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Edited Transcript of VOW3.DE earnings conference call or presentation 30-Oct-19 1:00pm GMT

Q3 2019 Volkswagen AG Earnings Call

Wolfsburg Nov 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Volkswagen AG earnings conference call or presentation Wednesday, October 30, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christian Dahlheim

Volkswagen AG - Head of Group Sales

* Frank Witter

Volkswagen AG - CFO, Head of IT & Member of Board of Management

* Helen Beckermann

Volkswagen AG - Senior IR Manager

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Conference Call Participants

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* Adam Brian John Hull

MainFirst Bank AG, Research Division - MD

* Angus Vere Tweedie

Citigroup Inc, Research Division - VP & Analyst

* Arndt Alexander Ellinghorst

Evercore ISI Institutional Equities, Research Division - Senior MD & Head of the Global Automotive Research

* Charles Coldicott

Redburn (Europe) Limited, Research Division - Research Analyst

* Daniel Schwarz

Crédit Suisse AG, Research Division - Research Analyst

* Demian Mizupho Flowers

Commerzbank AG, Research Division - Team Head Automotive

* George Anthony Galliers-Pratt

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Henning Cosman

HSBC, Research Division - Analyst

* José Maria Asumendi

JP Morgan Chase & Co, Research Division - Head of the European Automotive Team

* Kai Alexander Mueller

BofA Merrill Lynch, Research Division - Associate and Analyst

* Michael Dean

Bloomberg Intelligence - Analyst

* Michael Blank

Egerton Capital (UK) LLP - Partner and Investment Analyst

* Patrick Hummel

UBS Investment Bank, Research Division - Executive Director and Lead Analyst of European Autos

* Stephen Michael Reitman

Societe Generale Cross Asset Research - Equity Analyst

* Tim Rokossa

Deutsche Bank AG, Research Division - Research Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Volkswagen AG Live Audio Webcast and Conference Call on the Third Quarter Financial Results 2019. For your information, today's conference is being recorded.

At this time, I would like to turn the conference over to Mrs. Helen Beckermann, Interim Head of Group Investor Relations for Volkswagen AG. Please go ahead, Madam.

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Helen Beckermann, Volkswagen AG - Senior IR Manager [2]

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Ladies and gentlemen, welcome to Volkswagen's conference call for investors and analysts on the results for the period January to September 2019, based on the interim report we published early this morning. For today's conference call, I'm delighted to be joined by Frank Witter, our member of the Board of Management, Volkswagen AG, responsible for Finance and IT; and Director of Group sales, Dr. Christian Dahlheim.

Most of you will have followed the webcast from this morning's press conference. Our focus now is to add a little more color relating to your specific needs as investors and analysts. Following the presentations, we look forward to taking your questions.

So now let me hand over to Frank.

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Frank Witter, Volkswagen AG - CFO, Head of IT & Member of Board of Management [3]

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Yes. Thank you, Helen, and a warm welcome to all participants on this call. So Volkswagen Group has performed quite well in the 9 months period in a very challenging global environment and a very tough sector. At EUR 14.8 billion, the underlying operating result before special items came in strong at 11% above the prior year, leading to an operating margin of 7.9%. Whilst we much appreciate the improvement, it is important to understand some of the drivers that may not be so obvious. Firstly, we need to consider the negative base effect from WLTP, which hit last year's earnings in Q3 hard when comparing year-on-year. A further significant driver was a positive swing of EUR 0.5 billion alone from the fair value accounting of derivatives under IFRS 9. Unfortunately, it was necessary to book further special items of minus EUR 300 million in Q3 relating to legal risks. This brings the amount of special items year-to-date to minus EUR 1.3 billion.

After special items, the operating result came in at EUR 13.5 billion. Deliveries for the 9 months at 8 million vehicles were slightly below the prior year. In Western Europe and South America, we've seen higher demand compared to the prior year. On the other hand, it is no secret that the Chinese market continues to be under real pressure. Overall, despite the known challenges, we continue to grow market share in a declining overall worldwide market. Christian will give you more color in a few moments.

Sales revenue rose 6.9% to around EUR 187 billion, reflecting mainly the strong model mix. At EUR 1.1 billion, the financial result is down about 1/3 versus last year. The decline was mainly related to higher interest cost and the negative impact caused by interest rate changes, relevant for long-term provisions. However, the equity income, mainly driven by our Chinese joint ventures, came in 6% above the prior year at EUR 2.6 billion.

For the 9-month period, profit before tax came in at EUR 14.6 billion, with profit after tax at EUR 11.2 billion. Automotive net cash flow before diesel outflows and M&A came in at EUR 8.6 billion, reflecting the strong operating performance. We ended the quarter with a robust EUR 19.8 billion of automotive net liquidity. We will dive deeper into the drivers in a few moments.

Let me now hand over you to Christian.

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Christian Dahlheim, Volkswagen AG - Head of Group Sales [4]

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Thank you, Frank. Ladies and gentlemen, I would also like to extend a warm welcome to this conference call and present the sales results. In the third quarter of 2019, the Volkswagen Group delivered a total of 2.6 million vehicles to customers worldwide. While the total car market decreased by 3.1%, Volkswagen Group achieved an increase of 1.1% in the third quarter. The increase was mainly driven by a strong performance in Europe and dampened by declining volumes in the Asian-Pacific region. Shrinking markets have already affected the first 2 quarters, with a total market decrease of 6.5%, respectively, 5.3%. In this environment, the Volkswagen Group has performed each time better than the markets and consequently increased market share to 12.9% globally.

Let us now take a look at the performance of our deliveries to customers on a year-to-date basis. Since the beginning of the year, the Volkswagen Group delivered a total of over 8.0 million vehicles to customers worldwide. After the last year's strong first 3 quarters for many of our brands, this represents a solid result, being only 1.5% below 2018 on a year-to-date basis.

Brand Volkswagen delivered from January until September over 4.5 million cars, minus of 2.3% compared to last year. Volkswagen wins market shares in shrinking overall global markets, especially Brazil and China remain the driver for growth with a slight market share increase. ŠKODA delivered 914,000 vehicles to customers from January until September, 2.7% down versus last year. The reason for this is the continuing decline in the Chinese car market where ŠKODA deliveries in its largest single market declined by 22%. However, the carmaker could nearly compensate this development with the strong growth in Europe and Russia.

Again, SEAT achieved a new record with delivery of 455,000 vehicles in the first 3 quarters. This result is the highest figure ever in the history of SEAT whereby 4 of SEAT's 9 main markets posted the highest sales volumes ever in the history. Volkswagen commercial vehicles delivered 370,000 vehicles to customers, nearly the same level as previous year, which was at minus 0.5%. Pushed by Crafter sales, deliveries rose in the key region, Western Europe and its home market. In contrast to this, volume losses have to be recorded, especially in Turkey, due to inflation and exchange rate issues.

Since January, Audi delivered around 1.4 million premium automobiles to customers, reducing the cumulative decline to 3.6% versus last year. While restrictions in the portfolio due to the WLTP test cycle have had a negative effect on deliveries in Europe at the second -- at the end of last year, this year nearly all variants have been homologated for WLTP Second Act and are available in the configurator.

Year-to-date, Porsche achieved an increase of nearly 3% compared to the prior year period, especially Cayenne and Macan saw the strongest growth with a plus of 25% for Cayenne and 9% for Macan. Furthermore, growth was driven by the Eastern European region across all model lines. Bentley delivered 7,200 vehicles, an increase of 0.8%. The New Continental GT has been successfully launched in all relevant markets. Since the beginning of the year, the truck and bus division showed a positive development. Scania increased deliveries by 8.9% and MAN by 6.8%, resulting in 179,000 vehicles delivered to customers.

Let us now take a look at the performance of our deliveries to customers versus the car market development on a regional basis. The demand in North American market shrank in the first 3 quarters by 1.9%, due to the still generally weaker economic situation in Canada and Mexico. Deliveries of the Volkswagen Group dropped by 1.4% compared to the same period last year. So we succeeded in maintaining our market share. In spite of the generally weaker markets, deliveries in Western Europe were encountered to the trend by delivering a plus of 0.7% to our customers. Therefore, the market share has been slightly increased. Germany, France and Italy have been the strongest driver for growth in the region, while the U.K. car market continues to be characterized by general consumer restraint and market uncertainty, mainly driven by ongoing Brexit discussions.

Volkswagen Group could not participate in the positive development in Central and Eastern Europe. While the total market increased by 1.3%, deliveries for Volkswagen Group decreased by 1.1%. This development was influenced by our high market share of 50.4% in a shrinking market in the Czech Republic. On the other hand, the Volkswagen Group could increase market share in Bulgaria, Russia and Slovenia. The upward trend of the Volkswagen Group in the South American market continued. While total market decreased by 5.2%, Volkswagen Group has increased deliveries by 0.5% and achieved a corresponding market share increase. Brazil remains the strongest driver for growth in this region.

The car market in the Asia-Pacific region declined significantly by 6.4%. This was mainly caused by lower customer demand in the Chinese passenger car market, among others, due to the trade conflict with the U.S.A. Despite this market environment, Volkswagen Group increased its market share, especially in China. In light of the macroeconomic conditions, we expect deliveries to customers for the full year 2019 on the level of 2018 despite a downward market trend, especially in the Chinese market. Of course, we continue to roll out further excellent products, as you can see in the next chart.

With the Q3 Sportback, Audi is introducing the first compact crossover of the brand. Beneath its expressive design, the customer will find a variable interior with a digital operating concept and connectivity features from the full-sized automotive class. With the new e-Lavida Volkswagen by SAIC Volkswagen Automotive officially launched its first all-electric model in China. After the world premiere in 3 continents simultaneously in September, the Porsche Taycan 4S along with the Taycan Turbo S and the Taycan Turbo can be ordered since October 14 and will arrive in European dealerships in January 2020. Last but not least, Volkswagen Group commercial vehicles is introducing the facelift of the T6.1 Multivan in the last quarter.

Now I would like to hand you back over to Frank.

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Frank Witter, Volkswagen AG - CFO, Head of IT & Member of Board of Management [5]

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Yes. Moving on to look at the group operating result performance for the 9 months in detail. The block volume mix prices in the passenger car segment reported a plus of EUR 2.7 billion. Strong product mix reflecting the continuing growth in our higher-margin SUV portfolio, and strong pricing were the key drivers. The block exchange rate and derivatives, in total had a neutral impact on the operating result. Within this, the isolated currency translation effect was minus EUR 0.5 billion, mainly driven by the devaluation of the Brazilian real and the Argentinian peso against the U.S. dollar. In contrast, as mentioned earlier, the impact from the fair value valuation of derivatives for commodity hedges was plus EUR 0.5 billion. As you're aware, this position is highly volatile, demonstrated by the swings we have seen in the last few quarters. This shows again that it doesn't make much sense to speculate on where this position might end up at year-end. Product cost savings continued to improve with a plus of EUR 0.5 billion year-to-date.

Fixed costs have risen by EUR 0.3 billion over the 9-month period. Higher depreciation on CapEx dragged on fixed costs by EUR 0.9 billion. Furthermore, R&D costs with the P&L impact were about EUR 0.8 billion higher. It is no secret that Q4 is typically the quarter with the heaviest load of CapEx and R&D. We need to continue with the necessary high investments for further electrification of our product range, getting up to speed on our digital transformation and the expansion and overhaul of certain factories. To compensate for this, we haven't let up on the push for efficiencies to secure the respective margin targets. I will comment in a few moments on both our commercial vehicles and our financial services results when I take you through all brands in detail.

Turning now on to our brands. It should be noted that 3 of our brands contributed over EUR 3 billion to our operating result in the 9 months period. At around EUR 3.2 billion Volkswagen passenger cars operating result before special items increased significantly compared to EUR 2.3 billion in the prior year. This year, the WLTP homologation issues are better under control. However, let me remind you of the WLTP base effect from the prior year that boosted the improvement. The return on sales of 4.8% compared to 3.7% last year. Product mix and pricing compensated negative exchange rates.

Audi reported an operating profit of EUR 3.2 billion compared to EUR 3.7 billion in the prior year. WLTP related lower volume, higher ramp-up and run out costs, investments in new products and technologies and higher personnel expenses dampened the result. On the other hand, mix improvements and product cost improvements contributed positively. ŠKODA came in with operating earnings of nearly EUR 1.2 billion, slightly above the prior year. Negative FX effect and investments in new products could be more than compensated by volume mix and pricing improvements.

At around EUR 0.2 billion, earnings at SEAT improved slightly on account of volume increases, mix and price improvements. However, some cost increases impacted negatively. Bentley's operating result stayed in the black zone at EUR 65 million. Volume, mix, cost improvements and currency contributed positively. Porsche Automotive delivered an operating profit before special items of EUR 3.2 billion. Volume and the better mix compensated for negative currency impacts and cost increases.

The Volkswagen commercial vehicles' operating profit declined substantially to around EUR 0.5 billion. Higher fixed costs and development costs for new products as well as a declining mix burdened our result. This was only partially compensated by higher volume and lower product costs. The lack of availability of certain models due to changeover of -- to WLTP since the first of September was also a challenge. Through increased volumes, a better mix and a positive FX impact, Scania was able to generate EUR 1.2 billion, significantly stronger than the prior year.

MAN commercial vehicles improved results to EUR 0.3 billion. Volumes contributed positively. However, mix, a more difficult market environment for used vehicles and higher investments in the new truck and bus generation had a negative impact. Power engineering saw operating results decline to EUR 91 million due to a continuously challenging market environment. Volkswagen Financial Services grew the business and improved the operating earnings to slightly more than EUR 2 billion, with positive exchange rates also contributing. The Full Financial Services division also increased earnings to EUR 2.2 billion.

The other line came in at around minus EUR 0.4 billion. As you know, this position consists of the elimination of intercompany profits as well as the earnings from nonbrand companies, such as Porsche Salzburg and PPA cost allocation. Please be aware that the swing related to commodity hedging is also reflected in this line. There's no change in the principle. Volatility in this line and will be very difficult to forecast and reflects the global nature of our business as well as the cross supply of components and vehicles between our brands.

Let's now take a closer look at the underlying automotive net cash flow. Net cash after 9 months, including diesel payments and M&A activities, came in at EUR 8.6 billion, showing our strong operational performance. Cash outflows for diesel amounted to EUR 0.3 billion in the third quarter, bringing the year-to-date diesel related cash outflow to EUR 1.2 billion. The cash paid out for M&A activities of EUR 0.6 billion relates mainly to our stake in wireless car that we already acquired in Q1 as well as the announced acquisition of shares in Northvolt as part of our long-term battery cell strategy. Focusing on the underlying net cash generation, this came to EUR 10.4 billion, around EUR 3.4 billion ahead of where we were this time last year.

This is a decent achievement and above our target of at least EUR 9 billion of underlying automotive net cash flow for the full year. However, please be reminded again that due to seasonality there's a lot of CapEx and R&D coming in Q4. Furthermore, since the extent of the decline in some markets is still open, more pressure has been added to keeping inventories on track.

In relation to working capital management and particularly inventories, we've moved the needle in the right direction compared to Q2. However, the core message here is that our inventories are still too high, relative to ideal stock levels. By that, I refer to those stock held in our factories and our fully consolidated national sales companies. Yes, we have adjusted production downwards to the relevant extent with various measures. Nonetheless, we did not anticipate the full extent and pace of the downward trending markets. Therefore, we are somewhat fighting an uphill battle. At the same time, you can favor the trade -- you know fairly well that trade relations and tariff uncertainties do warrant in certain cases relevant precautionary measures in stock management. However, rest assured that in each CFO call, I make it crystal clear that ideal stock KPIs for year-end remain a top priority for everybody.

Moving on to CapEx and R&D. CapEx at EUR 8.2 billion corresponds to a CapEx ratio of 5.2%. Despite the inevitable CapEx increase in Q4, we are still striving to stay within our 6.5% to 7% full year guidance. Total research and development costs, or cash spend, came in above prior year at EUR 10.7 billion versus EUR 9.9 billion in the prior year, but not a surprise as we work hard to realize our e-mobility strategy.

Capitalized development costs came in at EUR 3.7 billion versus EUR 3.5 billion last year. The capitalization rate at the end of Q3 was around 34%, approximately 1% lower than in the prior year. As we have consistently commented, strict discipline in our investments and development processes is vital. We are not yet there, and 2019 is a crucial year to bring improved engines and new bets to market in order to meet our CO2 goals.

Automotive net liquidity ended at close to EUR 20 billion, roughly EUR 4 billion higher than at the end of H1 this year. We have received Chinese dividends of EUR 1.4 billion so far this year. And as mentioned, the outstanding amount is expected in Q4.

As you are already aware, the change in accounting for leasing with an effect of EUR 5.3 billion negatively impacted our net liquidity in the Automotive division. In relation to MAN minorities, the end of the domination agreement led to further payments of close to EUR 1.1 billion, shown already in the first quarter. Dividends of EUR 2.4 billion were paid out to our shareholders in Q2.

The key driver in Q3, in addition to our strong underlying cash generation, was the proceeds received from the TRATON IPO in the magnitude of EUR 1.4 billion.

Now getting to our final chart. While we are still growing in market share, it can't be denied that markets are contracting at a faster pace than assumed. Therefore, as we approach year-end, we see it as necessary to adjust our guidance slightly downwards for deliveries. However, we will stick to our original guidance for both revenue and the operating return on sales margin, before special items for the full year. We are currently in the final throws of tough discussions around the 5-year planning growth. The ramp-up for e-mobility and digitalization, combined with the challenge of CO2 compliance, already kicking in, in 2020, are the industry pain points that also we have to face up to. Furthermore, the unsettling global economic framework conditions have certainly not gone away. Global markets are cooling down. Brexit uncertainty seems never-ending. Risks of U.S. tariffs with China and Europe are still threatening. On top of that, the increased geopolitical tensions in The Middle East is also concerning.

To wrap up for today, we are still confident for our Holistic Strategy 2025 Plus continues to give us a strong backbone to keep on track, and our commitment to create value will remain unchanged. On the 18th of November, we will hold our planning round conference call with both Herbert Diess and I in the hot seats. And as always, you are welcome to participate.

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Helen Beckermann, Volkswagen AG - Senior IR Manager [6]

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Thank you, Frank. Thank you, Christian. We will now take questions from investors and analysts.

Operator, over to you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We will take our first question from Patrick Hummel from UBS.

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Patrick Hummel, UBS Investment Bank, Research Division - Executive Director and Lead Analyst of European Autos [2]

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My first question on free cash flow. With a more near-term focus, you did highlight, of course, that the lion's share of CapEx and R&D is coming in the fourth quarter, but is there any reason why Q4 free cash flow would not be in positive territory, bearing in mind the China dividend, and you're going to get the lion's share of the China dividend this year in Q4? And I would assume also some inventory reduction, helping on the working capital side. And in that context, how should we think about the dividend because it seems you comfortably exceed the EUR 9 billion free cash flow target for the year. Will we possibly see already a 30% payout this year? And second question, how are you thinking about the medium-term guidance. The 2020 targets you gave us at the CMD in 2017 are just around the corner. The market would certainly appreciate a medium-term update over and beyond the few KPIs that are out there for 2025. And more specifically, also on the CO2 topic, is there going to be like a CMD with the full year numbers? Or how are you thinking about updating the market on that?

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Frank Witter, Volkswagen AG - CFO, Head of IT & Member of Board of Management [3]

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Patrick, yes, a bunch of questions. Let me start with free cash flow. Yes, I mean, first of all, we certainly appreciate very much what we achieved so far. But you might remember how disappointed we were with the cash flow performance in Q4 last year for various reasons, which we intensively discussed. But I think you mentioned some of the relevant bits and pieces, CapEx and R&D will be pretty high in the fourth quarter. You know the seasonality. Inventories, I explained about the focus we are having more than ever on inventories. But on the other hand, to be honest, it's harder than it was in the last 2 years to predict even the near-term future, because markets seem to contract and therefore, inventory management is even more difficult. So with the experience from last year, we are certainly most cautious on that number, and you know how strongly we feel our commitment on cash flow. And with the guidance, minimum EUR 9 billion greater or equal to EUR 9 billion, our guidance gives the opportunity to exceed. But the elements I was describing and relating to are real, some of you follow also heavy-duty trucks, this is also an area where incoming orders are significantly slowing down for everybody in basically all regions in the world, particularly relevant for TRATON is obviously Europe. It's also certainly an area impacting us. So we will, obviously, continue to focus on those levers. And if we continue to exceed the EUR 9 billion, that's certainly what we are striving for. But I think the guidance is still fair and equitable from where we are. Dividend payout, I confirmed on numerous occasions, the 30% we are striving for. And supposedly, it's going to happen within the 5-year planning round cycle and not at the very end. So I think we will update you guys on the 18th of November on the state of the union in that respect, but I don't see from today's perspective, to do worse than where we were last year in terms of our aspiration level.

2020 targets, you mentioned some of that obviously related -- relates to what I said and the level of uncertainties. Part of the call on the 18th will certainly be related to the outlook, final numbers for 2020 will be posted with Q1, but we certainly will give you a better flavor where we see 2020 to end. So I hope that is addressing all of your questions.

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Patrick Hummel, UBS Investment Bank, Research Division - Executive Director and Lead Analyst of European Autos [4]

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Yes. Just 1 little follow-up. I was more referring to the medium-term planning because back in 2017 you gave us a very detailed plan for 2020. And I think the initial plan was also a strategy update in summer this year, which, I think hasn't happened. So are you planning like a bigger CMD type of event to give us a more detailed framework for the years after 2020?

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Frank Witter, Volkswagen AG - CFO, Head of IT & Member of Board of Management [5]

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I think, obviously, if we had the Capital Markets Day and at the end you have press conference, that is also an occasion. I think for the time being, we laid out the plan. I think it was appreciated when we explained the 5 pillars of the 2025 strategy and the focus and also ERR is certainly to be mentioned. So that's the way I would currently leave it. For us, it's tightening the forecasting. And obviously, with the planning round call, we will look at the guidance we gave when we posted PR 67. Some of the framework conditions have worsened, but you also know how serious we take commitments, but obviously, our guidance has and will be realistic based on what we think can be accomplished, but we will strive for the max.

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Operator [6]

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We will now take our next question from Tim Rokossa from Deutsche Bank.

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Tim Rokossa, Deutsche Bank AG, Research Division - Research Analyst [7]

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Tim Rokossa from Deutsche Bank. Frank, I'd like to follow-up on the free cash flow question from Patrick. And I know you took it very personal last year to not have met the EUR 9 billion. So completely understandable that you want to be conservative. Let's leave the CapEx element and the spending aside. When you push for working capital, you as the CFO, what do you consider to be the optimal working capital ratio for VW? And where do you think specifically on the inventory side, since you mentioned that you still see room for improvements. And also, when I look at your working capital movement in Q3, I noticed that quite a bit came from payables. Can we see this as a sign that you're stretching the payment terms for your suppliers substantially more, similar to how your French counterparties, for example, do it? And is this a sustainable way? Or was that a coincidence? And the second element of my question, Frank, maybe for you or maybe for you, Christian. The EUR 900,000 you took out of your production forecast, can you split that up by region? And is there a material difference by any of the brands?

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Frank Witter, Volkswagen AG - CFO, Head of IT & Member of Board of Management [8]

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Yes, let me start and, yes, working capital. I mean, we just yesterday in the board, discussed that even though we significantly reduced the production plan for this calendar year that even in light of the EUR 900,000, which I related earlier, which is the number for the whole group, including China, that we probably need to cut even further production for the remainder of the year. So we are obviously -- take the sales forecast very serious and want to be realistic in terms of the relevant impact on our inventory. In terms of payment terms, no, we are not touching that. There's no stretching of payment terms. And if you look into what drove working capital, obviously, significant impact from lower increase of inventories, versus to a very difficult prior year. This counts for roundabout EUR 1.8 billion. We had higher liabilities and higher provisions. And on the negative side, we also had roughly, I think, roundabout EUR 800 million change in receivables. We have an outstanding dividend receivable from China. So if you add that up, that is pretty much explaining the EUR 3.8 billion improvement year-over-year.

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Christian Dahlheim, Volkswagen AG - Head of Group Sales [9]

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Yes, Tim, let me take your question on production. I mean, I think it's relatively simple. I mean, obviously, if you look at the core region, China, which is pretty much local production, we adjust production according to the market trend which you know. Second, same holds true for Brazil, which is also mainly driven by local production. And then, obviously, given the cash impact, there's always a particular focus on the European production. As you know, the Chinese liquidity doesn't come directly into our liquidity. So of course, we took down European production pretty much across brands, as you see sales numbers. Obviously, so if you look at SEAT, as you can see, due to the phenomenal sales results, less reduction in the, say for, brand Audi. But again, let me reiterate also from the sales side, the clear focus is to manage the liquidity position at the end of the year. Given our current stock levels, I think we need to continuously adjust.

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Tim Rokossa, Deutsche Bank AG, Research Division - Research Analyst [10]

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Great. Let me maybe follow-up to the first question that we have both of you on the call. When you two discuss about the ideal working capital ratio. Frank, you don't just say to Christian, surely you have to improve that number. You may -- must have some sort of benchmark number in mind that you consider to be ideal because otherwise Christian would probably always say we need a little bit more stock than this stock. What is that number? Are you happy to share that? Or do you really just say it needs to be improved?

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Frank Witter, Volkswagen AG - CFO, Head of IT & Member of Board of Management [11]

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I mean, in absolute numbers, we are not going -- we are not in the position to share. When we talk about ideal stock level, it is about the forecast for the period thereafter. It's basically -- if you take year-end, it's about what business we do expect to be written in the first quarter and that determines the level of ideal stock we should be holding on December 31, to stick with this example. So it's not a number which is cast in stone. It is always to be updated based on the expected sales going forward. So we are obviously very closely exchanging the perspective and sometimes to -- not to disclose it, sometimes sales and finance tend to come from different angles. But at the end of the day, we are able to come to a conclusion and particularly relating to yesterday's discussion in the Board, coming that late in the year with additional production requests are a tough cookie, tough for every brand concerned. But there's no good reason not to face up to reality.

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Christian Dahlheim, Volkswagen AG - Head of Group Sales [12]

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And a few additions, Tim, if that helps your guidance. So one is, of course, in a declining sales trend your ideal stock levels or the ideal stock factors automatically go down because you see declining sales going forward. So by definition, the way we manage ideal stock, all markets and national sales companies are driven to then drive down stock. And second, we typically manage ideal stock levels in a bandwidth of plus/minus 15%, which in a more problematic market environment or a more uncertain market environment like today, we more look at a plus 5% instead of plus 15%. So maybe that helps you a bit in terms of guidance without disclosing the absolute figure.

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Operator [13]

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We will now take your next question from Arndt Ellinghorst from Evercore.

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Arndt Alexander Ellinghorst, Evercore ISI Institutional Equities, Research Division - Senior MD & Head of the Global Automotive Research [14]

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Arndt Ellinghorst from Evercore. Frank, you're doing really well on CapEx. And you're running well ahead of your 6% -- or below your 6% CapEx ratio target. But on R&D, it's actually not so great. The R&D ratio has gone up in 2018, will likely increase again this year over last year, quite a way above your 6%. As you're heading into planning around 68, and your top line assumptions have to be so much lower, what can you do to come from this elevated level down towards the 6%? That's the first question. And then, again, I'm sorry, on inventory levels, with 100 days of supply, you are still really way, way ahead of your normal levels. And I think we all understood during diesel and during WLTP, you needed more inventory, and it's not just about inventories, it's about sales and being able to print revenues and everything, we all understand that. But I would say your normalized level historically has been around 60 days -- 70 days, give or take of inventory. So if we assume that market flat line for you in the coming 2 to 3 years, what measures would be necessary to move from 100 to about 70 days? How much production would you need to take out?

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Frank Witter, Volkswagen AG - CFO, Head of IT & Member of Board of Management [15]

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Okay. And let me start. I think we guided very early, and I think pretty precisely that in 2019 on CapEx and R&D a lot needs to be accomplished, predominantly for the electrification of our fleet and digitalization of our company. So the 6.5% to 7%, we clearly positioned as tough to accomplish, but clearly a commitment on our side internally as well within the brands. And from today's perspective, we have strong reasons to assume that we stay within this corridor even though it will be at the higher end. You rightly hint to what we think strategically is the right level for the Volkswagen Group. This is 6% on CapEx and R&D. We made that our top line KPI and one of the numbers which we posted very early. And from where we sit here today, this is still what we are striving for and 2020 being the first year. We have a peak year 2019 with a lot of investments in electrification in all relevant brands. And we know that we guided that way, but we are going also to normalize going forward. It is also a significant reduction of complexity within our ICE lineup. We could talk about examples. And we did that at numerous occasions. So I don't want to repeat all of that. So more disciplined, more top line guidance from the group and more involvement in sharing and more synergetic approach is what's driving it, Arndt. At the end of the day, a clear-cut target and discipline in execution, and the Board is fully committed. We know that this is a huge task, but the 6% is what is in the box and what -- where we want to go to. In terms of inventories, obviously, we expect a significant improvement in November, in particular December, that leaves the guys, like Christian and myself, who are supposed to forecast properly, obviously in a difficult spot because if you are depending on such a short period to bring things in a better position. You have also a couple of anomalies, just to have it mentioned, you have a very early Chinese New Year. And our folks over there, together with the market forecast, expect some business being pulled forward due to this very early Chinese New Year. But this is just one or so spots. Generally speaking, the most relevant measure is adjusting production to revised forecast, and this is exactly what the company is willing to do, if needed. On the other hand, from the overall sales performance, we have opportunities. We are gaining market share in almost all regions. So we need to optimize inventories, but we also don't want to cut it too thin. But at the end of the day, we have more cutting to be done. I don't know, Christian, if there is anything to be added.

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Operator [16]

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We will take your next question from Stephen Reitman from Societe Generale.

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Stephen Michael Reitman, Societe Generale Cross Asset Research - Equity Analyst [17]

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Stephen Reitman from Societe Generale. Just a question again about production and inventory. And just to get understanding about this EUR 900,000 cut from where you were budgeting and trying to understand how much of it still has to go in the final quarter? If I look at the production numbers in your interim report, in the 9-month figures, you are down about 200,000 units or so from last year. Your unit sales, obviously, are also down, delivers to customers are down about 130,000 and you're down a bit 100,000, also roughly the same thing in terms of deliveries to dealers. So I'm just wondering, really, given the guidance at the beginning of the year was for a slight increase in the sales. You're taking almost 1 million units out of your production during the course of this year, it's quite a big cut. So I'm still trying to square all these different factors, really, because -- or this is just a very substantial reduction in the final quarter.

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Frank Witter, Volkswagen AG - CFO, Head of IT & Member of Board of Management [18]

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Stephen, there are a couple of elements coming together. Obviously, there's a point when you basically fix the budget, you obviously have developments in the previous calendar year. And basically, the actual stock level you are ending with, that has an impact. And yes, we had higher retail sales in our previous plans in the original budgets, which were quite a bit higher than the last year's number. So it's a carryover from '18. It is a starting point in the budget and the expectation you have for the full year. That is pretty much explaining the swing we have been relating to without getting lost in details by brand or region. But this is pretty much the way we look at those numbers. The one element which probably hasn't been mentioned before is, obviously, if you have a negative carryover from '18, then you also have to catch up with it.

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Christian Dahlheim, Volkswagen AG - Head of Group Sales [19]

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Just maybe to add Stephen on the Q4 outlook because you mentioned our year-to-date performance, I mean, we can -- yes, we have decreased our outlook, but we continue to believe that we can gain market share and catch up the, let's say the loses versus last year -- versus last year -- in the last quarter. I don't remember. Last year, the first 3 quarters were particularly strong, and the last quarter last year was particularly weak due to WLTP. In that sense, some production adjustment, I think you can safely assume by the end of this year, we will have adjusted production accordingly in line with sales figures.

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Stephen Michael Reitman, Societe Generale Cross Asset Research - Equity Analyst [20]

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And so just to follow-up on that. Would this guidance be a surprise you think to suppliers? Or would this already have been incorporated into the forward planning based upon information that Volkswagen has been providing to the key suppliers over the last few months?

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Frank Witter, Volkswagen AG - CFO, Head of IT & Member of Board of Management [21]

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No, I can't imagine that they are fully surprised. And I think if I look left and right in the industry compared to some other folks, we have been a pretty decent and stable factor for them.

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Operator [22]

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We will now take our next question from Michael Blank from Egerton Capital.

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Michael Blank, Egerton Capital (UK) LLP - Partner and Investment Analyst [23]

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Just 2 or 3, if I may. Can I ask Arndt's question on inventory levels in a different way. So if I benchmark back the inventory days to 5 or 6 years ago, then there currently seems to be about EUR 10 billion excess inventory level, should you not commit as part of the next planning round to normalizing that in the excess inventory over, say, the next 5 or 6 years, and therefore, boost annual cash flows by EUR 2 billion? That's one. And then secondly, you mentioned the headwinds for the business going into 2020 and we can all try to estimate and try to quantify those, but I have a hard time quantifying what the offsets are or what they could be? And you mentioned in Frankfurt that VW has the unique opportunity to offset a lot of those headwinds. Could you just say how significant, for example, the complexity reduction could be? When you talk about reducing engine gearbox variants and options by 20% or 30%, what is that in EBIT terms? And is it significant enough to offset the headwinds in 2020? And then maybe for Dahlheim a question on EVs. Looking at your launch schedule on EVs over the next few years, say, in Europe and taking IHS numbers as a benchmark, which are a bit conservative to your own assumptions, then it seems that you will have a much higher market share in EVs compared to your existing business in Europe. Do you agree with that? And do you think you can gain significant market share over a number of years with the EV rollout?

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Christian Dahlheim, Volkswagen AG - Head of Group Sales [24]

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Michael, yes, I'll start with the third question, if that's okay, because it's relatively easy to answer. Yes, absolutely, you are right. We expect a higher market share for EVs in Europe compared to our average market share. And second part of your question, yes, we are absolutely confident to gain -- achieve that market share. Why are we so confident? Because we are confident on, first of all, the range of models and the superiority of models we are bringing to the market, given the usability and the range. So a clear confirmation of your calculations and a high degree of confidence that we can achieve this.

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Operator [25]

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We will now take our next question...

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Frank Witter, Volkswagen AG - CFO, Head of IT & Member of Board of Management [26]

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No, I think I still owe Michael a couple of answers before we move on. I think in the second part, you talked about complexity reduction in engine gearbox combination, measures of that nature are certainly core elements of the profit improvement programs like the future pact we have in place at all brands. But obviously, other than that, we are rolling out. We are still in the final rollout phase of MQB, basically using that very competitive platform. And it is certainly behind some of these successes, which you can see in the individual brands results. So I think that is certainly one of the key elements in order to be successful in this tremendous transformation in our industry with the cost for ICEs increasing. And obviously, an increased share of battery electric vehicles with the level of profitability, which is not yet where ICEs are today. So this balancing act is more than anything else, depending on our ability on the profit improvement programs, using the synergies to the full extension -- to the full extent. And when we started, basically, educate our medium- and long-term plan, one of the big advantages we have, we have a lot of areas where we did not perform at benchmark level. So basically, using that potential is also supporting our current position. And I think it's probably undisputed that we are improving, but we are also fully aware that we have room left to improve further, and this is what we are building on. You mentioned EUR 10 billion excess inventory number also related to the past. I think whether EUR 10 billion is right or wrong, I don't want to assess too closely. But at the end of the day, we need to bring inventories down, but when you look at comparing today and the past, the footprint of the company, also from a regional perspective, has changed from the mix perspective. And it also always depends -- a snapshot number depends on the outlook you have for the next months in terms of sales to come. So it's a mixed bag. But it is undisputed that we have until December 31, quite a bit to do. But we have internally the organization geared up. And if the market somewhat will end up in the range where we are expecting, then we should come in at a decent inventory level, not at perfect level but at least at decent.

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Operator [27]

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We will now take our next question from George Galliers from Goldman Sachs.

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George Anthony Galliers-Pratt, Goldman Sachs Group Inc., Research Division - Equity Analyst [28]

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Firstly, just a quick housekeeping question. I think at the H1 point, you guided for diesel payments in the second half of around EUR 1 billion in Q3, obviously, you said it was EUR 300 million. Are you still expecting this total for the second half to be EUR 1 billion or is that now expected to be a bit lower?

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Frank Witter, Volkswagen AG - CFO, Head of IT & Member of Board of Management [29]

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I think for the full year, we expect the number little short of EUR 2 billion. For the -- in the first 9 months, we paid out EUR 1.2 billion year-to-date. So EUR 600 million, EUR 700 million is probably what you should think of.

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George Anthony Galliers-Pratt, Goldman Sachs Group Inc., Research Division - Equity Analyst [30]

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Okay, great. Then the second question I had was on the battery electric vehicles. So for next year, you have presented charts where you were targeting around 500,000 units in 2020. Can you just give us some idea of the split between Europe and China? And given the negative development we've seen in battery electric vehicles in China over the course of the last 3 months, do you think that, that target may lead some downward revision?

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Christian Dahlheim, Volkswagen AG - Head of Group Sales [31]

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So the guidance, as we already confirmed in Frankfurt on the roughly 500,000, is that the majority of these BEVs will be sold in Europe. Majority, meaning, obviously, a range share of above 50%. Yes, it might be that we have to adjust slightly to a bit more European level, although keep in mind that most models are country-specific. And if you look at our performance in China, admittedly, mainly on ICE cars, we continue to gain market share. So we believe that while some of the smaller brands are currently struggling in China, based on our strong brand image we're very confident that we can achieve our best shares in China in this market environment.

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George Anthony Galliers-Pratt, Goldman Sachs Group Inc., Research Division - Equity Analyst [32]

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And if I may just sneak in a final one. Lots of OEMs have discussed sort of hypothetical time lines of when they see cost parity between battery electric vehicles and internal combustion engines, but I wanted to ask you a slightly different question, given the scale of your investments in electrification. Can you give any insight into when Volkswagen will be spending more on electric-based powertrains than internal combustion engine based powertrains from a CapEx and R&D perspective? Is this a tipping point that you will pass in the coming years? Are you there already? Or is it something that's much further out?

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Frank Witter, Volkswagen AG - CFO, Head of IT & Member of Board of Management [33]

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I mean, we are definitely not yet there. That is obvious. I think in terms -- to give you at least a snapshot idea, in terms of R&D, we are probably notch higher than 20%. And on CapEx, it's still a rather smaller percentage number. So from the top of my head, I don't have that number with me. I think on the 18th we can certainly shed more light on it when we have the updated planning round numbers. But from today's perspective, certainly, on R&D, significant increase over the last 2 years, but the majority of the R&D and CapEx is still for the good old ICE world we are living off.

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Operator [34]

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We will now take your next question from Kai Mueller from Bank of America.

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Kai Alexander Mueller, BofA Merrill Lynch, Research Division - Associate and Analyst [35]

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The first one is coming back to question asked earlier in terms of your savings that you're looking at to offset your regulatory costs going into next year. Can you also maybe split out, you'd obviously talked about the measures internally, how much is it external also possibly getting better pricing from your supplies versus your internal measures? And can you give us a little sense on when those price negotiations would actually occur with regards to 2020 and maybe beyond? And then the second question would be, you've obviously benefited significantly from a strong mix impact on the SUVs across your group so far this year. It's over the 30% mark now. How do you see that progressing into next year? And can you give us a bit of color how much of your margin improvement was driven from SUVs? And how that sort of fades or progresses into 2020 and maybe 2021?

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Christian Dahlheim, Volkswagen AG - Head of Group Sales [36]

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So Kai, maybe I'll start with the SUVs here. So you're right, we have a continuously increasing trend, and we actually see that continue into 2020 across all global regions. So talking about North America, Europe and China, I would say, in about the same pace that is increasing today. And of course, this is partly driven by market, partly driven by our model mix. As you see, we, of course, launched and continue to launch significant shares of SUVs, both in Europe and in China and in the U.S. So I would say general guidance would probably develop according to market trend. Margin improvement, of course, is mainly driven by SUV, but that's probably a comment I leave to Frank.

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Frank Witter, Volkswagen AG - CFO, Head of IT & Member of Board of Management [37]

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Yes. I mean, I think I indicated in the speech that from the portion, volume mix price, the type mix contribution is, by far, the strongest. So I think this is a pretty safe bet for the rest of the year. And the way I look at our current continued rollout of attractive SUVs, I'm quite comfortable to assume that at least in 2020 type mix will be an important part of any P&L improvement year-over-year. So in that respect, we are improving in terms of our mix, but we are still not at the perfect state where we think we should be. So continued rollout is the explanation. And you related to savings, obviously, we have pricing negotiation as part of the business and ongoing, though there's not a specific date or initiative. It's something which you continuously do. Working with your suppliers, for example, in order to improve their cost situation and ideally share the benefits and the outcome of it. So there's nothing earth-shattering. I would call it, the normal negotiations and improvements we are striving for. And yes, I think we need to, and we continue to push harder to improve on the cost side because, obviously, the competitiveness of the core markets is not to be expected to ease on us. And obviously, volume pressure is also there. So it's on us to make up for the gap.

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Kai Alexander Mueller, BofA Merrill Lynch, Research Division - Associate and Analyst [38]

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And maybe just a very quick follow-up on the inventories that was mentioned earlier. Can you give us a little sense of how much you currently have increase in inventories for this possible U.K. Brexit as well as U.S. trade tariffs and maybe in terms of units or a billion number?

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Frank Witter, Volkswagen AG - CFO, Head of IT & Member of Board of Management [39]

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Obviously, for, I think, good reasons, we are not in the position to share numbers, but they are not unreasonably high. And also given the fact that some of those issues, I think are related to Brexit, who knows what happens when. And therefore, we also started to normalize things a bit. And obviously, when you relate to the tariff discussion between the United States and Europe, it is a threat, it is a risk, but we also continue to assume and hope that an equitable and fair solution can be found. And at least to give you a flavor, when we talk about the U.K., we might target 20,000 vehicles. So it's not an earth-shattering number in the greater scheme of -- to make sure that nobody misreads my statement.

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Helen Beckermann, Volkswagen AG - Senior IR Manager [40]

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Yes, friends, we still have quite a number of participants still waiting in the line, we would request you to stick to 2 questions max. Thank you.

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Operator [41]

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We will now take our next question from José Asumendi from JPMorgan.

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José Maria Asumendi, JP Morgan Chase & Co, Research Division - Head of the European Automotive Team [42]

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José Asumendi, JPMorgan. Frank, just a couple of questions, please. Christian, can you comment a little bit on the product cycle across Porsche and Audi and please also the upcoming SUV product launches in North America and Brazil, which are definitely going to help earnings momentum in the next 16 months across those 2 items, please? And the second question for Frank. There used to be a time when the group was running a bit more balanced, fixed cost versus cost savings. I'm aware of the challenges in terms of CapEx and R&D and the transition to electrification, which are all fair points. Do you see, in the coming 2 years, maybe a more balanced equity between the incremental cost savings and the incremental fixed costs, which I think will also help the earnings momentum of the company?

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Frank Witter, Volkswagen AG - CFO, Head of IT & Member of Board of Management [43]

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Yes, let me start, José. Christian will take the fun part, talking all the great products. Yes, on fixed costs, I mean, you are rightly hitting the point. Obviously, we want to bring down CapEx to the desired level, which we talked about earlier. What we also shouldn't forget, this company is under monitorship. And it is without doubt that we have to significantly improve our integrity and compliance program. Together for integrity that we have to improve processes, which also means bringing on people, but focusing on all those relevant areas to make sure that Volkswagen is going to be a better company going forward and that things like diesel are never ever going to happen again. That requires a lot of internal and external resources during this 3-year monitor process. And some of the incremental expenses in order to improve our position will probably not to be incurred going forward, but also, obviously, when you relate rightly to headcount, personnel costs, but also depreciation. So rest assured, fixed cost development is an area we all together on the Board of Management have a clear target for.

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Christian Dahlheim, Volkswagen AG - Head of Group Sales [44]

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José, your first question probably could take the next 30 minutes of this call. So I try to maybe hit the highlights. So generally speaking, I think, look, 2020, of course, is special because we will launch the first full launch of our new MAB platform. So of course, you know about the launch of the ID. We will launch ID SUV, both in the U.S. and in Europe, and we will continue to work on each one in different variants. So that's across all major levels. And then, of course, we continue to launch SUVs. Let me take 2 examples, we have a Macan face-lift in the U.S. We have the Cayenne coming up. And of course, on the electric side, not to forget the Taycan and then last but 2 more mentioning, one is, of course, the Golf that you know just had the world premiere, and despite a huge SUV trend, the Golf continues to be a phenomenal car that is well received in the market, and that we believe will continue to build the basis of Volkswagen. And last but not least, if you look at the model lineup in Brazil, we now have a successful A0 lineup, and we will continue to drive that up with an A0 CUV, so more SUV-oriented version of the A0, which especially in this region is a very growing market. So I think great mix of SUVs also in the smaller segments, particular focus, of course, in electric vehicles. And at the same time, for your numbers, high-margin SUVs that we continue to launch.

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Frank Witter, Volkswagen AG - CFO, Head of IT & Member of Board of Management [45]

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And José, I'm not sure that I mentioned it, obviously, earlier in the presentation when we talk about fixed cost year-to-date alone, we have roundabout EUR 800 million higher research and development costs going through the P&L. And when you relate to the 6% target going forward, you obviously can probably rightly assume that the absolute amount of R&D in 2020 is going to be below the 2019 number. So this is obviously also an element other than depreciation and personnel costs, I shouldn't forget. So there is some light at the end of the tunnel.

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Operator [46]

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We will now take our next question from Adam Hull from MainFirst.

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Adam Brian John Hull, MainFirst Bank AG, Research Division - MD [47]

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Two questions. One, on your Chinese JV, bringing about EUR 3.5 billion of annual free cash flow in the dividend, could you talk a little bit about your situation with regard to your SUV mix now, pricing and how orders are coming in, in China, and how you see looking into next year? Clearly, you're doing a very big beat versus the market and even more, so I presume in revenues versus units. And then secondly, on Audi, clearly, you've suffered in a big way from WLTP. Could you tell us a little bit about how incoming orders are coming in? Are you now fully able to meet the fleet demand and therefore, we should be seeing clear year-on-year rise into 2020 from the weak position you had last year in the first half?

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Christian Dahlheim, Volkswagen AG - Head of Group Sales [48]

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Adam, I'll take your second question first. For Audi, yes, we still had some impact on WLTP restricted availability first quarter of this year. But by now, we're fully able to deliver virtually all requirements. We can fully satisfy our fleet demands in all fairness, unlike last year, where, of course, you know we had a big impact. So Audi is fully on track with way above 90% of their variants available. And if you look from a fleet customers perspective, that corresponds to 100% of their needs. Your question on China, we have launched excessive SUVs across all brands last year. And as you know, we have in a declining market gained almost 1% of market share. So as much as we regret the declining market, we also look -- take that as an opportunity to maybe drive out some of the weaker competitors and actually gain -- continue to gain market share going forward.

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Adam Brian John Hull, MainFirst Bank AG, Research Division - MD [49]

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And how -- just on the SUVs. I mean, in terms of the impact in your China JV, you're gaining share one thing, but is it significantly higher margins? And to what degree are you able to get good pricing in what seems to be quite a tough market, but hopefully, I mean, is it getting a better market in terms of pricing?

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Frank Witter, Volkswagen AG - CFO, Head of IT & Member of Board of Management [50]

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Yes, I think that's a fair assumption, even though it's not -- sometimes, we tend to go a little bit overboard because if margins on SUVs are better, they tend to be weaker at the same point of time on Sedan. So since we are selling in large numbers, both, they are 2 sides to the coin. But at the very end of the day, being in the right segment, where the margins are better, with more product it is certainly substantial, it is essential to maintain the margins. Nevertheless, quite a high degree of competition out there. And particularly, FAW-VW was quite late. We just this year started to have a fair share of SUV. So -- and you could clearly see the impact positively in their performance. So overall, SUVs are helping. But on the other hand, the Sedan segments are under pressure. So that combination is once you're pleased to take also with you.

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Adam Brian John Hull, MainFirst Bank AG, Research Division - MD [51]

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And just final on Audi. I mean, just those incoming orders? I mean, are they clearly up year-on-year? Outside China, say?

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Christian Dahlheim, Volkswagen AG - Head of Group Sales [52]

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Yes. So you asked about order banks, and specifically for Audi. So how Audi order bank, both order bank and order entries, if you look at October, are up significantly versus last year. Overall, order bank is about at the same level of last year, if you look at across all brands. Not to forget last year, we had a particularly strong order bank compared to prior years.

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Operator [53]

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We will now take your next question from Angus Tweedie from Citigroup.

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Angus Vere Tweedie, Citigroup Inc, Research Division - VP & Analyst [54]

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The first question is on capitalization of R&D. I believe you had an accounting change in the third quarter on this. Can you talk us through what's changed? And do you think you could give us a run rate on an annual basis for the level of capitalization we should expect? And then the second one is just on the simplification process. I know you've talked about it a lot today, but would it be possible to get an OpEx saving, euro amount that you've managed to ring through the simplification so far?

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Frank Witter, Volkswagen AG - CFO, Head of IT & Member of Board of Management [55]

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With respect to September year-to-date, there's absolutely no accounting change. I think the question of what is to be considered as cash-generating unit is a subject matter, which we are discussing and validating. And I assume that on the 18th of September -- November, we are going to be more concrete, but no decisions at this very point of time have been taken. But it is certainly an important proof point. And it's no secret that everybody in the industry is thinking about it. So for us, important to mention year-to-date September, no change at all. I think, even if I would have one, which I don't, I think there is no simple euro dollar number I could give you because those effects -- it's a convoluted package in terms of -- yes, obviously, just to give you a couple of examples, if you take engine gearbox combination Golf 8 versus Golf 7, roughly 50% reduced number of color options, roundabout 1/3 with certainly positive impact in production, in procurement, at the end of the day, also in sales. But on the other hand, we go through WLTP, very frequent homologation issues. So it is a mixed bag with plus and minuses. And in today's environment, and given the competitiveness and also the emissions-related changes, EU 7 is just around the corner. EVAP and all those issues, second act WLTP, it is an absolute necessity to optimize the complexity and your lineup and offering in order to reach the level of profitability, which we are achieving today and forecasting for the years to come. But a simple hard coded euro number, I think there isn't actually one which could hold up and be entirely true. It is this -- these are important steps but you shoot goals and you have headwinds you fight against. So it's all of the above, not just the benefits which you can calculate, but they will never be visible entirely in your P&L.

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Helen Beckermann, Volkswagen AG - Senior IR Manager [56]

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Okay. In the interest of time, time is ticking, and we still have quite a few participants left in the line. So please focus on one question only.

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Operator [57]

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We will now take your next question from Demian Flowers from Commerzbank.

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Demian Mizupho Flowers, Commerzbank AG, Research Division - Team Head Automotive [58]

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Demian from Commerzbank. My one question is this. So Frank, we hear from the press that you've created a 7-point plan, which is all about boosting the group's market value, and there's one item on there, optimize the business portfolio, which clearly points to the idea of the structural changes in the group moving up the agenda. So you've denied that Lamborghini is up for IPO. And you said on the press call today, there's no great rush with MAN power engineering so what then is left for this agenda point. In other words, what are your priorities for tackling this concept of optimizing the business portfolio?

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Frank Witter, Volkswagen AG - CFO, Head of IT & Member of Board of Management [59]

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I mean, first of all, this program is, I think, from my perspective, a proof point that the Board of Management is not only talking about a stronger focus on the capital markets, on the share price development. And we cascaded the remuneration scheme of the Board into the Senior Management. And we want the entire management to think about improving the market value of the company. And some of the levers that they expressively address there. Obviously, there's nothing to be discussed. Today the point we made is, is actually extremely consistent with the group initiatives and our strategies that we continuously have to and will review our asset portfolio. And you know the announcement we made on power engineering, and nothing else on top of is to be announced today. But part of getting to the optimal market value for the company is obviously to put the money where it counts the most and allocate capital where a decent return is to be expected. And these are some of the key drivers, but the focus is not on asset disposals. It's an element, but it's not the most relevant driver. And we have a lot of levers, and we have a lot of opportunity, improving profitability is one of them, but also getting -- doing what we can do in order to get to multiples who are more in line with the industry was used to trade at.

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Operator [60]

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We will now take our next question from Daniel Schwarz from Crédit Suisse.

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Daniel Schwarz, Crédit Suisse AG, Research Division - Research Analyst [61]

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I have 1 question on CO2 emissions. When I look at data from the KBA, I see that Volkswagen Group emissions are consistently rising through 2019, pretty much in line with the SUV share. And for most other OEMs, we see emissions actually declining. Is that of any concern for you? Or is that fully in line with your planning regarding CO2 emissions?

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Frank Witter, Volkswagen AG - CFO, Head of IT & Member of Board of Management [62]

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I think it's -- there are a couple of developments. First of all, we all know what significant improvement needs to be accomplished going forward towards 2020. And I think we are all -- we have been made abundantly clear that only a relevant share growing over the years to come are fully electrified vehicles will get us there. Obviously, improving the CO2 performance of ICEs is another pillar. So to answer your question. No, it didn't surprise us. But on the other hand, obviously, if you have a higher share of SUVs and the lower share of diesel than you were used to, that is certainly not making the job easier, but it's also basically the explanation why we did spend in 2019 a tremendous amount of money to develop the technical features and capabilities to be CO2 compliant in 2020 and thereafter. But it is not a walk in the park. It will be a huge improvement year-over-year because we're obviously coming from fleet averages in the north of 120 grand. And therefore, a proper launch of full electric vehicles is one of the essentials. And this is why, obviously, we put a lot of emphasis, money and resources on the successful launch of the ID family in the SAIC factory. But it's a huge improvement, rightly, as you're referring to it, but we are still working under the assumption and mandate that we will be compliant, but by no means a walk in the park.

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Operator [63]

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We will now take our next question from Henning Cosman from HSBC.

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Henning Cosman, HSBC, Research Division - Analyst [64]

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It's Henning from HSBC. I just wanted to ask a question about the midterm guidance, please. And without going into the actual numbers for 2025, just to understand a little bit better conceptually, seeing that we are at a much lower base now than where we thought we would be at this point in the global market and seeing that some of these offsets for some of the challenges are falling more into the volume category, I would imagine like the platform benefits, you're also illustrating your profitability for the volume brands with and without the benefits of the CO2 for the BEVs, where the, yes, the negative share of that rather tends to fall into the volume segment, then the benefit is maybe a little bit more felt in the Audi and Porsche brands where you can -- where you can then sell more variants with bigger engines. Is it fair to say that the VW brand and the target of equal to or above 6% is maybe the most vulnerable then of the 2025 targets, if you could just discuss that conceptually a little bit, please?

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Frank Witter, Volkswagen AG - CFO, Head of IT & Member of Board of Management [65]

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I mean, by no means, nobody has the intention to walk away from the 2025 targets. The 6% margin target for brand Volkswagen Passenger car was assumed to be achieved in '22. This is, obviously, a significant improvement because, obviously, it goes back to the -- to the 1.8% starting point, in 2016. The midterm guidance, we will obviously update in our call related to planning around 68 on the 18th of November. But on that agenda, we'll not be to revise the targets for 2025. We have ample time left. In the short term, obviously, things are worsening, and it is our management responsibility and the entire management to tighten the belt and to push even harder on efficiency and improvement. What gives us comfort is the fact that in such a difficult market environment, we are gaining quite significantly market share. I mean, just in China alone, roundabout 1 percentage point. But this is not limited to China. And that speaks for the quality product that we are addressing the segments and that we are, obviously, where we have to recover from diesel slowly but surely, but it's a marathon. But generally speaking, 2025 target is not in focus. We are focusing on execution in the next 2, 3 years, which will be tough, but obviously, doable.

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Henning Cosman, HSBC, Research Division - Analyst [66]

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So may I just clarify very quickly, how you might be updating on the midterm plan without possibly changing any of the numbers for the 2025? What do you mean by that?

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Frank Witter, Volkswagen AG - CFO, Head of IT & Member of Board of Management [67]

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I mean, the focus for the planning round will be for the period 2020 till 2024. This is the 5-year period which will be addressed. The targets for 2025 were posted after the Capital Markets Day in March '17. And from today's perspective, and from what I understand today what PR 68 will look like, there's no need -- no good reason to revise those targets for 2025, but more to come, obviously, on the 18th.

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Operator [68]

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We will now take our next question from Charles Coldicott from Redburn.

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Charles Coldicott, Redburn (Europe) Limited, Research Division - Research Analyst [69]

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I just wanted to ask on CO2. Can you give us an idea of when in 2020 you expect to first be compliant with the European Emissions levels? And is it fair to assume that, that might be in the second half of the year, given that the ID doesn't start deliveries until the summer?

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Christian Dahlheim, Volkswagen AG - Head of Group Sales [70]

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I think your assumption is correct. So we will be compliant, and we will obviously be compliant as of the second half because then the ID volume will reach relevant levels.

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Operator [71]

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We'll take our final question, comes from Mike Dean from Bloomberg Intelligence.

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Michael Dean, Bloomberg Intelligence - Analyst [72]

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It's Mike Dean from Bloomberg Intelligence. I just had a follow-up question on corporate restructuring. I was just wondering, when should we expect an update of the strategy here? And following the TRATON IPO in June, has that experience changed your thinking on how best to extract shareholder value from within the group versus the view you held back in March when you presented it to us at the Capital Markets Day?

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Frank Witter, Volkswagen AG - CFO, Head of IT & Member of Board of Management [73]

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I think the TRATON IPO was a step, which I think, generally speaking, was considered to be right. Obviously, market conditions were difficult. But a line to be drawn after a number of years, and obviously, going through the cycle in the industry. We announced, and I referred to it earlier, that we are looking into alternatives for power engineering. And this is what we announced. And if there are more decisions being communicated, we will do so, but it's at this very point this is what we communicated. And -- but certainly, revisiting the asset portfolio is an ongoing management task. But generally speaking, IPO was in the cart and we executed accordingly. So other options can be thought of, but no decisions being made. And therefore, I don't want to spur up any speculation in that respect. But I think we are committed to do so to increase shareholder value. And this is what the management is focusing on, and that's what the internal communication regarding the company's market value relates to.

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Helen Beckermann, Volkswagen AG - Senior IR Manager [74]

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Okay. I think to wrap up from my side, thank you to all our participants, to my colleagues in the IR team and especially to all my internal colleagues who support us always for the event and the preparations. And yes, we've already said a lot about the 18th of November, so we're hoping for good participation there as well. If you have any questions, you can contact myself directly or any of my colleagues in the IR team. So have a good afternoon. Thank you.

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Operator [75]

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This concludes today's call. Thank you for your participation. You may now disconnect.