, very closely observing it. We have regularly updates, sometimes, on a weekly basis. We look over what can we do, what is logic, what is not logic. And we try to make the best compromise, which means getting the volumes right, but particularly, getting back the effect of the exchange rate impact due to price.

I'm pretty sure that this will occupy us over the next months to come, which is perfect certainly, and it will be interesting how the market will react. What will happen if we continue, for example, with the exchange rates to Russia, what will happen in Turkey, what is happening in South Africa, what is happening in Argentina, what is the situation in Brazil, what is happening in Southeast Asia, Indonesia and so forth, where they have as well enjoyed having changes in terms of the exchange rates and then, step-by-step, we will try, as I've mentioned before, to get the best out of it. But there will be an impact on both, one in terms of market share, another in terms of profitability, that's for sure.

Charles Winston - Redburn Partners LLP, Research Division

Very clear. And please, just a follow up. Can I just very quickly follow up? Does that mean if pricing is stable in Europe, but perhaps seeing some increases in the emerging world, that net-net on the global basis, it's fair to say that pricing net-net globally was very slightly up in the quarter? Is that a fair assumption?

Christian Klingler

It all depends what is net-net. Is net-net in terms of -- including or excluding exchange rates?

Charles Winston - Redburn Partners LLP, Research Division

Forgive me. Excluding FX. In other words, just looking at price and incentive.

Christian Klingler

In terms of excluding -- oh la la, you asked me a question that's not easy to answer. But the -- I would guess so. The answer would be more in the tendency to confirm what you think.

Operator

Our next question comes from Jose Asumendi of JPMorgan.

Jose M. Asumendi - JP Morgan Chase & Co, Research Division

Two items please. The first one on ŠKODA, in present performance, can you talk about the key drivers behind the improvement in margins? And would you agree that this brand is likely to be the first one to show the improvement in margins from the 5% level into the 6% to 8% range? Second item on the profit bridge, could you please help us understand the split between volume, price mix on the profit bridge? And if you could also please comment on the currency hit on the top line on the revenues, how much it was.

Christine Ritz

Okay, thank you, José. You have 2 questions for us. The first one is -- refers to ŠKODA and the impressive performance in the first quarter, if we can explain a little bit what are the drivers for that performance we have seen. And the second question refers to the EBIT or so-called profit bridge. You are interested in more details about our volume/price mix, the impact we have seen in the first quarter. And then also if we can give a number how currencies fits the revenue line in the first quarter.

Hans Dieter Pötsch

Well, first of all, on ŠKODA, I think I couldn't agree more with you, good performance. What we should not forget, nevertheless, is that we saw a relatively weak 2013. Of course, in some quite difficult market framework conditions on the one hand, but also by the one changeover of the Octavia, which we all know is the very key model of ŠKODA, the new cars that's selling extremely well, and hopefully, we can bridge some limitations in terms of capacity, which makes this trend a continuous one. And as you indicated, the model sits on our MQB platform, so we have some excellent cost base included there also. That's a very good basis which makes us quite optimistic for 2014 going forward. Now hopefully, the situation with regards to the Russian market, as Mr. Klingler mentioned, is not too negative, which could put some limitations to continue all with this trend. But definitely, it's always on the right way. Second question, on the EBIT bridge, the split between volume, price and mix now, evidently, if you look at the volume development always x the China, that can't be so much related to volume and indeed, that's more or less, a wash. But we have a pretty good development on the mix side, which is also to be explained by the positive development in the European markets. On average, the bigger cars, more costly cars, a good portion of equipment, which goes with the car, very positive mix effect and also quite positive price effect included there.

Then the currency impact on the top line, now this is some bigger -- something in the neighborhood of EUR 2 billion, and it is the main impact created by the Brazilian real, the Argentina situation, the Russian ruble and a little piece of South Africa.

Operator

Your next question now comes from Fraser Hill of Bank of America.

Fraser Hill - BofA Merrill Lynch, Research Division

It's Fraser Hill. Just 2 questions. The first one, just looking at specifically the VW Passenger Car brand. I think you made some broader comments about the group and European strength offsetting emerging market headwinds. Can you just drill in a little bit to the VW Passenger Car brand and give us your appraisal on how those 2 counterbalancing trends are going to affect that brand, specifically as we look into Q2 and Q3? You did mention that emerging market concerns or weight, it's not really going to go away in the second quarter. So maybe just starting there, when we look at the second quarter for that brand, will the European strength be able to offset that emerging market pressure or will the net effect still be a headwind then -- and a likely profit decline in Q2 for passenger car? The second question, a bit of housekeeping, really. But on our R&D capitalization that was actually up quite sharp in the first quarter. I think you've been quite clear about the effect that Porsche is having on that line. But when we look at the R&D capitalization for the year as a whole, should we still expect that to be higher year-on-year versus the 34%, I think, that you reported 2013?

Christine Ritz

Okay, thank you, Fraser. For your 2 questions, the first question refers to the performance of the Volkswagen Passenger Cars brand, and if we can give you a guidance for the second quarter, could it be that the European situation and the improved situation in Europe, that this brand will actually offset the weakness we have to face in the emerging markets, if we can give here some more information. And then you would like to have an update on the capitalization of development Porsche. So can we give you a guidance for the full year, how will be the ratio for the full year also in comparison to 2013.

Hans Dieter Pötsch

So first of all, on the Volkswagen Passenger Car brand, and you're right, it's beginning to take a little bit the blame off of Volkswagen Passenger Cars. This is the brand which were covering -- almost all the areas around the globe is mostly affected by what is currently going on in the emerging markets. So there's no other brand with a similar effect. If one thinks about Audi, it's quite different because the position in the emerging markets, first of all, is different. And of course, then it's limited numbers -- number of competitors operating in the sector. So what I'm saying, this is very clear. We are in the middle of a process to echo this negative effect. One issue is, of course, to get the pricing, which, of course, can have a negative volume effect also. And secondly, which is also important to mention here, by principle, Volkswagen Passenger Cars does have not a bad marching [ph] position to tackle the issues coming from the emerging markets development. For the reason that -- in a number of these markets, we are already operating on the basis of proprietorship [ph] based on local content, which is not at all to say that we sufficiently have a good natural hedge position already exists. But this is to say that we will have to improve our business model, which means that we need to create more local content in a number of these countries. But I'm saying the elements are there. It's only a matter of time.

Then again, on the European side, Mr. Klingler said we have a pretty good order backlog. We are able to deliver and fortunate [ph], for all the cars, of Volkswagen Passenger Cars. So on that basis, we can be confident that we will see improvement going forward into the second quarter even under circumstances, which can mean that there is some burden to be carried by the emerging markets situation. It's also clear that Volkswagen Passenger Cars is in the middle of a significant investment cycle. So as sometimes in formal [ph] life that sometimes things do come at the wrong point in time. We cannot have a choice there, but under the circumstances, we are confident that we can improve the economic picture of Volkswagen Passenger Cars going forward in 2014.

Then on the R&D side, you are making a good point. First of all, into towards a very high level of R&D expenses, out of which, a significant portion was capitalized. Now the capitalization rates is specifically high on the Porsche side, which is even for Porsche, historically speaking, a very high level of around 6%. So taking this into consideration and looking at the product portfolio, which is under development, and all the new models which will come to life in the upcoming period, for the next 12 to 18 months, we will continue on a relatively high level. And it is possible that we see a slight increase against the capitalization rate of 2013.

Operator

Our next question comes from Jürgen Pieper from Metzler.

Jürgen Pieper - Metzler Equities, Research Division

Sorry, it's Jürgen Pieper from Metzler. Two questions from my side, the first one on commercial. You can see a decline on the first quarter of 3%. From my point of view, it's a bit weaker than the overall market trend in the first quarter, clearly. And my answer, it's going down 13%. From your perspective, is that below the expectations? And what would you expect in the second and third quarter? I mean, can we expect -- will we see a reversal of the negative trend here? And the second one is on the U.S. market. Mr. Klingler, you said that you expect to -- the position to strengthen there. Can you give us a picture -- or can you illustrate it from what's kind of products this reversal should come?

Christine Ritz

Okay, thank you, Jürgen. So 2 questions you are interested in. So the first one refers to the commercial vehicles development in the first quarter, where we have seen a slight decrease in deliveries. So is that below our expectations, or what is our expectations for the second and third quarter? And the second question refers to the U.S. markets, how we would like to strengthen there our position, which products would -- do we intend to launch to the market.

Christian Klingler

Well, if you'll allow, I'll start with the second one. We do have an interesting and positive strength in the majority brands -- in the majority of the brands in North America and particularly, as well as in U.S. So you see this, of course, with Porsche, the new Macan, and see this with the Audi with the new A3 sedan, which is coming to the market. And you see as well that the effects of the launch of the Golf would come. We are not on the same, let's say, positive feeling on the brand Volkswagen, in general, in the United States. We believe if we are achieving more or less the result of last year, it's already a good success. So we don't see there any, let's say, substantial growth. The growth is coming from the other brands. And this might explain in general why we believe that the group will improve their position, but is maybe not true for all of the brands.

Jürgen Pieper - Metzler Equities, Research Division

Okay. That's fine, okay.

Christian Klingler

So you then come to.. Sorry?

Jürgen Pieper - Metzler Equities, Research Division

No, sir. So it's not the Volkswagen brand. It's more Audi and...

Christian Klingler

No, no. It's a group, it's a group, it's a group. So -- and for Volkswagen we believe -- last year, we have sold a little bit more than 400,000 -- 404,000. So if we're around this number, we believe it's already success. It will be the third year that will be close to 400,000 in more than 30 years. And of course, we are not in the cycle that you get very new products into the market. So we would estimate already this is a positive thing.

If we now come to the commercial vehicles, and I think you would like to talk essentially about the heavy trucks and not about the light commercial vehicle, if I understand this right. That, of course, 2 things, which needs to be looked that. One is we have the first quarter in Europe, which is still under the impression of the Euro 5, Euro 6 change. As you know, with the beginning of this year, only Euro 6 cars could be sold. But like, as well, last year, at the end of last year to a strong an increase of Euro 5 cars because some of our customers wanted to buy Euro 5 cars and not Euro 6, which leads as well to some caution in terms of registration. In the registration, you don't only have the Euro 6 sales. We'll have some Euro 5 cars. So that's the first general comment. The second is as well how half the banks gone forward, in terms of order bank were delivered was end of the year 2013, and who has given it a bit more, a little bit less to that. So you can easily understand that for Scania, that had a little be more in the profit, if you want, for 2014 than MAN. Then we have another effect, which is Brazil. There, we have a different effect. One is that you have, of course, in general, a decline of the Brazilian market, but this Brazilian market is differentiating in terms of segment. So you have the heavy trucks, where there is a decline, and you have, let's say, the lighter heavy trucks that's regulated [ph] . So there's the decline a little bit strong. So this gives some distortion. And finally, if you're going to the detail, it is clear that Scania has performed in some countries are not coming back to Europe better than MAN in terms of commercial performance in the same period.

Operator

Our next question now comes from Stephen Reitman form Societe Generale.

Stephen Reitman - Societe Generale Cross Asset Research

Steve Reitman, Societe Generale. I have 2 questions. I was intrigued by your comment about the Octavia sitting on the MQB platform, which puts up an excellent cost base. Can you comment a little bit more about how MQB is developing, from a cost perspective, against your budget? Secondly, on Oxford. You've now, I believe, started the Sportsvan, the Golf Sportsvan. When do you expect to be through kind of disruptive phase in Wolfsburg, where you have all the MQB vehicles launched and -- with all the derivatives?

Christine Ritz

Thank you, Stephen. For your 2 questions, the first question refers to MQB cars and the MQB impact in terms of also savings we do expect this year. And also is -- how has that developed our budget in comparison to that. The second question refers to the Golf family as we have started with the Golf Sportsvan. So you are interested also to know when will all the MQB cars actually be launched.

Hans Dieter Pötsch

So first of all, to leverage a little bit on the first question. As you're well aware, we can fortunately say at this point that any car, which we'll introduce on the MQB platform, is a major success. In economic terms, market terms, customers are satisfied. We're winning all the test drives. So I think it really could -- really be better. And the key driver behind is, without any doubt, the MQB platform, which also serve to organize that the ramp up of these cars very efficiently. So this is to say that we are perfectly on track with the execution of the installation of our MQB platforms in our plants around the globe. There's going to be a longer exercise, and we're also perfectly in line in terms of execution of the respective advance volume on the MQB platform. For this year, the number is just to repeat a rough sketch are -- without China, roughly 1.6 million cars on the MQB platform. Including China, it would come to close to a 2 million figure. When would the effect of introducing new cars fade away in terms of Wolfsburg, we clearly will have relatively stable situation already before summer as we will then be pretty much in sequence also with the new Sportsvan, which we will start selling in beginning of June. So until then, the first -- in terms of, let's say, for the dealers, it will be delivered, and production is up and running. As you're well aware, we will -- it was a good part of summer break to continue to work there in Wolfsburg on the basis of the order backlog. So we should be fine from that point. Now when we say Wolfsburg, we should not forget that looking a little bit into the future, which is next year, of course, the new model introductions are not going to stop, so we will have additional new models coming along. At some point, it's going to be prepare some models for the Touran van and the little SUV, the Tiguan. But clearly, they would not necessarily affect the mainlines where we assemble the Golf Sportsvan cars.

Operator

Our next question now comes from Adam Hull of Berenberg.

Adam Hull - Berenberg, Research Division

Two questions. Firstly, I think if you could give us some guidance on the cash R&D figures for the full year, perhaps in absolute terms or relative to revenue? I think that capitalizing R&D is one of the issues a little bit today. But I note if I look at your cash earnings in Q1, it was 6.6% of revenues, about your highest ever, and that was up 23%. And even if I look at your P&L and R&D, it seems to be about 5.6% of revenues, so much higher than normal. If you could give us some guidance on the full year there? Is that exceptionally high for Q1? And then secondly, on the Chinese JVs, you mentioned the pricing. I think it's pretty good. You seem pretty happy with pricing in China. Were there any particular costs on the start up side, maybe on the Foshan plant, the A3 saloon. because your 7% growth in EBIT there is a little less than your unit sales figure growth there, that would be great.

Christine Ritz

Okay, thank you, Adam. So we have 2 questions. The first question refers to the ratio of R&D costs in comparison to revenues or in relation to revenues, sorry. So if we can give you your guidance for the full year. And the second question refers to our -- to the performance of the Chinese joint ventures. You were assuming that the pricing situation was quite good. And the operating response we have seen in the first quarter, you commented were a bit bigger or -- from what you might have expected, if we can explain here what are the impacts of -- on that performance.

Hans Dieter Pötsch

So to get started with the question related to R&D, and if -- you were interested on the cash part of R&D. And if you look back the past 2 years, then I think the trend is already visible there. We are going to see a continuation this year and also clearly next year, which is that in the cash terms, R&D entities are moving towards the level which is somewhat similar from a relative point of view to our CapEx part. And it definitely is around -- for the full year, around the 6% number. And the explanation behind is the following: First of all, we are introducing new models for the market, not only the successful models, but new cars into new segments. On top of this, we committed to regionalize our model portfolio. So one of the example is, and as you might also be well aware that we need to build on our model portfolio for North American market, for example, on the Volkswagen Passenger Cars side. As we introduce -- to introduce there constantly new models for additional segments for China for example. On top of this, we are in the middle of a very significant R&D activity to make sure that we are able to meet our 95 grams CO2 target for 2020, which should not come as a surprise that any new car which we introduce to the market from now on will, of course, be part of the product portfolio in 2020. So it needs to take part of the burden to be able to meet this very ambitious target. So far, I think, we are probably the only group who have firmly and hopefully committed to meet this target. So to cut the long story short, yes, we have to form that R&D expenses will run on a higher level compared with historical levels, that this definitely is going to open up new opportunities for the group. It makes sure that we're able to meet the ambitious CO2 targets, not only in Europe but elsewhere in the world.

Adam Hull - Berenberg, Research Division

If I could just ask on that, just in full year '13, it was a 6.0%. So just to say -- so you're -- that's what we should be thinking for the full year rather than necessarily that the 6.6% for Q1?

Hans Dieter Pötsch

It's too early to be that precise as we have to target out for the CapEx ratio between 6% and 7% in a similar way we should think about R&D.

Martin Winterkorn

To answer your question about China. What I mentioned before, yes, we are pretty satisfied with the pricing situation in the first quarter. So there is the, let's say, interesting situation. In terms of profits, we have some negative impact to exchange rate, which probably explains the majority of the difference that it might be.

Adam Hull - Berenberg, Research Division

Were there any particular start up costs on the Foshan plant and another plants, I think, in Q4 as well into Q1, or not especially?

Hans Dieter Pötsch

Yes, of course. Just to be able to deliver the volume which we have to expect going forward. As you're well aware, we are ramping up production, not only in just one plant, and this was also creating some burden. But I think looking at the numbers, we shouldn't have to be worried at all. It still the case that China is performing very positively.

Christine Ritz

Thank you. So we'll take the last question from an analyst and then we switch to the media. Thank you.

Operator

Our next question now comes from Kristof Reinault [ph] from [indiscernible]

Unknown Analyst

Mr. Pötsch, could you please give us an indication if we should expect an announcement on the Scania tender results tomorrow or if this might drag on until Thursday? I seem to remember from [indiscernible]'s first statement by Wednesday evening, but I might be mistaken here. Maybe you can give us an update here.

Christine Ritz

Okay, thank you, Kristoffer. There was a misunderstanding because, I guess, we lost now an analyst, but anyway, we take your question about the -- that is about the Scania, about when do we publish the outcome of the offer.

Hans Dieter Pötsch

Again, I can repeat what I already said. As the settlement agent is still examining the -- think about the offer, the final result and further decisions will be available shortly and will be notified separately from this call.

Christine Ritz

So are there any other questions from the media? If not, we close the call. That does seem to be the case, so I would like to thank you for your question and your interest in our conference call. Enjoy the rest of the day. Goodbye from here in Weissberg.

Operator

Thank you. That will conclude today's conference call. Thank you for participation, ladies and gentlemen. You may now disconnect.

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