Volkswagen's (VLKAY) Management on Q1 2016 Results - Earnings Call Transcript

| About: Volkswagen AG (VLKAY)

Volkswagen AG ADR (OTCPK:VLKAY) Q1 2016 Earnings Conference Call April 28, 2016 7:30 AM ET


Frank Witter – Finance and Controlling

Herbert Diess – Chairman Volkswagen Passenger Cars

Garcia Sanz – Procurement

Christine Hohmann-Dennhardt – Integrity and Legal Affairs

Matthias Mueller – Chairman of the Board


Arndt Ellinghorst – Evercore ISI

Charles Winston – Redburn Partners

Adam Hull – Berenberg Bank

Horst Schneider – HSBC Global Research

Jose Asumendi – JPMorgan

Michael Tyndall – Citigroup

Michael Raab – Capital One

Hans Hirt – MS London

Tim Rokossa – Deutsche Bank

Patrick Hummel – UBS


Ladies and gentlemen, welcome to the Aktiengesellschaft Investor Conference. This morning, Mr. Matthais Mueller and Ms. Mueller explain the strategy and the business development of the Volkswagen Group to you. A number of questions of analysts and investors perhaps remained open, and we would like to answer those questions now.

I’d like to ask the participants to wait until they get a microphone and then also give us your name and your institute. You can ask your questions also in English, the answers will be made in German, but interpreter interpret it into English, but for that of course you need to put on your headphones.

Okay. And this lady has to scan in your name and then the name is added to a list. Let's get started now.

Question-and-Answer Session

Let's start on my left. Mr. Ellinghorst, on the left here, the floor is yours. Mr. Ellinghorst wants the floor, second row.

Q - Arndt Ellinghorst

Yes, thank you. Arndt Ellinghorst from Evercore. The first question goes to Mr. Mueller. This morning you said that you want to be assessed -- as management team you want to become more entrepreneurial and accept more responsibility. What are the targets against which you want to be measured? Give us some concrete information. You had 10-year earnings targets, but the capital market would appreciate if you also gave short-term and mid-term targets, which would show that -- you have targets that under pressure to achieve those targets.

Second question goes to Mr. Diess. The question on the margin was already asked, 6%, That's in the books for 2018, and it sounded as though you were actually putting this a bit backwards and were being realistic. But if I look, every brand has its own reporting, has its own annual report, and we can see the figures. But the brand that has been biggest problem, the Volkswagen brand, is a black box. Can you imagine that Volkswagen actually gets its own reporting and can be measured then against its own targets?

Matthais Mueller

Well, I mentioned that we are considering a strategy, the Strategy 2025. By midyear, this should be completed. And until that's achieved, we just cast our KPIs. Once we've determined our KPIs, they will be allocated targets. Then by midyear you will receive information on that.

And that is something that needs to be well considered. Can't be done overnight. And what you should remember is the transformation of the automotive industry. Thee transformation and the direction of digitization, and therefore diligence is required.

It's too early to give up our targets for 2018. But of course, all depends on how rapidly we get through the diesel crisis. Well, let's be optimistic and assume that we can make good progress as planned in the US and can implement our plans by the end of the year in Europe. And that would mean that we would not give up our target for 2018 -- the target for the margin for 2018.

Well, Matthias Mueller mentioned that we want to give every brand its specific targets, and you do not want to see a target for 2025, you want to see milestones. Message has been heard and received, and we'll do this for the principal brands and companies but need to generate an intelligent reporting structure and consider how far we will make this public. But for our core brand and the most important brands, of course, we're conscious of that fact that not the ultimate goal but also milestones are required, which of course what will be the most important KPIs for us. Some will be confirmed but some modification might happen. That's a detailed and intense process from which we are also happy to consider input from the market.

Charles Winston is next.

Charles Winston

[Indiscernible] your distribution costs rose very substantially from the fourth quarter, think it was around about 35%. Could you give us a bit more detail as to what was behind that and also whereabouts that increase might fit in your in the [multiple speakers]? Is it split into [multiple speakers] fixed costs? Then this is the second question. Could you have [multiple speakers] on what you are thinking about [multiple speakers] you might see [multiple speakers]

Unidentified Company Representative

Yes, our distribution costs. On a year-on-year basis, they increased by €3.3 billion and we also had a negative currency effect of €500 million, competitive pressure in various markets and additional costs which occurred in connection with the diesel, or the emissions issue, that what's is behind the picture.

The Chinese dividend for 2014 for the full year, we had €4.5 billion, which were paid for FY'15. As to the dividend for 2015, that decision hasn't been made yet. The decision will be made in the second quarter. What must be considered is that local result in Renmen B is not as good as it was in the previous year. Nothing has been decided definitely, but all-in-all it should be somewhat lower than the previous year's figure. Well, thank you very much. Next is Adam Hull, here in the second row.

Adam Hull

Three questions please. First, on the -- we've gone to €16.9 billion provisions. Can you give us some idea as to how much of that you think will be tax deductible so we can put that as a cash impact in the future? Secondly, on the orders of VW brand, particularly in Europe, can you give us an indication of the recent weeks of development? I guess the a lot of the negative earlier in Q1 was to do with your 800,000 CO2 issue, which now seems to have disappeared. Then finally, [indiscernible] on the cash flow. When I look at €8.9 billion free cash for last year for the Group -- VW brand had a terrible year, in many regards, do you view that as a, it's clearly below average, an average or a mid-term? Can you be doing more than €10 billion in that sort of not that distance future? Just give us some feel today for that in terms of the annual meeting. Thank you.

Unidentified Company Representative

Well, I would like to start with the special items, the €16.9 billion Here, not every single component has been definitely determined or negotiated, so a number of material detail is still missing. So any fines will certainly not be tax deductible. For the rest it depends on the detail, but under IFRS a considerable amount of the overall sum should be tax deductible.

Cash outflow so far, until April, May, earlier marginal cash outflow happened so far. I think what will start in the second half of 2016 until 2018, that is more or less the profile. But, here, once again, not all components have been determined, so we do not have a concrete plan as far as liquidity is concerned. But by 2018, a considerable amount of the liquidity will be paid out. That's correct.

And then the Volkswagen brand in the first quarter? Brand or group? Group. He said Group but I think what he meant was the brand, the brand. That's what you meant?

Adam Hull

We are in order stable order book in Europe over [indiscernible]?

Unidentified Company Representative

Yes, we have a stable order book in Europe and in Germany, but we do not have a part in the growth of the market. We are losing market share in Europe and especially in Germany. For the last few weeks, the situation has been stable. We do not see a shift from diesel cars to petrol cars. Thank you. Thank you very much. On to Horst Snyder in row three. May I just wrap this up, because I still owe the answer on the net cash flow -- rather charges from diesel issues to digest. But we assume a positive net cash flow, which, however, in 2016 should be significantly under the 2015 value.

Thank you very much, then Mr. Horst.

Horst Schneider

Horst Schneider from HSBC. I have so many questions I don't know where to start. I'll start with the price. If I calculate right, in Q4 you had negative volume-price mix effect of €1.1 billion. You said the mix was positive. I assume that a large charge -- share of this €1.1 billion is from the negative price.

At the same time, you, Mr. Mueller, said that you're supe at an average of your competitors in terms of pricing. Nevertheless, the pricing seems to have deteriorated. It would be great if you could quantify the price affecting Q4. You might describe what is nonrecurring special effects and what the nature is? How many we can take out of that and what's the nature? How do you see the trend, the price trend in Q1? What may we expect for 2016?

On the other hand, it would be great if we got a guidance on the currency effects, the exchange rates, which were substantial in the past financial year? And a guidance on the trade-off between the product and fixed costs? Will that be rebalanced or, Mr. Diess, you've mentioned your efficiency improvements that you are aiming for this year with improvements in the fixed cost as well, concomitant.

Last but not least, can you give us a feeling for the course of the year? Are we talking about a week, start of the year, and then model driven because of the many new launches which will come in increasingly, that there can be an acceleration second half to the year in terms of sales and maybe even in terms of earnings.

Frank Witter

Well let me begin. The exchange rate effect we saw in 2015 will not be there in 2016. The exchange rates will provide us with less of a tailwind there. Fixed costs/product costs, a question is whether in that bridge we will be able to compensate for that as well for 2016. This has to be our ambition, at least, to compensate for that.

And then the volume mix and prices, as you mentioned. Some might remember that at the nine-month period we were at plus €0.1 billion, which is minus €1.1 billion now. We were, and are, at a positive trend when it comes to prices and mix, but when it comes to the volume in the fourth quarter we have a negative effects. The sales incentives, of course, due to the aspects which we've described in great detail, particularly when it comes to the diesel issue, have been negative, naturally. So that the bridge from plus €0.1 billion to minus €1.1 billion in the overall year picture has developed. This is mainly due to the volume and sales incentive issues.

Herbert Diess

For the second half of the year, for the Volkswagen brand, because of new SOPs and because of the ramp up for Tiguan, we expect positive effects, which, of course, presuppose that we have come to grips with the diesel crisis and the loss of trust. We need to overcome that by then.

The outlook, of course, is always the most difficult part. The first quarter at around about €3.3 billion operating result in 2015, we expect a sound first quarter below the first quarter of 2015, however.

Unidentified Company Representative

Thank you, very much. Let us continue with Jose Asumendi in row two.

Jose Asumendi

Thank you very much. Jose Asumendi, JPMorgan. A couple of items, please. The first one for Mr. Witter. Can you please guide us on how much was the enrichment cost in 2015, and also the revenue growth ex-currency? Also if you could comment a little bit on R&D and capitalized R&D, maybe give some comments on the fourth quarter capitalized R&D? And also is the Volkswagen brand loss making in Q1 year to date, or not? If you could just give us some direction on that?

The second element for Mr. Diess, please and the route of the Inkoo B brand. First, my understanding is that you are going through a very large exercise, especially across Polo, Golf and Passat, where you looking at the commonality of components. Can you help us understand how far have you got commonizing components across the families? And is this the reason for the acceleration in the cost savings we saw in 2015?

Second, in order to improve the profitability of the Volkswagen brand two years out, you need to do more outside of Germany. It doesn't mean that you need to cut the labor cost in Germany. Does not mean that. It means that you need to do more in Eastern Europe and in Spain. Maybe similar, you can maybe address that, how you want to leverage the different production standards over the next two to three years.

The third point is the in-house component production, which I find complex. And I find that there are -- there must be opportunities there. Maybe you can also comment, Mr. Diess or Mr. Mueller, on that topic?

Frank Witter

In terms of revenue for 2016, across the year we'll see that below the revenue for financial 2015 in an order of magnitude of around 5%. Outside China, for the current year, we expect to be just below the previous years in terms of sales volume, harder competition and negative exchange rate effects. This is about the context for 2016.

Jose, you talked about R&D. Expenses capitalization rate for 2015 was 36.9%. Right about on a par with 2013, 2014, slightly above that, compared to 2014. We have a continuous policy for development costs for future large volume production. We will be capitalized once the products are concrete enough, and future benefit inflow is probably with a design decision. And we expect a rate for 2016 around that level.

On the first quarter and the Volkswagen brand, you are right. Operating profit -- operating result in the fourth quarter is minus €127 million. The first-quarter 2016, we assume that it's at least not in the red, but would show a slight profit.

Then the question on the materials costs and the modular toolkits. We are currently rolling out the MQB worldwide for both the Tiguan and the new models. In China, all these are based on the MQB -- the ramp ups are on these, so that we are using economies of scale effect and leveraging the benefits. We have high cost reduction rates year over year, many stemming from purchasing, so that the MQB toolkits becomes more competitive each year. That's my full cost, with concomitantly decreasing materials costs.

Sourcing, outside Spain, have a number of products, particularly products in the Polo class, are available from Fiat, SUVs, hatches, and a lot is made locally in Spain, actually, all of them. It's a vehicle segment that is very cost intensive. And we have higher growth rates in the overseas markets, for instance, in Mexico or Chattanooga, in the mid-term planning than in Germany.

Component manufacturing, just like vehicle manufacturing is called to improve productivity dramatically. Here, in some fields, we are on a good trajectory, and we are focusing on competitive fields in component production where they are really competitive against external competitors here. This has concerned some decisions in the recent past in terms of in-sourcing/outsourcing decisions. It's a continuous process.

We believe a component manufacturing at Volkswagen makes sense. We are big enough. We've got the internal economies of scale potential to leverage that sort of potential. The individual production, however, is reconsidered time and again and also compared against competitors benchmarks.

Unidentified Company Representative

I have a complement, if I may. I have the component, as we call it, component manufacturing, should not just be considered on the production aspects. We have 1,200 develops employed there that increasingly work in brand -- cross-brand development process, particularly when it comes to innovative technologies, electric components, they are involved here.

And you asked about the production locations. Indeed, that is a difficult question. Why are we only deciding on the production location once we have a stable product program? And I've already explained at that at this juncture, considerations have to take place on how this transformation from conventional powertrains with existing cars are changed over to those powertrains of the future? For each brand and against this backdrop, we've got to wonder -- you mentioned MQB. We have the MLB and the MSB toolkits, and how far these modular platforms are suitable to meet the needs of the future or whether with MEB at Volkswagen, we can -- need to go down a different path. In that respect, I believe we'll have an answer -- a conclusive answer in three months. The next is Michael Tyndall, in the second row.

Michael Tyndall

Hi there, it's Mike Tyndall from Citigroup. Just a couple questions, if I may.

The first one, I realize it's a bit premature, but can we talk a little bit more about Strategy 2025 and the review process that's ongoing? I understand at the moment you are looking at your model line-up and deciding which model should be replaced, which potentially should be cut. But if I think about the problems the VW brand faces, as best as I know, you are not making money in Latin America. You're not making money in India. You're not making money in North America. You're not making money in Russia. The list goes on.

To what degree are they sacred cows? To what degree will you address the fact that perhaps your ambitions in some of the emerging markets are too stretched for the volatility of those markets, and potentially, you maybe you should pull back?

Then the second question -- and I will pick up on what Jose said with regards to components. When I look across the industry, a number of your competitors own their own suppliers. And those suppliers have done a very good job of selling to other companies, and therefore improving their margins. Given your scale and your technology, have you considered the idea of eventually selling VW's products, as in their components, to other vehicle manufacturers? I certainly know that there is one or two in Europe that probably could use your help right now.

Herbert Diess

Firstly, on the question on the strategy [multiple speakers] and whether we have any holy cows. Well, we do not have any holy cows. Let me put it like that.

We basically look at the product program. You mentioned the Volkswagen passenger car brand, as an example. And when you look at the passenger car brand, you can see that, here, we have been willing to take major decisions. Just look at the Feyta that already had reached a certain maturity in its development, but we discontinued this product and we are now considering whether or not to introduce a successor model in this segment.

We look at the product portfolio of every single brand. But, of course, we also need to look into the profile and the positioning of the individual brands in global competition. That also plays a major role as far as the starting position of the brands are concerned.

As for the long-term goals, then you are saying it's a question of economic success in how far we have in-house component production and what the products should be that are to contribute to the success of the Company. The 2025 strategy is also looking into the component strategy into the products, the plants, the equipment and the structure of the in-house components production division.

Unidentified Company Representative

And then there was a question on the regions. Well, yes. Latin America, currently we have a deficit there. Not only because of the crisis in that part of the world, but also because of a loss of market share. We were the leading supplier for a long time -- or we have been the leading supplier. And good money there. And we have, now, a very sound project to actually resume our strong position in that market if economic growth in Brazil picks up.

Russia, well, here we've been able to reduce our losses very clearly due too an efficiency program. We gained market share, and, potentially speaking, Russia is a larger market than it appears currently. Therefore, Russia will remain a potential market for Volkswagen

And I said something in my starting remarks about North America. Just let me add something to what Mr. Diess said on South America. This is a very clear example of what happens if Wolfsburg thinks they know better than Sao Paulo. If we had heard what people told us in South America, and if we had introduced the adequate measures then we would have a product portfolio that's adequate to the competitive situation there. And we did not do that.

Well, because -- well, if we look into the region, what applies to China also applies to the other regions, to North America as it does to South America. The customers there have their own ideas on mobility and what their cars should be like. And they differ from the ideas of customers in the center of Germany and Wolfsburg. Thank you. And with that we pass the floor to Michael Raab in the third row.

Michael Raab

Thank you very much. Michael Raab, Capital One. I have three short questions. First question to Mr. Garcia Sanz. Over the last few years I always ask you where do you stand as far as the cost-cutting of MQB products is concerned. Last year you said 17% -- or rather the year before that 19%. And where do you stand this year, 20%? Then the question of pricing in the fourth quarter. Sales incentives, can you give us an idea of how the sales promotion, the intensives developed in the Q1? The incentives might have been the cause for losses in Q4? And if that's no longer the case, in Q1, maybe that is why they dropped?

And then the overall situation at Volkswagen and around Volkswagen. It's obvious that additional savings are concerned. Now, what do you have on offer for your stakeholders, the unions, to make them more willing to cooperate in your efforts to achieve the required savings, so that we get a win-win situation? Thank you, very much.

Unidentified Company Representative

Let's start with Dr. Glossier and the MQB.

Garcia Sanz

Maybe I put things wrongly last year. When we decided on the MQB, and that was quite some time ago, we said we would reduce cost by 20%. Dr. Winterkorn said that. Last year, I said we did not achieve the 20% at the launch of the MQB. That was 17% or 19% for the individual cost and for investment, about 19%, but we have a continuous improvement of product costs. And are now far beyond the 20%. But that's the MQB for the previous PQ.

Unidentified Company Representative

Stakeholders, what do we have an offer for our stakeholders? We share the opinion that the automotive industry is going to change dramatically as far as the value-added structures are concerned, moving away towards e-mobility, the development of software components. And we have very intense discussions with the workers representatives for every single location on how to shape the change. Because the change offers new opportunities for new -- different job, but also means restructuring and that you let go of certain matters.

We had a good start. We had detailed talks and workshops with the workers representatives. And on the Group level we started a process that is to accompany this change, this realignment.

And lastly, and I think I'm in a position to say this, jobs cannot be saved by having many people build a small number of cars. Productivity and efficiency secure jobs.

What do we have on offer? That we do this process together with the workers representatives, so that all partners in the industry collaborate and that we make it a safe process for the workforce with the joint understanding and then joint discussions.

Well, maybe I can now take the floor and give you some more information on sales incentives. Let me add that with our volume bands in the Group, we are below the competitions' figure, about 10%. For Volkswagen, sales incentives have increased by 10%, compared with Q4 of the last year. We are at still 10% below our competitors. And as far as our premium brands are concerned, we're still 10% below our competitors. So we will use this -- these incentives very moderately.

When you look at the cost of sales -- or the distribution costs, rather, you saw that we had a certain development. When we look at special items, we had €900 million on sales in Q3 and Q4. These are special measures for North America. Then we have Euro 5, as a specific situation. The US situation was quite different.

And to give you an example, with Q4 -- well, the Volkswagen brand sells 20% of diesel vehicles in the US, and these were gone and had to be replaced with petrol engines. That wasn't -- we didn't perform as badly as that, but it meant a massive intervention. And all this was balanced with the incentives, which gave dealers a motivation to sell the cars.

And let me underline another thing, we had a large number of initiatives under the header of trust and loyalty, so we didn't just put a bit of money in the glove compartment. No, we have offers in the market, extended warranty, free maintenance, trouble-free mobility. Well there's a third thing, and these measures take the cars to the dealers. And that, actually, doesn't have a big effect on residual values.

It cost a bit of market share, but we wanted to balance things out. So, have stable residual values and an increased value for the customer. And let me add something to what Mr. Diess said on stakeholders. We agree with the Work Council that we want to agree on a pact for the future. In connection with the cycle-plan discussion, changes concerning component plans, drivetrain systems. And the Works Council is aware of the fact that something needs to be done here, and we will be signing the pact probably in the summer, after the summer break. Thank you.

Thank you. And now we go in the second row to Dr. Hirt on the left.

Hans Hirt, MS London

Thank you. Hans Hirt MS London. First question. AGM, can we expect that because of the delay in the publication of the Jones Day report? The items on the agenda referring to the report will be delayed, and of course, I think, also the approval of the active of the management will probably have to be delayed. Have you taken legal advice on that?

And then compliance and culture at Daimler and Volkswagen, are they different? I would like to hear something from Christine Hohmann-Dennhardt. You have been with Volkswagen for four months. Maybe you can give us a first estimate? Thank you.

Unidentified Company Representative

As far as the AGM is concerned and your question as to the approval of the act of the management, well, there will be a discussion on that. And for the known reasons, I do not want to preempt the discussion.

Christine Hohmann-Dennhardt

Well if I am asked on differences concerning the compliance structure, the first thing I answer is they must differ because the structures of the companies are quite different. Daimler does not consist of different brands under company law. Here at Volkswagen, the Volkswagen Group, well, it's quite different, has different brands. Therefore, you need to offer different approaches.

I have come to know a compliance system here, which is quite impressive and has already received a number of certificates because of its soundness and stability. What we intend to emphasize more is a more connection between the various brands and the headquarters. We want to go into the regions more and support the entities there. For instance, as far as risk assessments are concerned, give them our advice and our help and work jointly, go jointly with brands that our independent at the same time. But legal and compliance strategies should be the same for everyone and now to give this an intelligent structure. That's one of our principal tasks. Thank you.

Unidentified Company Representative

Tim Rokossa is next in the third row. Tim?

Tim Rokossa

Thank you, very much. Tim Rokossa from Deutsche Bank. Three questions. The first, I will not ask you again what's included in the €6.2 billion, don't worry. But maybe you can help us understand outside all legal obligations in discussions with customers. What makes you so confident that if you got clear compensation payments for American customers? You gave them the option of returning their cars, giving back their cars that you did not have to offer something similar in Europe. Are there indications when talking to dealers and customers?

Second, on the Chinese joint venture probability, which looked pretty good in Q4, some of it will be FX driven. Can you comment on this? Then you have a two-digit margin, clearly, that you achieved. Is that sustainable when the growth rates comes down and see more volatility like you saw last summer?

The third question, just to come back to pricing. Mr. Witter, I did not understand this correctly. Does that mean that pricing was negative in Q4, or was the negative effects just due to the volume? Mr. Mueller, the 10%, when referring to that OE 20 might like-for-like conservation, or what Mr. better talk to you about offering customers more option extras, loyalties programs reflected in this way of looking at things? Thank you.

Matthias Mueller

I didn't really understand what you are referring to about the 10%. Please, do use the microphone, Tim.

Tim Rokossa

Just referring to the difference your competitors you referred to. Or the basic statement where you say your above your competitors in terms of pricing. Does that just reflect the cash incentive or does that reflect what Mr. Witter as, well, levels of options, extras, et cetera?

Matthias Mueller

I just referred to sales incentives. And I might continue when it comes to exhausting customers in America or Europe and Germany. As I mentioned this morning, that would be a two hour topic. If we could, we could go into details. But the differences and framework conditions in the US and Germany and other countries in the rest of the world are extremely different. And a one-to-one carryover is simply not feasible. In Europe, of course, it is our objective to satisfy customers. And we will see when the time comes how we will manage that.

Unidentified Company Representative

On your question about China. Last year, we continued to have a good result, good margins in China. Also, because, in the context of the increased competitive pressure and certain volume contractions last year, we had an extreme cost reduction program. This was started, and we achieved tremendous successes, which carry on having an effect. When it comes to fixed costs, proportion and the material costs in all these programs continue to run, on the cost side. In general terms, we must state, however, that the intensity of competition is increasing continually and there are, in particular, clearly higher -- very high growth rates in the lower-priced segments due to the growth in the tier three to five cities. And so we have to assume that the margins will be close to international levels. I think I still owe you an answer on pricing in the fourth quarter. That was negative. That was the clear message. All right. Then, thank you very much. We will stay in the third row and George is on the third row.

Unidentified Company Representative

Good afternoon, George [indiscernible] I have several questions. Just a comment on China. Just wanted to know, you said double-digit margin, good margins. But those margins should decline over time. How fast are you feeling we'll reach some kind of normalized margin? I think [indiscernible] you did mention something around 8%. Is it something that could come at a faster pace than expected? And back to the earlier question regarding the dividend. Should we see the €4.5 billion of last year as some kind of a one-off, or is this level sustainable? Because €4.5 billion was well above [indiscernible] trend of the previous years.

Second question on the provision for the year, diesel emission. I think out of the Q3 stage there was €1.3 billion earmarked for original value in payments. I was wondering, what's the final number on that one? And maybe, if you could shed some color on the trend for original values post the diesel issues?

And last question on [indiscernible], if you could maybe comment on the progress that you are making in the recent process on the one hand and the cost reduction structure, especially, at the other hand? And maybe, I know that you're probably working for Strategy 2025 as well, but what kind of a margin could we hope to get under normalized conditions for the new [indiscernible]. Thank you.

Unidentified Company Representative

Let me pick up on your question about the two-digit margins. Naturally we intensively work towards achieving a good -- also in the international comparison, to achieve an above average margin level and to maintain that in China as well. There is intensive competition pressure. However, just to make that very clear, in that context of the volumes last year, we don't generate or succumb to any price pressure just to maintain volumes. It's also about value stability. It's also about value-oriented growth.

We have the resale value of our cars very much on our minds. Here again, things are developing in a positive way in China as they are in other regions in the world, for the brands of the Volkswagen Group. Good, above average resale values in the competitive context against the competitors. And it is realistic that the margins wilt to some effect, but we will do everything in our abilities to prevent them from wilting to far.

As Mr. Witter had already explained, the dividend in China is geared to the local result and that, last year, was not at the same level as in 2014. So that, there too, we have slight deterioration.

On to commercial vehicles. Thank you very much for your question. We, in May last year, started with the new commercial vehicles holding. In the mean time, we've established brand independent cooperation. Those have been intensified. At the moment we see synergies in the long-run right up to €1 billion.

We've realized, to date, right about €200 million, particularly short-term through the division's purchasing and other things, which could be realized at short notice. Example for a cooperation which we're intensifying between the different brands, of course, is the drivetrain.

As you know, 55% to 60% of the value of a truck are powertrain. We have joint transmission development already decided. The non-driven front axles are developed jointly -- or, one company is developing that for the others, as well. And then, their made, produced jointly inside SKODA. That's the target and objective for the whole powertrain. The long-term efficiency will be leveraged jointly.

The whole margin topic, here. We are in conjunction with the development of Strategy 2025. We are working on the commercial vehicles' strategy. It's almost finalized. Yet, there is a model for the individual brands in Brazil, Scania and within MAN. And we will publish that.

The commercial vehicles, of course, have to have the specific control elements of the commercial vehicles market. Particularly, how do we go through that sort of model cycle, which is very typical in commercial vehicles, and the potentials which we can leverage jointly?

Together with Strategy 2025 this will be the commercial vehicle strategy for the Volkswagen Group. We'll publish that and you will, of course, get explanations with the whole truck and bus peam will explain that to you. I assume that's going to happen during the second half of the year.

I'll take up your question on resale values, or residual values. Residual values and taking over these residual value risks is one of our core competencies in financial services. The risk from residual values always relates to those cars which are still in the books at the present point of time compared to the fourth quarter of 2014. Those are €780 million more, round about. Behind that we have a volume increase, so we have more leasing vehicles with residual value risks in the books. But opportunities, as well, which are concomitant.

When it comes to the exhaust issue, the special charges, we have €700 million full-value reductions on leasing cars. While we have the expectation that the cars that are still in the books and the residual values that they do not materialize, we right things off. This doesn't mean that this is going to happen. It's just the correction of the recognized book values.

That information, which of course, goes through a wide range of sales channels and countermeasures work against that risk. It doesn't mean the risk actually materializes, but we are making provisions for them.

In the Western European markets we do not, at the present time, see any diesel or other effects, which can be clearly allocated to us. The effects are stable, particularly in the EU 5 context. That's very important because it's one of our core markets.

You asked, the situation is different? Diesels are, of course, special, because at the moment we're basically not selling any cars because of the stop sale. So the effect on the diesel vehicles in the long run, we'll be seen once these cars are sold through auctions, for instance.

We see a slightly negative effect on petrol cars in the US, as well. There, we've already done the corrections. We are extremely conservative, generally speaking, in the leasing business, in terms of residual value establishment. And we have adequate risk provisions at any stage. All items are collateralized with equity or risk provisions.

Thank you, very much. Next will be Patrick Hummel in row two.

Patrick Hummel

Thank you. Patrick Hummel, UBS. I have two follow-up questions. One refers to liquidity planning for the coming two years and cash outflow expected due to the diesel issue. You said that the outflow in the second half of the year are expected in the beginning of the year. Then, you expect a distribution across 2017 into 2018. That would permit that liquidity not decreasing so much over that period. I'd be interested to know, if the outflow should concentrated and be earlier than expected, with Q talking about 2016, beginning of 2017, is there a late net liquidity target which you want to keep above in this context in any rate? And what would you reduce if you did go below that mark?

The second question is, investment planning. You made quite clear that deficiency is very important, too. You want to prioritize it and set priorities when it comes to investment project. At the same time, you said that the large topics in the sector MAB -- you just mentioned a buzzword, will have high priority? Is it the declared target to get the investment rate in the Group down compared to today? Or do you want to use efficiency measures to make areas of discretion possible where you need the funds for the makeup projects?

Frank Witter

Right, let me begin with the liquidity planning. You are right, liquidity is very much on the tops of our minds, not just in terms of operating -- operative business but also against the backdrop these outflows. The outflow, which is discernible at the moment during the period you've described, of course, happened. There are still some uncertainties because not everything has been converted and negotiated. So there are a couple of opportunities in there.

The target mark will be -- in the old times, this used to be known over many years €10 billion net liquidity was a good and important target. We achieved that continually, at least. But the Group grew significantly; however, at the same time and volatility hadn't become smaller. So that, I, as a CFO, surely wouldn't be opposed to a doubling of things. My colleague see it likewise.

Liquidity, of course, we've played two defence scenarios to ensure that we are ready for anything. And we've pulled all the registers from working capital management, et cetera, et cetera. And the organization, in our experience, is really well-placed. It's a well-practiced, operative plan, investment planning.

Yes, we want to get the rate down from the 6.9%. That will not happen overnight in one year, in one step. But in addition to the declared necessity, we need to take into account that we need additional investments into new topics, electro-mobility, for instance, autonomous driving, much more, connectivity, et cetera, et cetera, which counteracts that trend.

We'll need to find a different balance, but it's our declarative target to get this rate down. And it's our declared target for come to the year 2016 to be below the €12.6 billion in absolute terms. You know that CapEx investment adjustments don't work over night. Though many products and a lot of money has been invested, so you can't just turn things off. But this discussion has arrived throughout the organization concerning all brands in all regions, and we've signed up for that target. And we're accurate in our Strategy 2025.

Unidentified Company Representative

Thank you, very much. Please, consider the time and restrict yourselves to just one question. On the right-hand side, [indiscernible]

Unidentified Analyst

Just one question addressed to Mr. Mueller on the US. At the beginning and the middle of late 2000 period, the Group results we're losses and then in the Winterkorn era, the three-digit losses were not published any more. Our there any plans to report by region now again? Because if I look at these losses at the accumulation for the Volkswagen passenger car brands in the US, where the result is rather more negative than positive, as I said, for the Volkswagen car brand. The diesel scandal will also create a cost of €10 billion, also the reputation of the brand has suffered and it's difficult to assess. Will be about €10 billion again? And then we did not provide the required models to that market. And on the basis of that, was it ever considered by the Board to actually leave the US market? And why is this not done?

Unidentified Company Representative

Well, we never discussed withdrawal the Volkswagen brand from the US markets. Well, you listed all of the mistakes we made and we're saying to ourselves now, we can do better, and we will do better and adjust our program. And if we finally understand that we need to listen to our customers and that not everything can be decided in Wolfsburg as to also the design of products, then the Volkswagen car brand can be successful in the US market portion. Audi are successful, why not the Volkswagen passenger car brand?

How do we assess our KPIs? How do we publish them? Well that question was already answer by Mrs. Hohmann-Dennhardt. We're looking in to this. We do this with great care and diligence because we know that you are interested in those figures, very strongly interested, and we want to have good collaboration with you.

I want to say something from my own experience on the damage to our reputation. We lost a lot of trust in the US. I lived for nine years in the US, and two of my children have US passports. Well, in the US, what applies is you apologize and then you rise again and you make clear that there is a point in going back to the Volkswagen brand in the US. And that is what we be built on.

And this is a target market where we see an enormous potential. Audi is the proof of that. Audi was clinically dead with the inverted acceleration, and now Audi sells 100,000 cars and is a luxury brand which is on the same level as all other luxury brands.

In the volume segment, the rules of play might be different, but I think we have the potential and we will manage. We need to do our homework, get our act together and then we can build on that in the American market. Thank you.

Next, Dr. Kalivoris, you waited for quite sometime. Now, here is the microphone for you.

Unidentified Analyst

Research. Very brief question. You mentioned that you were very pleased with the results of SIAT and SKODA. But the target margins and the target sales figures have, perhaps, a stronger potential for SIAT than for SKODA. Because for SKODA you already have high margins. Or can the sales and the margin to be increased for SKODA, as well?

Unidentified Company Representative

Well, I will try to give you an answer. The SKODA brand, it showed an incredibly fantastic development over the last 10 to 20 years, and that is something that we really appreciate. And the question now is, why did this not happen to the same extent for SIATs? Here, a lot -- many mistakes were made over a long period of time. Garcia as the Chairman of the Supervisory Board put things back on track. Now, we have an excellent team there who are doing a great job and who did not just express the intention to bring about a turnaround, no. Things are well underway now. And if I assess this clearly, as to the product range and the Company culture and the overall ambition at SIAT, then I can look confidently to the future.

Next, Mr. LaPierre, row four.

Unidentified Analyst

[Foreign Language]

I have -- when do you think you will be ready to come back on the bond market? Specifically, you are reporting your Q1 earnings at the end of May. Is there any reason for you not to be ready before the date, or any legal limitation no to report before? Also, on the funding, could you tell us, exact what portion of the bridge loan has been drawn, please?

Unidentified Company Representative

The capital market, yes, we had access for ABS for commercial papers, but not for notes and bonds. But, no, with the unqualified auditors certificates, we have taken a major step. But I don't think that we will go to the capital market before Q1. So at the end of May, the window should be open, and we intend to go through there. That's the plan. Of course, we will have discussions and coordination on the amount and on the life of the budget. We all agree that it must be a success. It's a bilateral agreement of €20 million, but it's just a bridge facility. The current utilization is clearly below 50%.

Fine. We've almost come to the end of our time, and the last speaker is [indiscernible]. Maybe I pronounce your name wrongly, but, okay.

Unidentified Analyst

You talked a lot about the US, and I don't want to go into the detail much more. I must respect that you do not want to endanger the settlement you appear to have reached with [indiscernible]. But could you, perhaps can give us information on the penal fines that you are expecting? Various figures were mentioned. So quite apart from the settlement you appear to be achieving, do you have any idea on an estimate of the penal fines?

Unidentified Company Representative

No, I can't give you an estimate. Nobody can do that. What we're doing currently is have a talk, discuss, inform with DOJ Criminal Division side. We promise that we will fully collaborate here, and that is what why we held to strict confidentiality. You know that in the United States the amount of a penal fine depends on the many different factors. We do our best to make this a manageable fine.

We already mentioned some figures. They are in the Annual Report, that's defence and legal advice costs. For that we have a reserve of €7 billion -- or provision rather of €7 billion. Then, we have contingent liabilities of €1 billion. And, I've got nothing else to add to that. Those are the figures. We heard experts on that. We looked at all influencing factors and those are the figures also as presented and accepted by our auditors.

Unidentified Company Representative

Ladies and gentlemen, thank you very much for your questions. I would like to thank the members of the Board for their answers. And we are available for further questions. With that, we all wish you a pleasant trip back home. Thank you.

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