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Executives

Christine Ritz – Head, IR

Hans Dieter Pötsch – Member of the Board of Management and Head, Finance and Controlling

Christian Klingler – Member of the Board of Management and Head, Group Sales and Marketing

Analysts

Horst Schneider – HSBC

Thierry Huon – Exane BNP

John Lawson – Citi

Brian Johnson – Barclays Capital

Alexis Albert – Nomura

Daniel Schwarz – Commerzbank

Jochen Gehrke – Deutsche Bank

Lothar Lubinetzki – MainFirst

Arndt Ellinghorst – Credit Suisse

Philippe Houchois – UBS

Christoph Rauwald – Dow Jones

Daniel Schäfer – Financial Times

Volkswagen Group (OTCPK:VLKAF) Q3 2010 Earnings Call October 27, 2010 8:00 AM ET

Christine Ritz

Joining me today are Hans Dieter Pötsch, Member of the Board of Management, Volkswagen AG, responsible for Finance and Controlling; and Christian Klingler, Member of the Board of Management, Volkswagen AG, responsible for Group Sales and Marketing.

You can also follow the webcast and download the charts from our website, www.volkswagenag.com/ir. Questions can be sent by e-mail or called in. Following the presentation, we will take first the questions of analysts, while keeping time at the end for questions from journalists.

Let me now hand you over to Mr. Pötsch.

Hans Dieter Pötsch

Thank you and allow me to add my warm welcome to those of you joining this call today. Over the first nine months of 2010, the Volkswagen Group has continued to move strongly and successfully ahead with the implementation of our strategy 2018. With the number of new model introductions in Europe to US and to China, and now with the youngest model portfolio in our history, more customers than ever are buying the new car or truck from the Volkswagen Group.

Across our regions and for almost all our volume and premium brands, deliveries are up close to 13% on the first nine months of 2009 at 5.4 million units. Combined with our strict cost discipline, this is has more than tripled our operating profit to just over EUR4.8 billion. Profit before tax improved strongly based on the operating profit improvement, but also from a positive financial result.

Our stakes in companies consolidated at equity have together made a strong contribution to the improvement in our financial results. However a significant factor here has also been the change in valuation relating to the put call arrangement we established as part of our comprehensive agreement with Porsche of which more later.

Finally, our continued efficient management of our CapEx and inventory, not to mention our high earnings momentum helped to further improve our Automotive net liquidity to a new record just a fraction below EUR20 billion.

Let me now hand you over to Mr. Klingler, to explain the reasons behind our excellent sales performance.

Christian Klingler

Ladies and gentlemen, also from my side, a very warm welcome to the conference call. This first chart shows the development of the world car market this year by quarter, as well as for the third quarter by month in comparison to the previous year.

In the first three quarters of 2010, the markets record its gross mainly due to a slight recovery of the economic environment and government support, measures in many markets. As many of these measures are expiring due in 2010, the positive effect has already started to fade out. As a result, on a quarter-by-quarter comparison, we see that the global market is losing some of its momentum.

Despite still rather positive gross figures, the improvement is in relative terms only in comparison to the previous year. In 2009, the car market has lost ground significantly as a result of the global crisis as you know. In absolute terms, the markets are stabilizing now on a low level. To avoid the statistical distortion, the comparison to the last so-called normal year of 2007 seems to be to us appropriate. And this shows the next chart.

The positive influences of the government support missions in many markets led to a significant market rebound in the second half of 2009. Hired by support programs from various governments and high incentive levels, the first three quarters of 2010 were slightly below the normal year 2007.

In addition, the global automotive market benefited from favorable economic conditions in China as well as in India. However, our latest forecast suggests a weakening of the global market development in the last quarter of this year. Some of the major European markets continued to struggle with negative effect after the ending of the support missions.

In addition, the Japanese market is expected to lose momentum after its scrapping program ran out in September. To summarize, in 2010, the world car market is said to remain well below its pre-crisis level, despite continuing strong growth in Asia.

In the first three quarters of 2010, our deliveries to customers have shown a positive year-on-year development. The Volkswagen Group outperformed the overall car market in the third quarter of 2010. We continued to gain global market share supported by the developments in China, North America, as well in the major western European countries as Spain and the UK.

The shift in the relative importance of some major markets is set to continue. After a year, that was highly influenced by the scrappage incentives in 2010. The German market is said to lose some of its share of the total western European sales. This puts additional pressure on the performance of the Volkswagen Group as we have an extraordinarily strong market position in Germany as it is well-known.

The next slide, you can see the market performance of the regions around the world in direct comparison to the performance of the Volkswagen Group in the first three quarters of 2010.

First off, South America; the Volkswagen Group has again outperformed the markets in every single region worldwide. Due to a tough competitive situation, new players in the market and the lifecycle effect of some of our models, the Brazilian market increased in relative terms more than our deliveries.

In Western Europe, despite the market contraction of 3.4%, the Volkswagen Group recorded a slightly positive result as we achieved an increase in our deliveries of 0.4%. As already mentioned, some of the major markets in the region still suffer declines after the government pulled out their support measures. This development is currently led by the German market which contracted heavily at 27.5%.

Now, we will take a look at the performance of the individual brands of the Group. In the first three quarters of 2010, all of our volume brands achieved an increase in terms of sales. And for the Group, total deliveries to customers exceeded last year’s level by 12.9%.

The Volkswagen Passenger Car deliveries were up by an impressive 12.2% to nearly 3.4 million cars, driven by strong demand in China and the US. Audi deliveries rose by 17.6% compared to last year to 829,000. Premium brands only marginally benefitted from the stimulus programs in Europe and the United States. So as the world economy begins to recover, we anticipate increased potential for growth for this sector of the market.

Skoda and Fiat have also managed to expand deliveries, maintaining their respective market shares. Bentley benefited mainly from growing wealth in China, where deliveries nearly doubled, but also in UK, deliveries were up by 12%.

Volkswagen Commercial Vehicles in Scania benefited from the recovery of the global economy. Deliveries of Volkswagen Commercial Vehicles in total increased despite the exclusion of the Brazilian trucks and buses, which are now part of MAN since March, 2009.

So now, let us take a look at a few highlights on some of our new models which will provide a strong base of our sales performance in the coming months. The seventh generation of the Volkswagen Passat Variant, that innovates standards in terms of comfort and quality. It is the most comfortable Passat Variant ever and offers best travel and long-distance comfort at top category level. The Passat will hit the road in November this year, not only on Variant, but as well in Limousine.

A7 Sportback is pure attractiveness and combines the motion of a coupe with a prestigious of a sedan and the activity of an estate. Like the Passat, the A7 Sportback was recently shown at the Paris Motor Show and has been introduced on the market in October.

We already launched Volkswagen Amarok Double Cab but enhanced by a single cab. With its smart solutions and German engineering, the Amarok is the Volkswagen big pickup, ready for all terrains, tested by Dakar.

Within the new Skoda Octavia Greenline, we’ve applied the most common technology for lowering CO2 emissions. There will be a Greenline for nearly every model of Skoda, including the AT the Superb Combi.

Christine Ritz

Yes, thank you very much, Mr. Klingler. Now let’s move back to Mr. Pötsch, who will explain how the excellent sales performance has translated into our financial figures.

Hans Dieter Pötsch

The first nine months of 2010, sales revenue increased by just under 20% to EUR92.5 billion as this chart shows with significantly higher sales and in the comparable period of 2009, you will not be surprised when you see that the largest impact on revenue is indeed volume at EUR7 billion.

With continued lower stock levels, our pricing discipline continues to be a further positive factor and combined with mix contributed a further EUR2.2 billion. Currency movements added an additional EUR2.9 billion.

The sale of our truck facilities in Brazil during the early part of last year means that we do not have the benefit of the sale of those trucks within our operating result this year. This resulted in a small negative impact.

Scania continues to enjoy a robust recovery, posting an improvement of EUR1.4 billion or better put as a plus of over 30% in revenue. And, finally, our Financial Services division grew sales by just over EUR1 billion.

Let me turn to operating profits. The increase in sales was again the major influence in an improvement from EUR1.5 billion to EUR4.8 billion versus the first nine months of 2009. Volume together with price and mix effect came to a total positive of EUR3.2 billion. We continue to enjoy positive effects from foreign currency flows, reporting an improvement of EUR0.6 billion in the nine months period.

Product cost remained under firm control with the saving of EUR0.9 billion. Our target to save EUR1 billion for 2010 is clearly in reach and I’m confident that we will comfortably exceed this.

Scania translated a strong rise of revenue to an equally impressive rise in earnings of EUR0.9 billion. As we continued to ramp-up the additions to our production network and invest through higher engineering costs in our future, fixed costs and depreciation were EUR1.9 billion drag on our overall performance. These measures are necessary to provide the right foundations for implementing key implement of our strategy 2018, including the expected higher volume.

Our Financial Services division added an additional EUR0.2 billion. And, finally, the other negative versus last year reflected a one-off gain booked in 2009 from the sale of our activities in Resende.

Summary, our operating result was EUR4.8 billion that’s up EUR3.3 billion on the comparable periods in 2009.

Turning now to cash flow in the Automotive division. Operating cash flow improved 26% to 11.5 billion. A good performance in the first half has been maintained and our inventory levels remain low.

On the investment side, leaving out the sale of our Brazil truck interest in 2009 and our investments such as in Suzuki this year on a like-for-like basis the underlying cash flow in investing activities fell from EUR5.3 billion to EUR4.3 billion demonstrating our disciplined, effective investment management.

Our CapEx ratio has risen during the course of the year to a cumulative 4% as the second half typically sees a step-up in investment due to normal seasonality effects. For the full year, we expect to come in below our 6% guidance. To sum up, even after considering the investment in Suzuki, the net cash flow over the first nine months for the Automotive division came to a positive EUR5.2 billion.

Let’s take a look now at net liquidity in the Automotive division. In Q3, we added a further EUR2.1 billion to the EUR17.5 billion we held at the end of the first half. The excellent balance of almost EUR20 billion gives us the confidence to progress with the implementation of our strategy 2018 and our plant merger with Porsche free from any short-term external impact.

Let me turn to the financial performance of our brands. The Volkswagen Passenger Car brand posted earnings for the first time nine months of EUR1.6 billion, that’s up significantly on the prior year periods. Audi reported an operating profit of EUR2.3 billion, demonstrating a further improvement in their margin in Q3 which stood at over 11% for the quarter. Skoda also almost doubled their earnings, while Fiat and Bentley continued to work on improving their performance.

Our Light Truck brand earned a solid result with a strong performance, especially in Brazil and Turkey. Scania reported almost EUR1 billion of earnings also benefitting from strong demand in Brazil. The other result includes the elimination of intercompany sales as well as the ongoing purchase price accounting charge with regards to our consolidation of Scania.

Volkswagen Financial Services reported an improved result of EUR684 million, demonstrating the global reach of their activities as well as their wide product offering from financing through to banking and insurance. Combining the Automotive and Financial Services divisions gives a total operating profit of just over EUR4.8 billion. Financial results improved to a positive EUR618 million.

Amongst other items, this includes the companies we consolidate at equity, thereby reflecting the excellent performance of our Chinese joint ventures, which reported a proportional operating profit of EUR1.3 billion, as well as our 49.9% holding in Porsche Zwischenholding, which even after the inclusion of a significant PPA charge reported a positive net result for the first three quarters.

As you are well aware the comprehensive agreement between Volkswagen and Porsche supports a merger of the two companies and all parties continue to work in this direction. Bearing in mind, possibility that certain external factors might hinder the parts towards the merger, we established an alternative root via a put call structure. This would lead the acquisition of the remaining stake in Porsche Zwischenholding in effect to balance of the operating business of Porsche AG by the Volkswagen Group. Under IFRS rules, the put call structure has to be regularly valued. The positive impact of EUR863 million is also included within the financial result.

Now this leads me to our 2010 outlook which you can read in detail in the interim report. Our presence in all the key regions around the world, the multi-brand strategy, our technological expertise and the most up-to-date environmentally friendly and broadest vehicle range that has resulted from that expertise are key advantages for our company.

In the fourth quarter of 2010, our nine brands will again unveil new key models, thus systematically extending our position in the global markets. We therefore continue to anticipate with our deliveries to customers will be significantly higher than in 2009.

Successful business growth of the first nine months will not continue as strongly in the fourth quarter. Nevertheless, we believe that the Group’s sales revenue and operating profit in 2010 will continue to perform positively despite shifts in volumes between the markets, aided by exchange rate effect, our focus and disciplined cost and investment management, and the continuous optimization of our processes.

Christine Ritz

Mr. Pötsch, thank you very much. We will now begin with the question-and-answer part of today’s conference call, starting first with the questions of analysts.

Question-and-Answer Session

We’ll now take our first question from Horst Schneider from HSBC. Please go ahead.

Horst Schneider – HSBC

Good afternoon. I am Horst Schneider from HSBC. Three questions if I may. The first one is with regard to your statements of a weakening momentum in the fourth quarter. When I look at your chart and you take here 2007 as a sort of indication, I get to the conclusion that maybe Q4 will be weaker than Q3, but I have problems to interpret the chart. So maybe could you maybe give us some more color on the outlook for Q4? So my suspicion will be maybe that Q4 volumes could be rather unchanged compared to Q3, and I think by now you should have also good visibility on the volume developments and maybe you can give us an answer on that.

And the second question is with regard to the volume price and mix effect that you show also on the presentation. I get the feeling that you had a particularly a tailwind from price and mix in the third quarter. And I would like to ask to which extent you believe this price and mix effect are sustainable or will they even get more positive given the fact that you have now launched also the Passat?

And then the third question is with regard to provisioning. I am looking at your cash flow statement, I get the feeling that you have less provisions in Q3 compared to Q1 and Q2. So could you confirm that? And what I see as the outlook for the provisioning in the next few quarters have you got now a sustainable level or a number from the third quarter that we can extrapolate also in the next few quarters? Thank you.

Christine Ritz

Okay, thank you very much, Horst. You have three question for us. The first question is if you can give some more color on our expectations for Q4, especially that can give some more details about the volume development in Q4 and if the Q4 will be weaker than Q3.

Then the second question is related to the volume price mix effect. And you have an opinion that we had a certain tailwind from price mix. And you are interested to know if this effect will be sustainable. Are there coming any other effects from the new Passat also?

Then, the last question is related to provisioning. And you would like to know a little bit more about the provisions in Q3, because you are assuming that these are less than in Q2. Maybe there are some reasons for that, and if we can give an outlook how the provisioning will develop for the rest of the year or for the next quarter.

Christian Klingler

Okay. So maybe I’ll try to answer the first two questions. First one is about how do we see the market perspectives for the fourth quarter. If you can make a little bit history and I think we need to do that, we always compare 2010 to 2009. And as you’re aware, 2009 was the year of a pretty deep prices in the automobile business. So we have seen a very bad tendency in the first half of the year 2009 and in the second half of the year a lot of push through the incentive programs of a lot of governments.

So first thing is that we have to bear in mind that we talk about a base effect compared to last year. Then, your question is compared to 2007. As you can see now, a charge we believe that the last quarter 2010 will not be on the same level of 2007. So it’s again a question of comparison between one year to the other.

Let's be a little bit more precise. From our expectation for the fourth quarter, we believe that on total market, there is a tendency that the total market in general will be more or less on the same level 2010 than 2009. And, of course as every time, we try to perform a little bit better than the markets, so the rest is I think up to you to see how you feel the development could go.

Horst Schneider – HSBC

Sorry, I'm going to interrupt you here. So that means you expect the fourth quarter to be higher than Q3?

Christian Klingler

No, no, I talked about the fourth quarter compared to last year. But we think that the fourth quarter will be from the total market perspectives on the same level than last year. So that is the message what I would like to explain.

Horst Schneider – HSBC

Okay.

Christian Klingler

And as a consequence, as always we try to perform a little bit better than the market. Normally we should be on a pretty, let’s say, reasonable level for making business. So our point is just at the growing rate is going down a little bit, but in general we expect pretty, let’s say, positive effects in general.

The second question is about how do we see our pricing and mix effects over the last quarter and what do we feel over the next quarter to come. It is true that in terms of pricing, the Group in general is performing pretty well. And we should not forget that the competition is not all sleepy.

Due to our program of new products, we can achieve a precision on the market which is positive. So if you launch new products which are highly demanded as we have like the Volkswagen brands still in Gulf is running very well like the Polo, like the other launches we just have done, like now with the new Passat which will come if you look for the Sharan, and for the Touran in the fourth. If you look for the Audis, all the new models we have brought to the market now Audi A7, the A1, the Skoda models and the [inaudible], so we really can give a long list. We have a pretty good opportunity to have a pricing advancement in general. That’s I think the first point. And this is true by the majority of the market.

On the other side, we have to bear in mind that last year again a lots of the volumes was – of volume increase was driven by governmental incentive and there is a consequence when there is governmental incentives, the mix is pretty low. This year, the governmental incentives are going down, so now the mix is coming back to a normal level and we achieve industry normal level, with what I just mentioned, pretty positive pricing comments of our customers, achieve a good position.

So is there any reason for the next quarter to think that there will be a radical change in that perspectives? From our point of view, there is no indication. That’s just one remark and that is that the competition of our – of the other is getting harsher and harsher. But even though it's getting harsher, due to our excellent models and our excellent positions of the brands, we keep on going.

Horst Schneider – HSBC

Thank you.

Hans Dieter Pötsch

So a few comments on the provisions; first of all, there is a – there are certain methods applied in terms of provisioning, and these methods were not at all changed between the quarters in 2010, so there is no difference of course. The relevant sectors which are the basis of provisioning might fluctuate into one and the other direction, but normally this is resulting in a quite smaller window, so there is no change on that side.

And just in order to make sure that there is no misunderstanding, on the pension side, if you look at this, of course we have in rolling scheme always to recalculate the pensions with the most recent interest rate development. So there was a quite significant revision in Germany downwards this year which ended up in a significantly higher pension provision to be built, but this is not taken against the P&L, it’s taken against the equity.

Horst Schneider – HSBC

Okay, thank you.

Christine Ritz

Okay, let’s have the next question, please. Thank you.

Operator

We’ll now take our next question from Thierry Huon from Exane BNP. Please go ahead.

Thierry Huon – Exane BNP

Yes, good afternoon. This is Thierry Huon speaking from Exane BNP Paribas. One simple question to start with, when we are looking at your bridge in terms of revenue development, there was EUR1 billion missing. Could you explain what is – from where this EUR1 billion is coming?

And second question relates to the Porsche Volkswagen merger process. Porsche said recently that some tax issues appeared and could lead to have a several billion of tax paid in the case of a buyout. So could you confirm that the uncertainties regarding this tax is only in the case of the merger, but if we have a buyout, it's 100% sure that this tax would have to be paid either by the one exercising the call or the one exercising the put. Hello?

Christine Ritz

Yes, sorry, Thierry. So thank you for the two questions. So the first question is, if I understand you correctly, that you would like to have some more information about the revenue development. I’m looking at the slides, but you said that EUR1 billion, you want to be – the EUR1 billion should be explained. So –

Thierry Huon – Exane BNP

Yes, because if you sum up the different effects, you end up with EUR91.5 billion and not EUR92.5 billion.

Christine Ritz

Okay, we will check that. And the second question is – refers to the merger between Volkswagen and Porsche and the tax issue which was explained last week at the Porsche Analyst and Press Conference, and you want to know if this tax related issue is also relevant not only in the merger case, but also if somebody either Porsche or Volkswagen will exercise the put or call option.

Thierry Huon – Exane BNP

Yes.

Christian Klingler

So from – first of all on the tax issue side, from today’s point of view as we have not quite clear situation with the reorganization tax act. There is a similar issue tax wise both on the merger side and also on the put call structure side. And looking forward, if that uncertainty would remain, it would mean that only at the end of the 2014, any dealing whether it’s a merger process or triggering either one of the options would be free from tax burden.

Thierry Huon – Exane BNP

Okay, thank you.

Operator

We’ll now take our next question from John Lawson from Citi. Please go ahead.

John Lawson – Citi

Thanks very much and good afternoon. I wondered if I could first ask on a similar tone about recent statements including yesterday from Lower Saxony which suggests the merger could happen after the put call if that was necessary. We obviously had previously assumed these were alternatives. Could you just tell us if there are any provisions in the comprehensive agreement for both happening and whether you would envisage the reference conditions for a merger to be the same, I'm thinking in terms, for instance, of the positive net asset value of the Porsche Hold Co. If it happened, would it be the same if it happened after the put call as if it happened independently in 2011?

And secondly, I don't suppose we can easily understand the elements of your PZG put call revaluation. But could you confirm that it's entirely separate from the way that you're calculating PPA on the Porsche on this particular instrument? I mean, when last discussed, I think you were talking about an annualized charge of around EUR600 million on PPA, including both Scania and Porsche. And I wondered whether you could just update us as to whether that is what the running rate currently is. Thank you.

Christine Ritz

Okay, thank you, Tom. So you have two questions for us. The first question refers to the merger and the quote from Lower Saxony that the merger could also happen after using the put call option, if that is – if there is a basis in the agreement made last year, is there any references. And the next question was with regard to the put call valuation, if that is separate from any PPA or so.

Christian Klingler

Okay. On the first question, first of all, if we look in to the comprehensive agreement, then it’s stated that the direct supports by all the parties after comprehensive agreement is to be given until the end of 2011. Now there is no sentence in the comprehensive agreement to say this first that a merger after 2011 would not be allowed or possible. The opposite is true. I mean all the parties are committed to support the merger, of course, formally and specifically said in the agreement until the end of 2011.

Then, your question was on whether following your statement of Lower Saxony on whether after a potential triggering of the options, let’s say in another phase a merger wouldn’t be thinkable, possible or whatsoever, again there is no say that this would be not allowed or possible. It’s only on the parties of the comprehensive agreement to sit together and agree upon another step in the process, otherwise there is no fact wise reason why this shouldn’t be possible.

The issue, if I’ve got your question right of the necessity to turn up on the Porsche holding side with a positive net asset value, of course all will have to be proven. And this doesn’t make any difference on whether we would in a straightway move to the merger or if there would be a step in between.

John Lawson – Citi

All right.

Christian Klingler

Then the next question was on whether there is any linkage between the put call revaluation and the purchase price account. There is no relationship. It’s two completely independent issues and the ballpark figure I was giving for all the purchase price accounting effects we have to expect for the full year on our P&L is just between EUR600 million and EUR700 million.

John Lawson – Citi

Thank you.

Christine Ritz

Okay. Next question, please.

Operator

We’ll now take our next question from Michael Punzet from DZ Bank. Please go ahead, sir.

Christine Ritz

Hello.

Operator

It appears sir Michael Punzet has disconnected. We’ll now take our next question. We’ll now take our next question from Brian Johnson from Barclays Capital. Please go ahead.

Brian Johnson – Barclays Capital

Good afternoon. I want to focus more on the strategic side, and a couple of questions around the Volkswagen brand. The first is if we think of the EBIT walk, which on a quarterly basis looked like it was EUR1.3 billion improved, how much of that was due to Volkswagen brand roughly? And what was the mix between volume, price and mix?

Christine Ritz

Okay, thank you. That’s one question from Brian with regard to the Volkswagen brand. So if we can give more information about the volume, price, mix effect at the Volkswagen EBIT line.

Brian Johnson – Barclays Capital

And my next question will be strategically around the margins.

Christine Ritz

Okay. Then, continue Brian, and we will answer your questions then afterwards.

Brian Johnson – Barclays Capital

Okay. The second question is strategically on the goals of 2018, where do you view the VW brand now? And I note in this quarter you were about only 70 basis points ahead of Fiat, 270 basis point op margin versus Fiat of 200 basis points. And given Fiat's very public dissatisfaction with its profitability and its core business, where is Volkswagen against that? And is this where you want the core Volkswagen brand profitability to be?

Christine Ritz

Any other questions Brian or is that –?

Brian Johnson – Barclays Capital

No, thank you.

Christine Ritz

Okay, good. Then the second question refers to the Volkswagen brand and which profitability we expect or we are targeting for our Volkswagen brand, also in connection with our strategy 2018.

Brian Johnson – Barclays Capital

And why are you only 70 basis points better than Fiat?

Christian Klingler

Actually to the first question, as far as the contribution from Volkswagen brands on the EBIT side is concerned a break down into volume, price, and mix, unfortunately I got to say in the similar ways we did in the last conference calls. We do not want to give too much detail there for obvious competition reasons, but there was a significant contribution from the Volkswagen brand.

And clearly, it’s for us difficult to compare with competitors, independently which competitor we are talking to. We have got a strategic program and what we of course are trying to make sure is that we follow the path towards to target that for 2018 and the medium term targets. And there we can say we are very well underway though slightly ahead of the plans, it’s on the basis of a very conservative, very solid and robust balance sheet, that’s important for us. And it’s clear that in a similar way as for the other brands we are targeting on a 21% return on investment for Volkswagen also again in the similar ways for other brands for 2018.

Brian Johnson – Barclays Capital

It looks like though you are getting there in a different way perhaps with Audi carrying more of the weight to get to the 5% and 8% EBIT margins than Volkswagen. Is that correct or is there just more as you roll out modularity, margin upside in Volkswagen brand as well?

Christian Klingler

I think it’s different things we are talking. On the one hand, it’s very clear, if you look specifically on the third quarter, the relative margin development on the Audi side is I think quite positive. That’s the relative part. Clearly looking forward with a significant volume and momentum, there should be a chance also for Volkswagen to deliver a contribution to the Group’s P&L in the similar way as Audi does.

Brian Johnson – Barclays Capital

Okay, thank you.

Christine Ritz

Okay, next question, please.

Operator

We’ll now take our next question from Michael Punzet from DZ Bank. Please go ahead, sir.

Michael Punzet – DZ Bank

Michael Punzet from DZ Bank, sorry for the technical problems. I have three questions if I may. The first one is on your Financial Service division that we saw a step-up in the earnings contribution in Q3. Maybe you can explain what's happened there and maybe you can give us some sort of a guidance what we could expect as a run rate in the coming years.

Then with regard to the put call structure on Porsche AG, I’d like to know what was the main reason for the revaluation? Was it the postponement of the merger? And am I right to assume that we will see no major changes in the coming quarters with regard to the valuation?

And the third one is once again on the tax issue with regard to a possible merger on the put call structure? When you would exercise your option at the end of your second period, at the end of September 2014, and what is your assumption about tax issue? Will you have to pay taxes or not at this time? Thanks.

Christine Ritz

Okay, thank you. So we have now three questions. The first one refers to the Financial Services division and the improvement in the business Q3, and if you can give an outlook of how that business will develop.

Then the second question refers to the put call valuation and you want to know what are the main reasons for the change of the valuation and the revaluation, and if you or if we have to expect major changes also in the future.

And the last question refers to the tax issue. And if we – if when – if Volkswagen has to pay taxes or when they have to pay the taxes, then they exercise the call option, which refers to the Porsche Zwischenholding. If you can give some more information, if there are any payments to be done.

Christian Klingler

On the first question as far as Financial Services are concerned, I think first of all, it should be said that during the year and always under the most actual primary conditions, Financial Services delivered a very positive contribution. Of course, in the meantime, we’ve seen some underlying factors to improve.

One is the residual values, which in course of the improving market situation with the firming up of the prices of used cars have reached a more acceptable level. Of course, also the interest rate played a certain role there. And, of course, by continuing to grow the company with all the cost effectiveness schemes in place by exploring additional markets, I think that’s just the result of a perfect team work between our Automotive brands and Financial Services.

Second question on the revaluation of the put call option, it’s basically two main factors which determined the value first. And I’ve already said that we have to do the revaluation in the rolling scheme. Now, this time, we saw mainly three factors coming in at pretty positive outlook for the operating business of Porsche, low interest rates which in any discounted cash flow scheme of course boost the values of the relevant asset, and then the other element was reduced likelihood for the merger taking place.

So these were the key determining factors. And it’s also these factors which are going to determine on whether we would see some changes in that valuation going forward. It would be pure speculation obviously to look at this as we feel pretty well footed on the outlook of the company and the plans of the company that the key indicating or triggering factors would be interest rates and merger probability.

Then the question concerning a tax implication once the options either put or call would be triggered at the end of 2014, now at that point in time from today’s point of view, there won’t be any tax burden.

Michael Punzet – DZ Bank

Okay.

Christine Ritz

Okay, thank you. Let’s have the next question please.

Operator

We’ll now take our next question from Alexis Albert from Nomura. Please go ahead.

Alexis Albert – Nomura

Yes, good afternoon. Alexis Albert, Nomura. I have two questions if I may. The first one is regarding CapEx. Can you, of the last one on the run rate of CapEx going forward, especially 2011, 2012?

Second question is regarding dividend, you have a huge amount of cash. I know some of it is going to fund the – is going to be used for the dealer network of the Porsche and Piëch family. I know you want to have a kind of safety net. But, I would like to know if you can say a couple of words on the dividend?

And my last question is regarding North America. I think I'm not too wrong if I said that North American business is not profitable yet. So can you just help us to understand how the new plan with the midsized sedan and the new factory is going to improve this? Thank you.

Christine Ritz

Okay, thank you very much. We have three questions. The first refers to CapEx; if you can give an outlook for the next couple of years and how the CapEx will develop. The second question refers to dividend; due to the huge amount of cash which we have at the moment, if we can give here some more information.

And the last question relates to the North American business; if we can talk about that what will change when we have the new plant in Chattanooga and the new midsized sedan launched to the US market, if we can give some information about the improvement of the profitability there.

Hans Dieter Pötsch

So the first question on the CapEx side, obviously we’re a little bit low relative to our guidance, but it’s very clear that we will have a strong activity there in the fourth quarter. Still it’s not so much likely that we will get up to 6%, most probably it will stay a little bit below 6% for 2010. And looking forward, there is no real reason to change the guidance, we will stick to our 6% CapEx to sales target, which is hard work to be done as we did so far to say that, because we are still heavily investing around the world for new products, alternative powertrains and all the things related. But we feel very confident that we can develop the business further on 6% CapEx to sales ratio.

On the dividend side, I think first of all you’re well aware that we prefer a more continuous development after dividends. The key principle is very clear. If the profit goes up, normally under normal circumstances, management would propose somewhat higher dividend. But there is still someway to go for the remainder of the year. So let’s first of all bake the cake and then try to eat.

One point again here, because you mentioned our cash pile which is clearly significant. I mentioned a couple of times that this is to be seen in the relationship to our strategy 2018. And one important point is the transaction scheme with Porsche which will clearly going forward absorb a significant part of this and also we need to backing for our strategy with all the investments we do around the world.

And North America was probably – won’t be positive this year, although specifically on the Audi side it will become quite close to a breakeven situation. But looking – going forward, it is clearly impossible that we execute our strategy which will see an important milestone to this year with the introduction of the new Jetta, the first reaction by journalists and some dedicated customers we asked for their opinion, is very positive. So we think that’s going to be the first major step.

And then next as you’re well aware, we’ll introduce the new midsized sedan in connection with making use of about the factory in Chattanooga, so that’s why we think there is a very good chance 2012 and at the latest certainly 2013 to turn up with a profitable situation as far as North America is concerned on a Group level.

Christine Ritz

Okay. Let’s have the next question, please.

Operator

We’ll now take our next question from Daniel Schwarz from Commerzbank. Please go ahead.

Daniel Schwarz – Commerzbank

Yes, thank you. I’ve two questions. First is regarding China. Are you aware of plans of the Chinese Government to limit the ownership of cars in some regions, i.e. to implement a kind of one car per household policy?

And the second question is, can you comment on reports that you are planning to sell 10 million units already in 2015? And whether that is the basis for your CapEx planning?

Christine Ritz

Okay, thank you, Daniel. You have two questions for us. The first question refers to China and if we are aware of any plans of the Chinese Government to limit ownership of cars. So if we can give you some more information. And the second question refers to some media reports that if it’s possible for Volkswagen and/or the Volkswagen Group to sell 10 million units in 2015, is there is a basis for any CapEx plan.

Christian Klingler

So if you just take several minutes or several instances for China, China is a very dynamic market which is continuing on a growth perspective so over the last years. So they changed – in the middle of the year their stimulus program which gives the customer the opportunity to get some, I think it’s up to EUR300 incentives, if they buy a car which is from their perspective less CO2 consumption driven. So this is one of the laws which are existing in China.

The other side is that China is continuing as government to heavily support the automotive business and this on several levels. If I say support, it's not they invest to it, but they are in a positive mood concerning cars. So that is from our knowledge no legislation in China which gives the feeling back that could be one household one car logic.

What we see as well is that the majority of the Chinese customers are first buyers and this is a tendency what we believe over the next few years will be kept, but of course in two, three, four, five years, later on, we will be able to replaced as the cars are sold on a pretty high level. So this policy is not in our knowledge. And personally I don’t think from the position of the Chinese Government, the probability to that direction is not very strong.

If you come to our thinking on our plan 2018, which is to sell more than 10 million cars, what we have said is that, yes we confirm our Mach 18 planning as we have done last year, so we are not changing our position. But yes, as well, up to now we are little bit in advance concerning the steps forwards to achieve the 10 million cars. But we have not said from our perspective that it will happen in 2015 or 2014, so there’s nothing been announced into that direction.

It’s true that we have a positive momentum coming from several markets like China, like India, to certain extent there’s [inaudible] from South America. But it’s true as well that the positive momentum in Western Europe and in United States concerning total markets is not on the same level. So we see no obligation, no – let’s say no pressuring to change our plan 2018 to make more than 10 million cars there.

Daniel Schwarz – Commerzbank

Okay. Thank you.

Christine Ritz

Okay. Let’s have the next question, please.

Operator

We’ll now take our next question Jochen Gehrke from Deutsche Bank. Please go ahead.

Jochen Gehrke – Deutsche Bank

Can you hear me?

Christine Ritz

Yes, we can.

Jochen Gehrke – Deutsche Bank

Yes, good afternoon. Two questions if I may. First of all, with regards to the other side of your M&A ambitions, the Truck Group, in recent months, we read a lot about Mr. Heizmann heading potentially a truck unit. I wonder whether you could give us an update on that. Are you forming that? Will we see that in the reporting lines from 2011 onwards? And would you consider fully consolidating MAN? And in particular on that point, what are the tasks for such hypothetical management team, knowing that the synergy realization between MAN and Scania according to both managements of these companies seems to be constrained by the fact that they are still independent?

And then the second question is for Mr. Klingler. On the new Passat, this maybe is just a one product issue, but in the German market it looks as if you have reduced the base price for the entry version by some EUR600, roughly despite you’re offering more equipment to the customer. Is this something that we should expect now for the Passat and you reevaluate that on each and every car or is this a strategy you will pursue in particular once the MQB will hit the road with the successive model launches in the years to come? Thank you very much.

Christine Ritz

Okay, thank you, Jochen. You have two questions for us. The first question refers to the truck business, if you can give an update here about the ongoing cooperation between Scania and MAN, and if you have some more information. And the second question refers to the pricing of the new Passat, there seems to be a reduction in the base price, and if that is the strategy of Volkswagen for any other separate models which will be launched in the due course.

Hans Dieter Pötsch

So on the truck side, first of all, you’re absolutely right, there is a new position in the Management Board of Volkswagen, and Dr. Heizmann took that responsibility, and we’re currently building the team to deal with the related issues.

Now let me clearly say and I would think that most of you can follow my thoughts here. We are pretty busy in Volkswagen, and I think in order to make sure that the relevant responsibilities are being dealt with in the right way, we need to from one and the other point reorganize also to structure in our Management Board, and that’s exactly what we did, otherwise there won’t be enough attention towards the trucks.

Now then, clearly, we started to reinforcing potential corporations to produce some synergies there. And clearly on that side, we have to fulfill certain legal requirements, this is very clear. But nevertheless, there are some areas where it’s very promising to cooperate and this is exactly what’s taking place.

And again this is only possible with the respective organization, also here, because we think from the Volkswagen side there is some potential to contribute, also some technical competence is from the Volkswagen side. But to cut long story short, you’ll need somebody who is prepared to talk with the truck people on these kind of issues. That’s exactly what we are currently doing.

Christian Klingler

So if I may answer to the question concerning the new Passat. So the new Passat, as you maybe have seen in the press as well, and maybe you have tested already, is a very important step for Volkswagen brand, because the product itself is upgraded to come closer to the upper class and has a very good offer of a lot of security features as well have comfort features which nobody never finds in these kind of cars, so it’s some kind of democratization of technologies, which is part of our strategy and focus part, and which has been seen as well by the journalists with a very, very positive aspect.

So concerning pricing and you talk about the pricing in Germany, in general, we do have a pricing strategy which belongs when we have a new model, so this is true as well for this car. The pricing strategy is always in line with the competitive set. So we have a clear position and the clear orientation.

If you compare the prices, as well you have to bear in mind that the new model is a different engine mix as well as the former model had a so-called business package which has been chosen by nearly a 100% of our customers. So this business package is now integrated in the total pricing this package.

So, in general, we are keeping a good level of pricing in the Passat. We have a strategy which attracts the people to come to the brand and we have a strategy for the customers to choose added-value products to enrich the turnover as consequence as well the margin. So this is something which has worked very well with the other cars and we are fully positive that it will work as well with the Passat.

So do you have a strategic background on this on the cars which will be launched from the MQB? I think that was your indication. As you have seen, the Passat situation is very special and it’s only German what you are citing. And it’s base as I have mentioned on the extremely successful business package. This we don’t have in all the cars.

As a consequence, we are defining, as usual for each car, depending on its position in the market, depending on the results what we feel could be achievable, the pricing strategy to make the best out of it and to get the best base of giving our customers a very interesting offer as well as giving us a very interesting base of making money.

Jochen Gehrke – Deutsche Bank

All right. Thank you.

Christine Ritz

So thank you. It seems there are still a lot of questions, so due to the limited of time, please ask just one question. Thank you.

Operator

We’ll now take our next question Lothar Lubinetzki from MainFirst. Please go ahead.

Lothar Lubinetzki – MainFirst

Good morning. Actually I'm wondering whether you can explain the big swing in the Automotive cash flow, the line other non-cash items. If my numbers are correct, there was a EUR1 billion swing in the third quarter. And then, just basically a question for understanding. When did Audi book the EUR300 million impairment in the first half? Was it in the second quarter? And am I right to assume that the EUR200 million impairment which were booked in the group in the third quarter was not booked at Audi?

Christine Ritz

Okay, Lothar, so you have two questions for us more or less.

Lothar Lubinetzki – MainFirst

Sorry for that.

Christine Ritz

Yes, no problem. We are used to it. So the first question is if you can explain the big swing in the cash flow with refer to the other noncash items there is a EUR1 billion swing, if we can give you – give you some more details. And the second question is refers to Audi, when did Audi book the EUR300 million impairment. Was that in H1?

Lothar Lubinetzki – MainFirst

No, it was in H1. The question was in what –

Christine Ritz

No, in which quarter, the question is in which quarter.

Lothar Lubinetzki – MainFirst

In which quarter?

Christine Ritz

Yes, in which quarter the impairment was made? Yes.

Lothar Lubinetzki – MainFirst

And whether they booked something in the third quarter or not?

Christine Ritz

Yes, we got it, thank you.

Operator

We’ll now take our next question from Arndt Ellinghorst from Credit Suisse. Please go ahead.

Arndt Ellinghorst – Credit Suisse

Yes.

Christine Ritz

Okay, Arndt go ahead, and then we answer your question, and of course the question of Lothar as well.

Arndt Ellinghorst – Credit Suisse

Okay, probably and Lothar together. Well, just one quick update question on China, could you update us on the annual dividends that you would expect from China? I think beginning of the year, you told us something of around EUR500 million per year. And does China still have – the Chinese joint venture still have roughly EUR6 billion of net cash in the operations? And then, finally on China, should we look at this business more like a 5% or more like a 10% EBIT margin business? Thanks a lot.

Christine Ritz

Okay, then we take the questions of Arndt. So these three questions refers to the China business. First part is what if you can give some more information which dividend we can expect this year from China.

And the second is did we – if we can give a figure with regard to the net cash in the joint ventures if the figure Arndt has in mind of EUR6 billion, is that still correct. And then Arndt would like to know if we should more think about a 5% or 6% EBIT margin for the China – sorry 5% or 10% EBIT margins for the Chinese joint ventures. Thank you.

Hans Dieter Pötsch

So at least as much as we can say to these questions, first of all on the question of cash flow statement, the other noncash position, the cash flow statement, that’s related to the larger extent to the put call valuation we were talking about some minutes ago.

Secondly, as you’re well aware we’re not talking about single positions and when they are precisely booked. And it’s clear that we apply our payment testing with all the brands, all the entities of the Group in each of the quarters.

Then the annual dividend for 2010 is roughly expected to be EUR0.5 billion, still some of that to be received in the second half of the year. Net cash position in China is still very much on the higher side, almost unchanged. And it’s clearly more a two-digit margin business than anything else.

Arndt Ellinghorst – Credit Suisse

And then just quickly, and I'll make it very fast now, the [inaudible] that's in Germany, it has been approved and it's a question of putting this into practice. So is this really a deal breaker for the merger or is it more a technicality?

Hans Dieter Pötsch

Again the [inaudible] was published firstly in the version which is currently the one to refer to in 2006. Then the most recent position is that will be what is called an application decree to explain the application in the number of sections of their blog. And so this is still not published and we also don’t know about the content, so this is not quite clear which direction this is going to point. It is hindering the merger, but it’s not total road block-up, because the adequate position towards that is just sit and wait, and the question is how long.

Arndt Ellinghorst – Credit Suisse

All right, thanks a lot Mr. Pötsch.

Christine Ritz

Okay. We take now the last question from analyst and then we switch to journalist.

Operator

We’ll now take our next question from Philippe Houchois from UBS. Please go ahead.

Philippe Houchois – UBS

Yes, thanks for taking in. Just one question then. Could you Mr. Pötsch tell us if there is any form of insurance at Porsche SE that would be utilized or available to cover some of the litigation costs if there is a settlement?

Christine Ritz

Okay, thank you, Philippe. So your question refers to the Porsche SE, if there are any insurance to cover litigation costs?

Hans Dieter Pötsch

No, there is no such insurance.

Philippe Houchois – UBS

Thank you.

Christine Ritz

Okay, now let’s switch to the journalist, and please be – due to the limited of time, please ask just one question. Thank you.

Operator

We’ll now take our next question from Christoph Rauwald from Dow Jones. Please go ahead.

Christoph Rauwald – Dow Jones

Yes, good afternoon. My question relates to Forex issues. Mr. Pötsch, earlier today, you reiterated that the exchange rate effects will have a positive impact on earnings this year. Could you may be give us an indication about the rough magnitude of the expected tailwind you expect to see? I think it was EUR400 million contribution in the first six months and EUR600 million on operating profit level in the first nine months. So would it be right to assume a contribution of roughly around EUR800 million for the full year of 2010? Thank you.

Christine Ritz

Okay, thank for the question. This refers to the impact of currencies and what tailwind do we expect for the full year.

Hans Dieter Pötsch

We clearly expect another positive contribution in the fourth quarter, probably slightly over proportional to the first three quarters.

Christoph Rauwald – Dow Jones

Thank you.

Christine Ritz

Next question, please.

Operator

We’ll now take our next question from Christiaan Hetzner from Reuters. Please go ahead.

Christiaan Hetzner – Reuters

Hi, good afternoon. I was just wondering if you could explain to me a bit more about the way you’re accounting this put call option, in particular when you refer to the reduced possibility or whether there was a reduced possibility of the merger taking place, and therefore the option was priced at a EUR862 million in the third quarter. I just don’t understand where you get these figures from and how you sort of approach in terms of, the higher the possibility the lower the option is priced at or vice-versa. And so maybe you could just explain to me a little bit more in layman’s terms how that comes to be.

Christine Ritz

Okay Christiaan asked a question about the put call valuation, if we can give or explain it once again how this effect were coming from.

Hans Dieter Pötsch

Okay. I will try to make it not too long, which is really not so easy at this point. But let’s the say the valuation of the put call structure, in principle terms speaking, reflects the theoretical market price that could be achieved if the options, which gives you to right to acquire or sell the remaining 50.1% of Porsche or precisely to say the Porsche Zwischenholding GmbH at a fixed price of what you know the EUR3.9 billion if these were sold. So let’s stay on the call side that there is a similar consideration then on the put side.

And then there are two key elements to that valuations, firstly, the value of the underlying assets, which is the Porsche Zwischenholding compared to the strike price for the option and that’s been driven by the operating performance of Porsche on the one hand and by the current interest rate structures, which are reflected in the discount sector on the other. That’s one element.

Then, secondly, the probability that the put call options will be exercised. And this is due to a second determining factor. And if you then move from this principle explanation to the recent change in the valuation of the put call options, this has been driven by the performance of the underlying business, because that’s been a positive assessment. And simultaneously almost a reduced discount sector, which is simply speaking reflecting the lower current interest rates.

So then, again as we were saying before in addition to this, a change in the probability of the put call being exercised, because going back a few months, it’s clearly been a situation where the challenges we are now talking about which are the situation with regard to the legal claims and the tax issues were not hands. So based upon this external factors, we have to change the probability. And if you then ask why we were doing this, it is very simple to say, by the IFRS rules, we have to value this put call options.

Christiaan Hetzner – Reuters

But, so, I mean the probably went from a 100% to only 80% or how does –?

Hans Dieter Pötsch

No, it’s never been a 100% for the simple reason – and if you go back to the comprehensive agreement, at that time, the main reason why we introduced this alternative structure put call versus the merger structure due to comprehensive agreement, the reason for this was that it’s very clear and this is still an issue of course.

We need the support of a very significant number of shareholders in both, the general meetings of Porsche and also Volkswagen. At Porsche, it’s 75% majority to vote for the merger, and it’s a 80% majority at Volkswagen, in both share classes. So there would be a separate voting for the old shareholders and on the press side. But this is clearly the legal requirements to go for the merger. As we knew about this, this was the main reason why we put this alternative structure to the comprehensive agreement.

So on that basis you have a certain probability that the merger would not happen, it’s never been a 100% to zero. But clearly on the basis of this external factors which evolved in the meantime, legal claims and tax issues, it’s now a lower probability compared with the number of months to go.

Christiaan Hetzner – Reuters

And how much – I mean according to IFRS, how much is this probability now that it won’t or that it will be exercised, let’s put it that way.

Hans Dieter Pötsch

It’s now in roughly in the IFRS meaning a 70% pro and a 30% against the merger.

Christiaan Hetzner – Reuters

So a 30% probably that the merger won’t go through.

Hans Dieter Pötsch

Right.

Christiaan Hetzner – Reuters

Thank you.

Christine Ritz

Okay. Now we take the last question and then we finalize the call.

Operator

We’ll now take our last question from Daniel Schäfer from Financial Times. Please go ahead.

Daniel Schäfer – Financial Times

Yes, hello. I’d like to ask two short questions and one long one. Firstly, Mr. Klinger could you tell us what do you expect in terms of sales in China going forward? You mentioned the government incentives that are still being given. Do you expect sales to continue to grow in China strongly as they did in the first nine months of the year in the fourth quarter and in 2011?

And secondly, on Bentley and Fiat, both have improved their sales, but in terms of their profits, the improvement has been very small in terms of losses I have to say, the losses are almost high as they have been in the past year. So Pötsch, what are you going to do about just do you need to restructure harder both companies? Thanks.

Christine Ritz

Okay. So Daniel has two questions for us. The first question refers to China. If we have some more information about the sales development which development do we expect? And the second question refers to Bentley and Fiat. If Volkswagen thinks that there is any need for restructure the business?

Christian Klingler

Well, if you come to the question about China, we still have to bear in mind if you compare one year together that in the beginning of the last year the Chinese market was not at all on the same path than it was at the end of the year, so we see [inaudible] rates compared to last year going down.

This is a market issue which is very logic as on the one side, the economic – the economical situation has completed changed in China from January, February 2009 to July 2009, as well as the support, I wouldn’t say the incentive, the support of the government for the – for a lot of industries and for the car industry have had this positive effect starting, I would guess, something like in the beginning from March last year. So we have a base effect which is pretty strong.

If you compare the total market in this year compared to last year we are in a total market growth compared to last year which is, I would say, something like 15%. So this is – the actual tendency we believe that as well next year a growth of the total market on a double-digit base is possible, and of course which we will try to do our best to take our part of it.

Hans Dieter Pötsch

So with regard to the question on Bentley and Fiat, Fiat very clearly is in a situation where it suffers by the development of the very core markets of the brand. The Southern European markets are still in not the best shape and that is why we have undertaken some structural measures.

One of these measures being that we are taking out capacity, which doesn’t mean that we would close any part of the plants of there this is just that we took a decision to build the new little SUV of Audi in the Q3 in Spain, so this is taking away, just keeping portion of fixed cost from Fiat, the effects is going to start at the end of next year, and a couple of other measures. So we need to be patient for another year and then we think the situation will look significantly better at Fiat.

On the Bentley side, firstly, I think it’s necessary to say that the very luxury market is still a difficult market and then just by coincidence within this relatively difficult period of time, we had in the past take decisions to renew all the two core models of Bentley which means there is lot of P&L burden on Bentley by the related engineering costs. Now lot of them will be digested in 2010, so we should look after a quite significant improvement in next year.

Christine Ritz

So thank you very much for taking part in our conference call today. Enjoy the rest of the day. And good-bye from here in Wolfsburg.

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