Volkswagen AG

XETRA:VOW

Q1-2025 Earnings Call

[Operator]

Good morning, ladies and gentlemen, and welcome to the Volkswagen AG Investor, Analyst and Media Call of Q1 2025 Conference Call. I am Yousef, the Chorus Call operator. [Operator Instructions] And that this conference is being recorded. [Operator Instructions] This conference must not be recorded for publication or broadcast.

At this time, it's my pleasure to hand over to Pietro Zollino, Head of Corporate Communications. Please go ahead.

[Pietro Zollino, executive]

Good morning, everyone, and a warm welcome to the First Quarter 2025 Results Call of Volkswagen Group. This is a joint call for both the media and as well as investors and analysts, moderated by Rolf Woller, our Head of Treasury, IR; and myself, Pietro Zollino, Head of Corporate Communications. With us today is, as usual, Arno Antlitz, our CFO and COO. Welcome, Arno.

You should have received the press release, the interim financial report and all other related materials, which were published this morning. If you do not have them, you can find all the documents on our group website. In case of any issue, give us a call or drop us an e-mail, and we will send them straight to you. The contacts are also on our website.

Now let me hand over to Rolf, who will give you a brief run-through of the call.

[Rolf Woller, executive]

Thank you, Pietro, and a very good morning to everyone on the call. I hope the weather on your side is as sunny as it is here today in Wolfsburg. Thanks for joining us today.

Let's have a look at the agenda. Arno will first present the key highlights of the first quarter. And after that, we will take a closer look at the financial results and the full year outlook for 2025. Following his presentation, we will host a Q&A session for the investor and analyst community, which is moderated by myself. And after the session, we will have a short break before we continue with the media Q&A, which will then be hosted by Pietro.

Since today's call includes forward-looking statements, as always, the safe harbor language and other cautionary statements on the slide will govern today's presentation. Please read it yourself because I will not read it to you.

And with that, I hand it over to Arno. Arno, go ahead, please.

[Arno Antlitz, executive]

Yes. Thank you, Rolf. Ladies and gentlemen, we saw a mixed start to the year 2025. We continue to make significant progress in implementing our strategy. Some tangible results could be seen some days ago at the Shanghai Auto Show.

We have some encouraging news on the customer side. Sales revenue was up 3%. Order intake in Western Europe grew even by 30%. Our BEV share was up 10%, up to 10%. And the BEV share in Western Europe more than doubled to 19%. This is evidence that our vehicles are very well received by our customers. As expected and as guided, Volkswagen Group got off to a slow start to 2025 in financial terms. And on top, we had to book some special effects and restructuring expenses.

On April 9, we pre-released some of our KPIs. Therefore, let's dive straight into the presentation with the highlights of the first 3 months, and let me explain to you why we think our performance in Q1 was still respectable. The largest product renewal in our group's history has continued in Q1 with quite a number of new model launches. This includes exciting new models such as the Audi A6, the Skoda Elroq, and momentum will continue into 2026 with the launch of the urban BEV family. An even bigger step will be the ID.EVERY1. We have shown the first prototype of the affordable electrified future of Volkswagen expected to hit the markets in 2027.

During last week's Shanghai Auto Show, we've provided a follow-up on our In China, for China strategy. Truly amazing achievements on the product and technology side, but we also did not stand still to optimize costs and our financial setup. Having Volkswagen AG's agreement in late 2024, Audi's management and Works Council negotiated the future of the brand's German plants, and this is done to make Audi more resilient and more flexible and leaner going forward.

We successfully renewed our revolving credit facility with 44 banking partners and increased the amount to EUR 12.5 billion from EUR 10 billion. And last but not least, we've completed the placement of 11 million TRATON shares. And with that, we increased the free float to 12.5%.

Our colleagues in China are delivering. Time to market is down 30%, allowing us to develop vehicles in 24 to 33 months. Material costs are reduced by 40%, with the ambition to bring it down even further by another 10% until 2026. And the highlight, the highly competitive central zonal architecture, CEA, is being locally developed. The China Electrical Architecture will enable numerous software features that are tailor-made to the wishes of Chinese customers.

Our joint venture, CARIZON, will launch highly competitive Level 2+ and Level 2++ ADAS solutions in 2025 and 2026, respectively. And the execution of our In China, for China strategy is fully on track with customer-centric, China-specific and highly competitive product substance both in terms of tech and in terms of cost and with around 30 new models by 2026.

Back to the first quarter results. Global deliveries in the first 3 months of 2025 increased to 2.1 million vehicles. This is 1.4% above prior year quarter. Incoming orders in Western Europe were strong with an increase of 29% year-on-year. And BEV order intake was particularly strong, up by 64% compared to the same period last year.

Our models are well received in the market, and new models across drivetrains and types enjoy great customer demand such as the ID.7, ID.7 Tourer, Skoda Elroq, CUPRA Terramar, Audi A6 e-tron or the Porsche 911. As a result, order book in Western Europe has been growing to about 1 million vehicles at the end of March, reaching well into the third quarter. And in the coming months, we expect additional tailwind from numerous new models.

Deliveries growth in the first quarter was driven by a strong performance in Western Europe and North America region, which were both up 4%. Our operations in South America achieved double-digit growth overall, supported by a particularly strong increase in Argentina where we more than doubled volumes. Growth recorded in all 3 regions has more than compensated for the decline in China.

Our BEV deliveries saw buoyant growth and reached 217,000 units, corresponding to a 10.2% of group deliveries and 59% year-on-year growth. Our BEV share in Western Europe grew even stronger and more than doubled year-on-year to about 90% of our sales.

With that, let's move on to the financials and the operating performance of Volkswagen Group in the first quarter. Vehicle sales came in at 2.1 million units in the first 3 months, slightly up year-on-year at 1%. Group sales increased by 3%, driven by both Automotive and Financial Services. Operating result came in 37% lower at EUR 2.9 billion, corresponding to a margin of 3.7%.

Our product offensive continued across all brands, but in particular at Audi and Porsche. The substantial increase in BEV sales and their share in the group's volume is evidence of our strong product momentum. On the other hand, the strong increase in BEV share led to the expected margin dilution since as of today, margins of the battery electric vehicles are still significantly below those of ICE cars, thus putting pressure on our margins.

On top of this development, special earnings effects totaled EUR 1.1 billion or 140 basis points in margin in Q1 2025. Around EUR 0.6 billion have been booked to provision for potential penalties in connection with the current CO2 regulation in Europe based on the current regime. Around EUR 0.4 billion of costs were incurred for restructuring measures at CARIAD and Audi. Another EUR 150 million provisions were booked related to the diesel issue. And effects from the valuation of vehicles in transit in connection with the import duties introduced in the United States at the beginning of April burdened results by EUR 150 million.

Excluding the special effects, Q1 2025 operating margin would have amounted to 5.1%, roughly in line with the expected muted start, but definitely not at a satisfying level. We need and we will continue to reduce fixed costs and expand productivity measures to compensate for the margin-dilutive effect of the BEV ramp-up throughout the remainder of the year.

The cash flow in Automotive Division totaled to minus EUR 0.8 billion in the first 3 months, about EUR 1.7 billion above prior year quarter. Overall, a solid cash flow performance in a muted first quarter, which was impacted by about EUR 0.5 billion of cash-out for restructuring initiated in 2024, largely related to the end of production in the Brussels plant. The lower operating result was more than compensated for by less working capital outflow as well as lower investment spend in the quarter.

This brings me to the Automotive net liquidity, which declined by about EUR 0.2 billion compared to the year-end 2024. Two additional items are worth noting in addition to the net cash flow: M&A expenses of about EUR 700 million, largely related to the acquisition of a stake in Sauber Formula 1 from Audi and an investment of Porsche in Varta; and about EUR 400 million inflow from the placement of TRATON shares. Overall, at EUR 33.2 billion, net liquidity continues to stay at a solid level at the end of Q1 2025.

Coming to the divisional performance. Passenger Cars recorded an operating result of EUR 0.6 billion (sic) [ EUR 1.6 billion ], about 50% below the prior year period. The margin amounted to 2.8%, down 3.2 percentage points. Commercial Vehicles saw a decline of 38% to EUR 0.6 billion. This corresponds to an operating margin of 6.2%, below the full year guidance range. The division expects a pickup, in particular, in the second half and confirmed its full year targets. The Financial Services Division recorded an operating result of EUR 1.1 billion, corresponding to an increase of 19% year-over-year.

Let's look to the drivers behind the operating result development in the Passenger Cars segment. Volume price/mix contributed to a negative EUR 0.8 billion with the higher volume outside China could not fully compensate for a negative mix and pricing due to the higher sales incentives for BEVs. On top, CO2 provisions had a negative impact of around EUR 0.6 billion. Fixed costs and other costs increased to a large extent due to restructuring measures.

Let us have a more detailed look at the overhead cost development. The group recorded a slight increase of overhead cost in absolute terms. This was due to increase at Porsche and TRATON as well as related to the ramp-up of new business fields. On the other hand, we achieved first effects from restructuring measures. The overhead cost ratio was stable in the quarter. We've just started accelerating the execution of our efficiency programs across all brand groups and business fields. Rest assured that we continue to drive implementation of the defined measures with full force to improve our position from here in the coming quarters.

The measures in implementation related to Zukunft Volkswagen, which we agreed in December, play an important role here. Zukunft Volkswagen is delivering results as evidenced by the reduced headcount. The tariff agreement is implemented. In the first 3 months of 2025, Volkswagen AG reduced the number of active employees by about 2,000 at its German locations. In total, since the end of 2023, headcount declined by about 7,000 as a result of our performance programs and the hiring freeze.

Moving on to the performance of our brand groups, platforms and Financial Services business. With the Passenger Cars segment, Brand Group Core recorded strong sales revenue growth of 8% year-on-year. The operating results stood at EUR 1.1 billion and a margin of 3.2%, 3.2 percentage points below the prior year level. Headwinds were recorded from a significantly higher BEV share and special effects related to a CO2 regulation and an increase of allowance for the diesel issue in the magnitude of EUR 150 million. Including special effects, the operating margin would have amounted to 4.6%.

The product momentum at Audi is paying off. Brand Group Progressive recorded sales revenue significantly above last year with a plus of 12%, driven by growth in unit sales. Despite the strong top line, operating result came in at EUR 0.5 billion, corresponding to a margin of 3.5%, only 10% -- only 10 basis points above the prior year quarter. Positive effects from volume growth were compensated for by high ramp-up costs related to new model launches, provisions for vehicles in transit and the strong increase in BEV share.

The operating margin of Brand Group Luxury came in at 8.7%. The decline was mainly due to lower sales, in particular in China, higher material and R&D costs as well as expenses for adjustment of the company organization.

Let me outline some effects at Brand Group Core. ŠKODA margin continued to stay strong at 7.5%. And Brand Volkswagen recorded strong product and sales momentum with sales revenue plus 10% above prior year, but was burdened by special effects in the magnitude of EUR 350 million. Even after these effects, Brand's margin amounted to just 2%. Both Brand Volkswagen and Brand Commercial Vehicles had an encouraging start to the year in terms of fixed cost reduction, but need to speed up implementation of productivity measures in the German plants.

CARIAD continues to increase license income, backed by increased sales volume on the 1.1 and 1.2 software stack. Sales rose accordingly by 33% to around EUR 0.2 billion. Operating results stood at a negative EUR 0.8 billion. Excluding the mentioned costs related to restructuring measures of EUR 0.2 billion, results would have been stable compared to the prior year period. The PowerCo ramp-up of Salzgitter plant and the buildup of the organization is continuing, which lead to an operating loss of EUR 0.2 billion in the first quarter, some EUR 100 million higher than in Q1 2024.

TRATON saw a slow start to the year, both in terms of volume and financial results. In the first quarter of 2025, TRATON recorded about 10% lower unit sales, which translated into a corresponding decline in sales revenue in the quarter. Mainly due to the resulting lower fixed cost absorption, the company's operating result declined by 38% to EUR 0.6 billion.

Our Financial Services business performed well in the quarter, supported by improved contract volume, especially in Europe. Operating result increased by 19% to EUR 1.1 billion. The used car business benefited from positive remarketing results, while the normalization of used car prices continued in the quarter. The credit loss ratio slightly increased to a still solid level of 0.42%.

Expenditures on CapEx and R&D in the Automotive Division decreased by around 11% overall to EUR 7.7 billion in the first quarter. This corresponds to an 11.2% of the Automotive sales revenue, which is slightly below our forecasted range, mostly due to reduction in R&D costs. Reduced investment spend of EUR 165 billion for the 2025 to 2029 planning round period is confirmed while we continue our efforts to improve investment efficiency.

Moving on to the performance of our China joint ventures. In a highly competitive market environment, we continue to balance profitability and market share. Deliveries in China fell by 7% to about 644,000 vehicles. The proportionate operating result of our joint ventures activities in China came in at EUR 272 million in the first quarter of 2025, about 1/3 below prior year period. Based on a solid start to the year, we regard the upper end of our guidance range of EUR 0.5 billion to EUR 1 billion in proportionate operating profit as a realistic target.

This brings me to the financial outlook for 2025 financial year and the key results drivers. We continue to expect a tailwind from our revamped model portfolio in a slightly positive volume trend and the markets outside China. We expect gradually increasing benefits from the execution of our performance programs and restructuring initiatives. The significant expansion of BEV volumes, particularly in Europe, as well as the ramp-up cost of numerous new models and related to the new business fields are expected to burden earnings in 2025, but at a slower pace than in the first quarter.

In summary, we confirm the financial outlook for the year 2025. We continue to expect the Volkswagen Group to increase sales revenue by up to 5%. The operating return on sales is expected to be in the range of 5.5% to 6.5%. This outlook is based on the tariff situation as per end of February and, thus, does not include potential additional effects from the introduction or adjustment of trade tariffs as the effects and their interactions cannot be conclusively assessed at present.

The investment ratio in the Automotive Division is expected to be in the range of 12% to 13%. Automotive net cash flow should be in the range of EUR 2 billion to EUR 5 billion. This includes cash-out of around EUR 2 billion in connection with the implementation of restructuring measures. And we continue to expect net liquidity to be in the range of EUR 34 billion to EUR 37 billion.

Taking into account the most recent announcement of Porsche AG related to the adjustment of their full year outlook, we currently expect group return on sales as well as automotive net cash flow and net liquidity to trend towards the lower end of the presented guidance ranges.

Ladies and gentlemen, our start to the year was mixed. We continue to make significant progress in the implementation of our strategy. For example, in China, as presented last week at the Shanghai Auto Show, our product offensive is starting to paying off, as evidenced by the strong momentum in the order intake and our top line performance.

On the other hand, we cannot be satisfied with our results in the first quarter. And the financial outlook for the full year and operating margin of around 4% in the first quarter clearly shows that there is a considerable amount of work lying ahead of us. Given the current volatile global political situation, it's even more important to focus on the levers within our control. This means driving our strategic initiatives with full force and complementing our great product range with a competitive cost base, so we can ensure to succeed also in a rapidly changing global market environment.

With that, I hand back to Rolf.

[Rolf Woller, executive]

Thank you very much, Arno. And we are now starting the Q&A session. [Operator Instructions]

[Rolf Woller, executive]

So we see the Q&A rolling up, and the first question comes from José Asumendi from JPMorgan.

[Jose Asumendi, analyst]

It's José from JPMorgan. I guess the first question, please, on tariffs and, obviously, the most recent announcements by the administration. I would love to hear your thinking a little bit, your take with regards to the latest announcements and what can Volkswagen do in the U.S. to improve the level of localization of vehicles or components and whether you're thinking about what could be the potential impact of the tariffs in your financial guidance. That will be the first one.

And second, Arno, I'd love to hear a bit more about also China. We saw the update you provided also in the past weeks and the product launches. Maybe more on a positive note, I would like to hear which product launches you think are going to be more meaningful in 2026, and how do you think this will impact the P&L of your operations in the region?

[Arno Antlitz, executive]

Yes, José, first, on the tariff side, on the quantitative side, as I said before, since the full impact of the tariffs going forward could not comprehensively be assessed by us, we guide before tariffs because it's highly difficult to give a concrete projection on -- for the full year.

On the side, what we can do, I mean, what I can say, we have already a strong presence in the U.S. We are localized in Chattanooga. We run a factory there. We have a huge operation in the U.S. with a lot of dealers. We are ramping up Scout, and we are strong in North America. And obviously, we look on scenarios to localize more group models, too early to say. And what I can say, we stand ready to work with policymakers to find solutions to support U.S. industry while preserving our opportunities and opportunities for workers. This is what I can say where we stand currently. And yes, rest assured, we work on that topic.

[Rolf Woller, executive]

The second one on China?

[Arno Antlitz, executive]

On China, yes, we are quite excited about the update we were able to give in China because basically, we said we work on several topics, first on the product offensive, second on technology and third on cost. And I was very pleased with the performance our team presented in China on all 3 dimensions. They are really delivering, and they are delivering fast. And they are not only delivering in time, but partly even over-exceed the targets both in terms of SOP, number of months or years, how long it takes to develop the cars.

I don't know whether your colleagues had the opportunity to drive the ADAS stack, which is currently developed with CARIZON. It's a great stack. It drives really great. We made good progress on the work on cost down. Our target was 40%, including obviously battery, where we move from LFP -- from NMC to LFP. The team also achieved the 40%. And all of that should really lead to the situation that we achieve our targets in what we communicated in 2027 with EUR 2 billion net operating proportionate operating result.

So having said that, you asked, obviously, for 2026, let me jump back to 2025. The second good message is we currently expect to be more on the upper end of the guidance range between EUR 500 million and EUR 1 billion, which you could see we had a good quarter at EUR 272 million. So a good compromise between pricing and volume.

And in 2026, basically the most important models from Volkswagen kicking, the EVO, the AURA and the ERA, 3 great models, one on the Xiaopeng platform, one on China Main Platform and an SUV developed together with SAIC. Audi is bringing some very interesting models. So they kick only in 2026. So it's too early to give you a concrete guidance for the 2026 operative proportion -- operative result. But rest assured, with the kicking in of these models and knowing the current P&L of these models, we are on a very good track to achieve the targets for 2027.

[Rolf Woller, executive]

Thanks, José. And we continue with Horst Schneider from Bank of America.

[Horst Schneider, analyst]

The first question that I have, of course, that relates to tariff, and I understand that you cannot comment that much on that because negotiations are running. But coming back to this interview that also Oliver Blume gave in the management magazine, he was saying that Volkswagen is negotiating directly with the U.S. I know you can't comment on that, but is it possible that we see basically a firm-based exemption on the tariffs? And any comment on that would be helpful. And then, of course, I know also you do not want to quantify tariffs right now, but Porsche did that for April and May. So maybe you can just give some hint what is the potential impact.

The other question that I had that relates to volumes. S&P lowered recently substantially the Volkswagen volume outlook. I know they are always wrong. I think they use Volkswagen as a sense of cushion to the rest of the market. So therefore, I do not pay too much attention to that. But they say Volkswagen sales globally, I think something like minus 5%, minus 6%. You still guide for this 5% revenue growth. There's a China element also included, of course, in this unit sales number of S&P. But can you explain again why you remain optimistic on volume growth and particularly in which region? And what do you see in Europe? Why is Europe for you at the moment increasing in terms of demand?

[Arno Antlitz, executive]

Yes. Horst, thank you for your question then. Some of the answers you gave already, rightly commenting that, obviously, we can't comment on current discussions, that's for obvious reasons. And also in quantifying, look, we really don't want to add to the speculation. What I said before, we are ready to work with policymakers to find solutions that support also the U.S. industry, and this is where we stand today.

What I can say, I really don't want to quantify. But as you know, our deliveries to customers in U.S. are about 730,000. About 200,000 of them are produced in the U.S., including international, about 290,000 come from Mexico and some 240,000 come from Europe. And I think knowing the size of the magnitude of the tariffs, I mean, everybody could do a little bit of a math.

In terms of volume, yes, we stick to our volume outlook, both in terms of deliveries and in terms of sales. In terms of sales, we are even a little bit more confident. Why? Because the deliveries outlook in total includes a positive trajectory in Europe, U.S. and also specifically South America; while China, we expect another, I would say, loss of about 1 percentage point or even a little bit more, and I wouldn't call it loss. We delivered -- we give up another 1 point of share until the great new models hit the market in China.

And just to remind you of some of them, ID. EVO, it's on the shopping platform and the ID. ERA with -- together with SAIC and AURA with FAW. So these are really great cars hitting the market in China, but only 2026. And so for 2025, we want to be a little bit cautious. But that means in order to achieve our deliveries outlook, we expect a growth in the areas which are basically in our books. And as you know, the Chinese deliveries are not in our books. They're only accounted for at equity result.

So we are quite confident that we have a good trajectory there. And there are obviously 2 elements. First is total market. Yes, total markets are muted currently. Specifically, there might be an effect from the tariffs. Who knows? But on the other hand, we have really an encouraging order intake. We gained some share in Europe. Even on a high level, we -- even our BEV share now increased our share in the total market. So cars are very well received. We see a very strong order intake, and there are more great cars to come. So basically, what we see in terms of our momentum, we stick to our current outlook of the up to 5% sales for the remainder of the year.

[Horst Schneider, analyst]

Arno, just quick follow-ups then. What is then your visibility in Europe given this order book? Is that already something like 2 quarters or 1.5 quarters? What would you say?

[Arno Antlitz, executive]

No, it's -- we have -- we achieved 1 million cars. I don't -- I'm not sure whether I can say that, but April would even see a little bit higher figures than the 1 million. So the momentum continues in April. So this is -- this reaches well until the Q3 in Europe.

[Rolf Woller, executive]

Thank you, Horst. And we continue with Tim Rokossa from Deutsche Bank.

[Tim Rokossa, analyst]

I also have 2 questions, please. The first one is sticking with this order intake that you just talked about, Arno, obviously, quite positive in Western Europe, probably the most positive news, at least, I think, today for ICE and BEV. We already know a couple of moving parts for Q2. We know that Porsche takes a really big hit, almost EUR 1 billion in one-offs. There's maybe some charges at Audi that I was going to ask about for their restructuring processes. How should we think about Q2 with this order visibility in mind that you have right now? Do you think you can be within the full year guidance range?

And then when we think about one of the burdens that you had in Q1, it was clearly coming from the BEV with a very high BEV share now that you already have. How should we think about the headwind from here? Is that getting lower, staying on about the same amount?

And I'll try again on the tariffs. I mean there's all sorts of analyst estimates out there. We all try to do the math. It's multiple billion euros, potentially low single-digit euro billion at the low end. Is there anything that you can at least vaguely confirm with respect to the tariff impact on that side?

[Arno Antlitz, executive]

Yes. Order intake, as you said, ICE and BEV, we discussed in Q2. There are several effects. But to start with the conclusion, even with this effect, we expect to be in the guidance range in Q2. So what are the plus and minus? We continue to expect product momentum and sales momentum to continue. We will see and plan for an even higher increase of BEV share, obviously, because you saw the burden of EUR 600 million in Q1 from today's perspective.

Now quarter-by-quarter, we will increase the BEV share, yes. But if you do the math, last year, we also had an increase on BEV share quarter-over-quarter. So let's call it the distance in the first quarter was about 10 percentage points. And we had to compensate on the cost side for 10 percentage points in the first quarter. And this basically difference between the target BEV share we need to achieve and versus last year, that narrows quarter-over-quarter. So the burden is there, but the burden narrows quarter-over-quarter.

And on the other hand, hopefully, you saw also the progress we made on reducing the headcount, 2,000 people already left in 1 quarter. Brand Volkswagen is doing progress in the plants. Just to give you an indication there, they were managed to manage the factory cost down significantly, not to the target. The target was ambitious. They made a good progress, but more progress to come, and we put a lot of pressure on that topic. And the wage piece is implemented already. So from -- for example, Brand Volkswagen, you could expect now a decreasing burden from the ramp-up of BEV share and an increasing support from our cost measures. And this should give you an indication of where we want to hit in the end of the year.

You rightly mentioned the one-off Porsche communicated yesterday or 2 days ago. And you rightly mentioned that we could expect some restructuring measures at Audi. They are still calculating the measures. They are still deciding on the measures and negotiating the measures. This is why we could not and had not to book for them for the time being. But both topics taking into account, we expect to be in the guidance range for the second quarter.

[Tim Rokossa, analyst]

Just to confirm that this would still be pre-tariffs, right, within the guidance range of the tariff...

[Arno Antlitz, executive]

Yes, obviously. That's very important. All the forward-looking statements I make today is obviously pre-tariffs. We are aware that some other automakers, they refuse to do a guidance at all. It's really -- currently, we must say the effects we cannot conclusively assess. So what we decided on, we want to do the math. We want to stick to all of our guidance, so to be consistent, but all of the forward-looking measures -- discussion today is pre-tariffs.

[Tim Rokossa, analyst]

I'm happy to contribute to your BEV share in Q2. I just got my Audi Q e-tron quattro last week.

[Arno Antlitz, executive]

Excellent. Congrats.

[Rolf Woller, executive]

Thank you, Tim. We continue with a question we got online. Yes. And to be fair, it's from Stuart Pearson from Exane BNP. He was with sending me the e-mail on rank 3 and -- or 4, better said. And this is why I read it now to you, Arno. His first question is, could you update us on the competitive environment in China? Given comments regarding reaching the upper end of the guidance range and also noting a slightly better performance from GM in China, reported this week too, could we start to see some stabilization in the market pricing dynamic there? And how does it differ between the premium and the mass market?

And the second question would be, how is the pricing dynamic developing in Europe? Renault, when they released revenue results just a couple of weeks ago, has mentioned the phase of price stabilization. Is that something you're also seeing? And how does the negative EUR 0.3 billion pricing in the first quarter bridge break down between the regions? And just to amend this, I think Renault largely referred with price stabilization to the European market.

[Arno Antlitz, executive]

Yes. In China, I mean it's -- generally, the market stays very competitive, and it stays a very competitive pricing environment. And this is why we decided to again, in 2025, take deliberate actions not to participate to full extent in that, let's not call it price war, let's call it challenging pricing environment. And so this is why we make, yes, deliberate decisions between pricing and volume. There is some, I would call, stabilization over the last months, but it's really too early to say. There are also talks about new stimulus.

So what we concentrate on us for the time being, this year, we deliberately make a choice to give another percentage points or so. But on the other hand, we want to stay relevant in China. We can't fall too far below. We want to have a good starting position in 2026 when all the new models from Volkswagen and Audi kick in. I don't want to reiterate all the models. Some of you have been at the auto show, really great models. We are really excited about both the customer acceptance of the models at Volkswagen and Audi, Audi with the 4 rings and Audi. And so we set the ground for reengaging in this environment in 2026 with a much, much better cost base. This is our way forward.

Yes, pricing, in terms of our bridge, I don't want to bother you too much. But technically, I must give you one example that -- or one information you know already. We have, in the pricing and the mix bridge, we have the norm -- I would say, the typical countries, the big regions. The high-inflation countries, pricing, for example, Argentina or others, we don't even show in pricing. So we balance this pricing we do in China -- sorry, we do in Argentina in exchange rate others. Obviously, the exchange rate hit in Argentina, Brazil, and these countries is much higher. But in this, we basically assess it more in dollar terms and the pricing we do in this region, it's not in the price/volume mix.

So the pricing you see there is basically the big regions, Europe, U.S. So pricing is by minus 3%. This is basically given the current situation and given the situation that the BEVs and the BEV ramp-up is obviously in that line, including the, to be honest, high incentives we currently still give for the BEVs. We are quite pleased because what we originally guided for that volume price/mix should be stable. So we already almost achieved volume price/mix stable.

And giving -- taking into account what I said some minutes ago that the gap between the BEV share we had last year and the BEV share we are targeting for is narrowing over time. The bucket volume price/mix should have even a small chance going out throughout the rest of the year.

[Rolf Woller, executive]

Very good. Thank you, Stuart, for those questions. And we continue now with the telephone line. The next one would be Patrick Hummel from UBS.

[Patrick Hummel, analyst]

My question is a bit more on the CapEx and free cash flow side of things. I would assume your conversations with U.S. administration are about local investments. And even taking the tariff debate aside, I think it's fair to say that Volkswagen Group, amongst the premium OEMs, is least naturally hedged, so to say, in North America with Audi and Porsche brand.

If we think high level, are you going to make additional North American investment commitments that could undermine your efforts to become a more efficient and more cash-generative company for the next few years? Are there any high-level thoughts you can share how you're going to approach this? Is that something, be it on the powertrain or component side or final vehicle assembly, is that something that could become a significant headwind to your free cash generation in the next few years?

[Arno Antlitz, executive]

Yes, Patrick, as always, I have to say it's too early to give you details. What I can say, there are a lot of significant initiatives in the U.S. already factored in, in the current figures, obviously, ramp up Scout, the joint venture with Rivian and ramp-up of R&D in a joint venture with Rivian and the stake in Rivian. And yes, we are currently evaluating options to localize more in the U.S. This is what I can say.

But on the other hand, what we also always said, going forward, year-over-year, we are basically in a phase that the combustion engine investments, although there are like some more investments in drivetrains, for example, like hybrids or range extenders, the major investments in ICE are running out and the double investments run out. For example, look, there are still investments in the Q7 and Q8 combustion engine and equivalent electric cars, but moving a year ahead or 2 years ahead, so the burden or the peak is basically also behind us. And this is how you should think of our investment in R&D CapEx going forward.

But obviously, it's too early to say. Currently, we stick to the EUR 165 billion. And let me put it like that, they are to that EUR 165 billion. There are clearly chances in what I just mentioned and some chances in the other direction, what we could do more in the U.S.

[Patrick Hummel, analyst]

And Arno, if you allow me that follow-up, I know Scout is your baby also. But it feels from a group perspective, protecting the cash cows of your portfolio should have a higher priority than a new EV-centric brand that comes at a time to the North American market when EVs are maybe not that much in favor of the administration and of the consumer. So is there any flexibility to repurpose the EUR 2 billion you are spending on Scout, maybe as also some capacity for the existing brand portfolio?

[Arno Antlitz, executive]

Yes. Patrick, first and foremost, as Volkswagen Group, we are not driving forward Scout because it's my baby. That's very important. We are driving Scout forward because it's the really biggest single promising segment, automotive segment in the industry. Now C-pickup and B rugged SUVs in the U.S. is, from a profit pool perspective, really the most attractive segment, and this is why we are driving forward.

Second, I would understand completely your question, and I still understand it, but I would understand it if we would stick to 100% BEV strategy for Scout. But having a really convincing concept introduced with the range extender, with the engine coming locally from Mexico for 500 miles of range, really positive customer feedback on that topic and basically 80% take rate for the preorders moving to that range extender, we are much more optimistic that we can hit the planned volumes first. And second, yes, there are also chances to include other activities in the factory in South Carolina, and we also look into that as well.

[Rolf Woller, executive]

Thank you, Patrick. Before we continue with Mike, I was reminded by Tim that we have not really answered the question on the tariffs and the impact. And Arno said it, yes, it's currently too early to make a conclusive judgment. However, I think what we can see and read is obviously the analyst reports with the numbers provided, the 700,000 and the breakdown Mexico imports in the U.S., we can clearly comprehend how most of the analysts come to their conclusions with a potential burden of EUR 2 billion to EUR 4 billion. And just wanted to confirm that, that's not our estimate, but this is something we can comprehend.

Let's continue now in the line here with Mike Tyndall from HSBC.

[Michael Tyndall, analyst]

Mike from HSBC. I appreciate you giving me a chance to ask a couple of questions, if I can. Arno, can we talk about BEV profitability? You flagged that it's significantly below ICE. And I'm just wondering what the moving parts are there because it feels like you're being quite aggressive on pricing, which I wonder if that's the bigger headwind because from what we can see from a cost perspective, I would assume the cost position of those vehicles is improving.

And then the second one, again, focusing on costs, just the savings that are coming through, can you give us a sense of what the cadence is? Does it accelerate from here considerably? Is there a point where that fixed cost other component in the EBIT walk might actually turn positive? And if so, when?

[Arno Antlitz, executive]

Yes. Mike, in terms of BEV profitability, look, to be very honest, I was talking about margin parity some days ago. And we did some really major improvement first on raw materials, look at lithium, look at other raw material prices. But to be honest, on the pricing side, there's still a lot of support necessary for the BEVs. I mean you look at the Internet site, you know our offers. So there is some support necessary. And this is where we stand today.

But we shouldn't give up because with the ID.2 family, 2026, they kick off, basically kick in for the Volkswagen Group and then also available in other Volkswagen brand models and at least volume models. A total new chemistry, LFP with a significant cost improvement and also a new battery type. So it's a much more integrated type. We don't operate on models anymore. So we talk about which we call them cell-to-pack, which is positive.

We have a next-generation electrical engine with much more integration of parts. Although I studied engineering, I'm missing the word for it. In Germany, you say [Foreign Language]. So converters and all these kind of topics are then integrated into one electrical engine, which makes really a step forward in terms of cost on electrical engine. And more of these cost innovations kick in with the ID.2 family and then will be rolled out.

So this is why we're also confident together with the scale and the site, the ID.2 family will be built in Martorell, very cost effective from today's perspective, low labor cost. So this will be the first car which could really reach margin parity with this equivalent, which would be a T-Cross.

And so -- and for the time being, as said before and as I'm communicating externally and internally, we have to compensate for the margin dilution effect of the ramp-up of BEVs on the cost side, and we have the chance for that. And you rightly mentioned to the overhead cost. And our clear goal is that throughout of the year 2025, there is a margin contribution, and we guided for that as well.

And if you take out TRATON and Porsche, the relative burden on overhead cost is already positive in Brand Group Core. It was not high enough to compensate for the ramp-up of BEVs. But as said before, the compensational effect on the fixed cost versus the burden on the margin dilution of the BEV over the year should really turn, that the margin dilution effect relatively versus prior year should decrease and the compensational effect of the cost side should increase with a clear target of showing a positive overhead cost contribution in the EBIT bridge throughout the year.

[Rolf Woller, executive]

Thank you, Mike. We continue in the line. We have 3 still questions or questioners. Harald Hendrikse from Citigroup.

[Harald Hendrikse, analyst]

Interesting, coming back from China, it feels to me like the local-for-local strategy in China has worked incredibly well. And in this sort of global changing environment, tariffs in the States and all that sort of stuff, what other learnings can we take from China, right? And I'm talking specifically the technology decisions over there seem to be much, much faster. The model decisions seem to be incredibly quickly. You're talking about ID.2, things like LFP, integrated motor and stuff like that, technology that China has obviously been working with for some time.

How much can you take from China to think strategically about your regional businesses, including obviously the U.S.? I know you've been trying to answer, but what I'm really thinking, what can you take away? What can you learn from there to make yourself, a, much more competitive; and b, longer term, even more resilient?

[Arno Antlitz, executive]

This is a great question. And this is also the impulse, what we internally obviously also use, try to learn from China. And there are a lot of elements you mentioned already. Look at the tech with China -- in China, we work together in a cooperation with Xiaopeng to work on our back end. It's a zonal architecture. And the same we do with Rivian in the rest of the world. So we move from the current software to a zonal architecture, state-of-the-art, much more cost competitive as well.

So if you look at LFP batteries, in the rest of the world, you have normally NMC batteries, rather expensive, yes, a better range, but expensive. China is basically working on LFP. So what we are doing, we bring the LFP battery 2027 to the ID.2 family and then roll that out. And we even want to combine it with our strength. So in ID.2, you can order an LFP battery for more affordable cost, but some compromise on range. And you can basically order an NMC battery with much, much better range.

So we look on other topics like ADAS and also on speed of development. Obviously, we see that China is able to speed up product development. And we have a close look on that. We have a good understanding of that. Some topics, we really can basically learn from; other topics, it's more in our DNA, how many winter tests, how many summer tests you do. This is more like Volkswagen brand and group is really deeply rooted in safeguarding and making sure everything is basically perfect. So this is what we look at.

On the other topics, to be very honest, in terms of speed, it's not only great technology. Sometimes China people are just working harder, to be honest. They work like 10 hours a day, 6 days a week and in 2 shifts in R&D department. So we look on a 2-shift system perhaps here in Europe or we basically try to copy a 2-shift system, develop things in Wolfsburg and then push it in the evening to our development headquarters in Mexico and Brazil and use the time there and get it back the next morning. So there's a lot of things we look at. And you could expect also learnings to evolve in Wolfsburg from these topics.

[Rolf Woller, executive]

Thank you, Harald. And we continue with Stephen Reitman from Bernstein.

[Stephen Reitman, analyst]

I have some questions, please. Obviously, the situation is shifting very fast. But what can you tell me your current understanding of the status of your plants in Mexico and particularly your engine plant? You are one of the only of the Germans that actually have manufacturing on the North American continent for engines. I understand that, obviously, you're supplying Volkswagens, but not Audi produced in Mexico. How are those engines being treated? Are they fully USMCA compliant? Do you believe that -- do the engines come in tariff-free into the United States? Can they be used in Audi products? That's the first question.

The second question is on the Progressive margin. Obviously, I understand the underlying margin was 5.9%. But even still, how do you feel that compares to where you think it should be? Obviously, we know that last year was burdened by the significant problems you had with the starter belt generators, which meant you couldn't supply the V6 and the V8. But given the dynamic situation you're talking about in the European market, it seems still a little bit on the low side.

And finally, you're giving -- you mentioned about the profitability of the BEVs. And obviously, you've had a surge in BEV sales. Given the fact that the phase-in could come in, this obviously still has to be approved by the Parliament, does that make some sense for you to maybe to ease back on some of these incentives, the EUR 3,500 starting that you're doing on the ID.3? Because as you said, you're very much more confident about some of your new products coming '26 and 2027, which will make it much easier then to make your average CO2 requirement over the 3-year average.

[Arno Antlitz, executive]

Yes, Stephen, thanks for these 3 questions. No, there's -- of course, we have a plant in Mexico, an engine plant. And what I just mentioned is, for example, there are 2 -- we call it 211 in English. In German, we call it [Foreign Language]. This plant is basically producing the engines for Volkswagen, and they go into the Volkswagen cars. And this would be also the potential engine for the range extender for the Scout, not a turbocharged version, naturally aspirated, but this is so -- we still use that.

And let me also remind of another topic we decided long before the tariff discussion. In the course of the Zukunftspakt, we will allocate the current Golf to Mexico in the runout to make space here for great new models on the SSP, we call it on a game-changer project. And so most of the Golfs we build then in Mexico will be basically for the European market anyway. So there will be a future for the plant in Puebla and also for the engine plant also in whatever setup you can think of in the future.

Audi is currently not producing under USMCA. So this is why the reason they have even higher tariffs. And as said before, we look at various options to improve the situation. We had the question on the BEV sales and the change of the regulatory regime. To make that very clear, even if the regime changes and we have 3 years' time to fulfill the target, that would not put any pressure away from us or from other OEMs. We still need every gram because from today's perspective, we will see still a burden in 2025, perhaps a smaller burden in 2026. And from today's perspective, we'll be overfilling in 2027.

What helps us is that we can put together the 3 years and can take together the burden in 2025 and basically [Foreign Language] and can offset it with the 2027 positive. And just to remind you, in 2026, then the ID.2 family kicks in. And then 2027, the ID.EVERY1, we are very excited about this car. And with these 2 cars kicking in from a range -- price range, EUR 25,000 on ID family -- ID.2 family, EUR 20,000 plus ID.1 family, we are very confident that we can heavily overachieve in 2027, and we have the chance to then take the 3 years in combination.

But coming back to your question, that wouldn't put pressure away from the industry or us for 2025 and 2026. We have to concentrate on improving the costs of the electric cars. It's clear to say not make a compromise in the interior on the quality, rather on the things I discussed before on the battery chemistry, and to significantly and consequently implement Future Volkswagen, which will be the biggest single element to compensate on the cost side for the continuous ramp-up of the BEVs and the margin dilution of the BEVs until 2027. And as said, with the ID.2 family, the margin dilution effect of the BEVs should really then be much smaller than today.

And Audi, yes, Audi obviously has basically the same effect. In margin dilution in BEVs, they did also very well on the Q6, E6. Deliveries to customers were up, and they had some special effects. And what you could expect from Audi going forward, the positive restructuring effects from Brussels. They also negotiated now in negotiation with the Works Council also a reduction of their workforce, I think, in the magnitude of 7,500. And these effects should give the same positive headwind -- tailwind as on the Volkswagen side. And the margin, the guidance is 7% to 9%.

[Rolf Woller, executive]

Thank you, Stephen. And we are coming to the last question, Philippe, best for last.

[Philippe Houchois, analyst]

Philippe Houchois at Jefferies. Two questions. First one is, we talk about guidance, but of course, it's all pre-tariffs and we know tariffs are going to happen. Against that, you've taken that EUR 600 million provision on CO2 in your Q1 accounts. And I'm just wondering what is the scope for Volkswagen to reverse that provision, especially on the basis of the banking system that's going to be put in place in the summer, we hope.

And the second point is we talk about earnings, but no cash flow. You've given us a guidance. And I'm just trying to understand, we had cash burn in Q1 that was expected. I'm just trying to think what can you tell us about -- is the EUR 4 billion kind of M&A still on the cards for 2025? What's the outlook for dividend from China? And as it seems like your net cash position come under some pressure, how do you see the leverage and the funding of the Financial Services at this stage as an additional source of stress or not?

[Arno Antlitz, executive]

Yes. Philippe, thanks very much for your questions. I'm not 100% sure whether I understood the question right. I'll try to answer it, then I ask you whether that's what you asked for. Look, we provisioned EUR 600 million in the first quarter. If the European Union would change the legislative regime throughout the year, we don't expect that EUR 600 million to significantly increase than for the full year. That would be basically then almost the whole burden we would have provisioned for already then in the first quarter.

But why is that still -- why I'm a little bit cautious? That obviously depends on your expectations for the next 3 years. So as you understand how volatile the markets are, and it depends on our ramp-up targets on BEVs in 2026 and 2027, then obviously to calculate that because we have to take the ramp-up of BEVs in 2027 into account to make a 3-year calculation, which in the nature of the subject is basically volatile. So this is why I'm a little bit cautious, but EUR 600 million, perhaps a little bit light, more a little bit less than it should be than the whole burden for the full year.

Was that your question, Philippe?

[Philippe Houchois, analyst]

Yes, exactly. So I was just trying to think is, can you reverse, but I think your answer is no. It may not increase, but it's not going to reverse.

[Arno Antlitz, executive]

It may not increase. Perhaps I don't think that -- I don't expect that we can reverse significantly, but the first quarter burden would be already the burden then for the full year, which is also a good news for the quarters to come.

So -- and on the cash flow, I think we were very precise on the cash flow guidance, EUR 2 billion to EUR 5 billion, more towards the lower end of the range. You mentioned the EUR 4 billion. One is for Rivian, some M&A we had already. And of course, we look at -- to the topic. On the other hand, we are glad to announce at least the first small step on the TRATON increasing free float. So that works also in a positive direction. And I don't rule out that we stand -- I don't want -- would expect that we stand still there. We have to look at that, might be also a small chance over time, of course, not in the next weeks and months. And yes, this is where we stand.

And the cash flow, as we also guided, is significantly burdened by the outflow of cash in the magnitude of EUR 2 billion by restructuring measures we decided on last year, you also have to take into account. And the dividends from China, as always, we don't exactly guide the dividends from China. But by and large, the proportionate operative result from this year would be the China dividend for next year. And obviously, what you can expect this year is basically strongly related to the Chinese operative result we achieved last year.

So this is how we think of the net cash flow. And obviously, given the unsecured and, yes, the current geopolitical environment, we are really focused on cash, preserve cash, increase liquidity to have a really strong liquidity base because a strong liquidity base, and we have a strong liquidity base, is the best assurance in a challenging environment.

And yes, one other topic. The -- you said it, I think it was a dividend -- no, it was related to the bank -- to the Financial Services.

[Rolf Woller, executive]

If we have a funding pressure.

[Arno Antlitz, executive]

No, it's even the other way around. We achieved a dividend from the bank. So it's actually the other way around.

[Rolf Woller, executive]

And then if you think about the Project [ Corale ], which has been concluded last year, so Financial Services, I would not see any funding pressure in the current environment. Of course, you have rating, we always have to take in sight. And we are, of course, very much focused on keeping our strong investment-grade rating in proper shape. But because of the cash flow development, short term, I don't see any additional funding pressure.

Very good. That brings us to the end of the Q&A session. Thank you for all this discussion. We are now at the end of the investor and analyst call. If anything was left unanswered, you know where to find us. You have our telephone numbers, and the IR team in Wolfsburg is very happy to take any additional questions.

Our next event will be the Volkswagen Group ESG Conference, which will be held next week on May 7. And then we will have the Annual General Meeting on May 16. H1 results will be released on July 25. And we are now doing a short break before we continue with the Q&A session for the journalists, which will start at about 10:25, Pietro.

And thanks very much for your numerous participation. Take care. And for those who have a long weekend, a good long weekend. And for those in the U.K. who have a bank holiday on Monday, also a long weekend just with a Monday added. Thank you very much and speak soon.

[Arno Antlitz, executive]

Thank you also from my side. Thank you for your time.