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Edited Transcript of VOW3.DE earnings conference call or presentation 14-Mar-17 12:00pm GMT

Thomson Reuters StreetEvents

Full Year 2016 Volkswagen AG Q&A Investor Conference

Wolfsburg Mar 14, 2017 (Thomson StreetEvents) -- Edited Transcript of Volkswagen AG earnings conference call or presentation Tuesday, March 14, 2017 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Oliver Larkin

Volkswagen AG - Group Head of IR

* Jochem Heizmann

Volkswagen AG - Functional Responsibility, China

* Frank Witter

Volkswagen AG - CFO

* Herbert Diess

Volkswagen AG - Passenger Cars

* Karlheinz Blessing

Volkswagen AG - HR and Organization

* Matthias Mueller

Volkswagen AG - Chairman and CEO

* Rupert Stadler

Volkswagen Group - CEO of Audi AG

* Hiltrud Werner

Volkswagen Group - Integrity and Legal Affairs

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Conference Call Participants

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* Tim Rokossa

Deutsche Bank - Analyst

* Stephen Reitman

Societe Generale - Analyst

* Arndt Ellinghorst

Evercore - Analyst

* Michael Tyndall

Citigroup - Analyst

* Patrick Hummel

UBS - Analyst

* Horst Schneider

HSBC - Analyst

* Charles Winston

Redburn Partners - Analyst

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Questions and Answers

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Oliver Larkin, Volkswagen AG - Group Head of IR [1]

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(Interpreted) On behalf of the investor relations team I'd like to welcome you very warmly here in Autostadt for this conference. And your questions this whole event will be webcast around the world.

This morning, Mr. Matthias Mueller and Mr. Witter spoke about the business performance of the Volkswagen Group and we are now happy to take your questions. So, who's got the first question? I think we'll start in the second row. Tim. Tim Rokossa. Tim.

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Tim Rokossa, Deutsche Bank - Analyst [2]

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(Interpreted) Tim Rokossa, Deutsche Bank. Two questions. Now, we don't know what you're going to tell us this afternoon, so I'm going to focus on Q4 and the outlook for 2017. Mr. Heizmann, last year you said that profitability in China is going to go back to normal. Now, in Q4 we saw strong volume growth in the Chinese market, driven by incentives, but profitability was slightly down. Is this a trend that you expected? And what can we expect for the next few years, especially considering your electrification goals for the market, which are margin dilutive, I would think?

And if I look at the 2017 outlook, I can see that your CapEx goal is more or less unchanged. The R&D ratio will fluctuate between 6% and 7%, so it might go down slightly. Now, to me, it seems as if you are focusing on bringing down your ratios, not absolute cost savings. Is this the right way forward? Am I right? And Mr. Diess, you spoke about absolute savings this morning. Thank you.

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Jochem Heizmann, Volkswagen AG - Functional Responsibility, China [3]

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(Interpreted) Well, first of all, let me say, very clearly, that we are still highly profitable in China, with double-digit profitability rates. So we are really extremely satisfied with the year-end result.

Now, by international standards, things will go back to normal. I think this is obvious, and we've said this before. Having said that, we still expect that will be above the international average in terms of our own profitability ratios, and our goal is clearly a double-digit goal.

Now, you mentioned Q4 in particular. Now, if you look at Q4, you have to bear in mind that there were a few special effects, special items, in particular provisions that were posted in the fourth quarter. All in all, this is something you mustn't forget when you talk about the profitability of the Chinese market, and especially in euro terms, we had negative currency effects versus the euro. On the average over last year the RMB was devalued by around 5.5%, but we are still very satisfied and highly profitable.

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Frank Witter, Volkswagen AG - CFO [4]

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(Interpreted) Okay, questions on CapEx and R&D. I'm happy to take those. Now, I'm not going to steal away the thunder from this afternoon. Let me just say two or three things. For both ratios, we've been on track that we could have kept up from the left-bottom-hand corner to the top-right-hand corner over several years. And that's not sustainable.

Now, [7%] of CapEx is spent on the product in this Company and we are changing that, but we would have destroyed capital had we eliminated existing projects, but we have stopped this trend. Plus there is CO2 compliance and the necessary upfront investments into electromobility, connectivity, autonomous driving, etc. And these are now an important element of our plan.

So, the income statement was dominated by certain items in the past, but here we've made considerable progress. We're now focusing on the importance and critical things when it comes to CO2 compliance. So this really is a major effort.

At the moment, we can't afford to bring down the absolute amounts, but we stand by those ratios and we're going to repeat that this afternoon. 6% in the 2021 timeframe for CapEx and R&D. So if you look at the sheer amount, that's a maximum of 50% of the story that we are telling.

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Oliver Larkin, Volkswagen AG - Group Head of IR [5]

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(Interpreted) Right, thank you. Stephen Reitman in the fourth row.

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Stephen Reitman, Societe Generale - Analyst [6]

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Yes, good afternoon. Stephen Reitman, Societe General in London. Looking at the -- two questions. First of all, looking at the earnings bridge and the operating results, it was marked, I think, by substantial improvement on the product costs versus fixed costs, a EUR1.4 billion delta in 2016, whereas in 2015 fixed costs and product costs were the same, EUR2.6 billion, one positive, one negative. Obviously, there were differences in volume, mix and prices. It was a positive this year, it was a negative last year. Currencies were a negative this year. They were positive last year. I'm wondering, really, you don't give us a breakdown by division, but I suspect a large part of these changes relate to Volkswagen passenger cars. So what is it going to take to get Volkswagen passenger cars' margin moving above the less than 2% margin you reported in 2016?

And my second question also relating to Volkswagen passenger cars, you alluded to the fact that you're going to reclassify or reshow the results of Volkswagen passenger cars, excluding third party brand sales. I wonder if give us an idea of what the margin of Volkswagen passenger cars would have been, on a pro forma basis, in 2016, if you had already adopted this procedure? Thank you.

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Frank Witter, Volkswagen AG - CFO [7]

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Yes, let me start with Volkswagen passenger cars and Herbert will certainly step up to the plate with me. We have two major markets where the brand is losing a tremendous amount of money. This is Brazil -- sorry. (Interpreted) So that's Brazil and the United States. They have to break even as quickly as possible. That's one of our most important challenges.

But the other issues also reflected in our pact for the future. It's about productivity, cost efficiencies, fixed costs, both in the plants, but also in the components factories. This is an action plan and this is our recipe to get Volkswagen passenger cars back on track, up to at least 4% and even more.

Now, let there be clear, Stephen, 2020 -- 4% that's our target, but we can't be satisfied with that. But we don't want to promise more than what we currently have in our plan. We are convinced, however, that once we gain momentum, and we can already see this happening, and this is also why Herbert Diess is so optimistic. Anyway, we're going to review that target and it'll be more ambitious, going forward, but the important thing is that we must be able to deliver on our promises. The whole issue of reclassification is highly complex, and we deliberately decided not to focus on that today. And to do that in Q1. Everyone needs to understand the positive and negative effects.

One thing is clear. We're not going to use conjuring tricks to improve the margin of Volkswagen passenger cars. This must be underscored, with operating measures and costs and revenue. And I think we should discuss this when we discuss the first quarter of this year, because this is a rather complicated issue.

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Herbert Diess, Volkswagen AG - Passenger Cars [8]

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Well, we'll have 30 minutes this afternoon to talk about Volkswagen, as margins are -- as far as margins are concerned. 4% or 6% seems to be relatively low. I can tell you that these figures were difficult to agree upon with the labor representatives. 4% would assume that we make dramatic progress in productivity. 25% in the German location, 7.5% this year.

The Golf should be EUR450 cheaper by 2020. The Passat (inaudible), even by EUR1,000. We're going to slash 14,000 jobs between now and 2020, so there's a lot of tension in there. And of course, this very much depends on the commitment and the willingness of all those involved to support those goals, including the works council. We negotiated about a 6% target with the works council for a very long time. This is really the limit of what they can accept.

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Oliver Larkin, Volkswagen AG - Group Head of IR [9]

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(Interpreted) All right. Thank you. Arndt Ellinghorst.

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Arndt Ellinghorst, Evercore - Analyst [10]

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(Interpreted) Yes, Arndt Ellinghorst, Evercore. Two questions. First of all, the new remuneration system, and secondly, your cost ratios. You have a new remuneration system in place. It will be introduced this year for the Board of Management. Can you give us more details on the share component? How high can it be, exactly? And at what point in time can they be exercised, these options? Is this a linear function and how significant can the share apportioned be one of these days?

Secondly, the cost ratios, in the annual report you show material and personnel costs on an annual basis. It's surprising to see that for the first time since 2008 material costs have gone down for the Group, EUR240 billion, approximately. The ratio went down to a little more than 75%. Can you tell us the underlying reasons? And what additional potential there is in material costs over the next few years because this is certainly the biggest cost driver.

And in terms of personnel, or staff costs, well, there have been no changes, as expected. 70% of sales is still too high. What ratio is your target for the Group in terms of personnel costs? Thank you.

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Karlheinz Blessing, Volkswagen AG - HR and Organization [11]

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(Interpreted) Well, I don't want to answer your question in detail today, because this would take a lot of time and the answer is very complex. You will find more information in the annual report in the remuneration section. Let me tell you this, at this point. This is very much based on what the German corporate governance code demands and this is also what other DAX companies are doing.

So there's an annual component that very much depends on profitability levels and personal or individual performance. Then there is a medium-term component, which is based on certain indicators. And then there is the component that you mentioned, a component where shares are issued at a certain price, 30 days prior to the effective date.

And in this option system there's also a deferral component, so the payout starts three years later and everything is based on individual years, so not the entire sum is made available immediately. And there's also a cap. These are the figures that we've already announced. There are caps for each and every component and there's also an overall cap.

Should the stock price development -- I think this is what the Supervisory Board had in mind -- should the share price skyrocket, and then it would be difficult for us to explain the high level of remuneration. That's why we have this overall cap.

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Arndt Ellinghorst, Evercore - Analyst [12]

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(Interpreted) Mr. Blessing, a follow-up question, if I may. I think, for management, it's always a stretch -- a difficult situation, to get those shares, and it can be a significant portion. Why is it so difficult for the Company to give us more details as to why -- so when these options will materialize and become effective?

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Karlheinz Blessing, Volkswagen AG - HR and Organization [13]

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(Interpreted) Well, I can't give you this information off the top of my head. I'll get back to you in due course.

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Unidentified Company Representative [14]

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(Interpreted) And there was also a question on material costs. Did I understand your questions correctly? That you said that since 2018 that -- 2008, material costs have gone down for the first time? You have to make a distinction between material and product costs. And material costs are very much based on type of vehicles you build and also on revenue levels.

(technical difficulty)

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Unidentified Company Representative [15]

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Well, I'd rather talk about product costs, rather than material costs. Product costs have gone down this year, because we saw the launch of the MQB. And this is more useful as volume increases. That's number one.

Secondly, especially for the Volkswagen brand, with Mr. Diess, we decided to do design to cost. That's a new process aimed at improving our competitiveness. And this happened for the first time in 2016. We can now see the results. But in fact, over the past few years, product costs have gone down, continuously, with a very successful year in 2016 in particular.

In future, we're going to reduce product costs further, but you will understand that I'm not going to answer this question because I don't want to disclose information to my competitors on how I negotiate with my suppliers.

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Unidentified Company Representative [16]

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(Interpreted) Let's follow up, Arndt. As far as material costs are concerned, in 2015 we had warranty effects also, as part of the cost of materials that were related to the diesel issue. Then when it comes to labor costs, there's another cost, especially at Volkswagen, we discussed a lot about staff numbers.

Now, we said that we are going to downsize the labor force over time, socially responsibly, so we're going to use early retirement schemes, existing schemes that we have used in the past, to make sure that we're not going to see major improvements overnight. Certainly not for VW passenger cars. So that's that.

Product costs and material costs. Let me get this one straight. Earlier, a number of events we talked about the MQB system. We're convinced, unequivocally, that MQB is an asset for us, not a liability. At the same time, whenever we talk about being disciplined and reducing the number of derivatives, the advantages of the MQB could be more significant than they are now.

In late 2016 only 30% of our vehicles were on the MQB. Now obviously, MQB is a good money-maker. You can see that what SKODA is doing, about 50% or a little more than 50% of their vehicles are based on the MQB platform. In other word, the MQB leads to tangible economic benefits, but ideally, they should be larger, of course, if we had been disciplined enough when we started to roll out the MQB matrix, but I think it's still an important point to make.

Now, when we're going to roll out the system we're going to see 40% by the end of 2017. The MQB is still an optimization tool. Continues to be. Thank you very much.

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Oliver Larkin, Volkswagen AG - Group Head of IR [17]

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(Interpreted) Let's go to Michael Tyndall. Row number five, please.

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Michael Tyndall, Citigroup - Analyst [18]

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Thanks. It's Michael Tyndall from Citigroup. I'm over here.

Just looking at page 144 of your annual report, CO2 emissions for you in Europe only improved by one gram in 2016, which is a somewhat disappointing result, given the improvements you've made in recent years. What's driving that? Is that a function of mix? Is that a function of diesel penetration going down? Is this just a temporary or is there an issue there, where you really need to push on zero emission vehicles, to actually get to where you need to be in 2010- 2021?

And then the second question, with regards to the review of the components business, can we just get a sense of what the timeline is here, in terms of potential changes that might come out of that? And is it feasible that you might actually think about selling your parts to other OEMs? I know that we mentioned FCA earlier today, and realize you're not talking to them at the moment, but is there scope within that review to open up your parts bin to other car-makers? Thanks.

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Oliver Larkin, Volkswagen AG - Group Head of IR [19]

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(Interpreted) Mr. Mueller, would that be for you?

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Matthias Mueller, Volkswagen AG - Chairman and CEO [20]

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(Interpreted) Well, the fact when it comes to CO2 emissions, that's certainly right, and you've done a correct analysis. That is first and foremost related to our mix, the vehicle trim levels i.e. the vehicle models that we're selling. It is true also that over the model generations, we have always been in a position in the past to reduce the C02 emissions by about 15% for each generation. And this is going to be the case going forward with our new models. But because of the mix and the specifications of how our vehicles are, being ordered it's not something that we can influence. But I think from what I said earlier today you will have understood that carbon emissions and also nitric oxide is very high on our agenda, because it's in fact a determining sustainability of this business.

As far as components is concerned, well we are going to take some first decisions later on this year. Do not expect any revolutions here, because there will be two or three phases of reorganization bearing in mind also the needs of every stakeholder involved. And these stakeholders, of course, are our Group brands that are involved in that process. Now whether or not we are going to take this transformation into a third-party business is not a decision we have taken yet.

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Oliver Larkin, Volkswagen AG - Group Head of IR [21]

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(Interpreted). Patrick Hummel, second row please.

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Patrick Hummel, UBS - Analyst [22]

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(Interpreted). I'm Patrick Hummel from UBS. My first question is for Mr. Stadler. In the fourth quarter at Audi, you made a relatively weak margin of only just about 6%. And I would assume that major share of the results effect is related to the ramp up of the new plant in Mexico. Could you tell us whether there are any other effects relating to that? Any facts related to the underlying profitability that we might expect in the coming quarters. And how quick will we be up with the ramp up curve in Mexico? And how quick then will Audi be back in its corridor of the margin where it had been before, margins might have been before?

Second question is for Mr. Witter, your guidance for 2017. You earlier talked about an adjustment to Group operating profit margin of 6.7% for last year. Now 6% to 7% is your guidance for 2017. Perhaps you could help us out here. As far as that bridge to the operating result year on year is concerned I would assume that your volume effect, because 4% of growth you said is going to be positive, and there should be more positive effects of an increased MQB penetration in your vehicles.

Could you also give us some other cost drivers, say fixed cost, FX? How do we understand this situation? Why haven't you aggressively, more aggressively provided a guidance for this year to come for 2017? And just briefly for the sake of clarification what were the actually diesel related outflows in 2016, cash outflows out of the Company?

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Rupert Stadler, Volkswagen Group - CEO of Audi AG [23]

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(Interpreted). You're right, the fourth quarter of last year but logically we have seen the launch of the our Mexican operations and we had to digest that. We are missing sales, but we still have the upfront costs of that plant and that is reflected in our bottom line of course.

And there's a number of effects related to the model portfolio, the A5 sportback, the A5 convertible, which also has an impact on the bottom line. And in the fourth quarter, we had a special depreciation and amortization on Brazil that we did for commercial prudence. And that is also part of the fourth quarter result.

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Frank Witter, Volkswagen AG - CFO [24]

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(Interpreted). No, no special items were related to diesel and to [Carter] and not Brazil. And we are still in the corridor between 8% and 10%. This is where we will be at home and this is not changing.

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Unidentified Company Representative [25]

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(Interpreted). Good, okay let's move over to the guidance for 2017. I think I should focus, as you have rightly just said, focus on the operating return 6% to 7%. And I'm specifically not talking about special items here. But diesel, the diesel issue as we speak today is not resolved fully in the marketplace. In other words, we have to accept there are some markets that also for VW were in the standard operating business we have quite some headwind and therefore unfortunately we are losing market shares.

We said this is not something that we are going to compensate with huge amounts of money. And therefore, there will be some effects here and there. And we are not going to be enthusiastic about it, but we are not going to give up our strategy. But it's more than just special items mind you. And therefore for 2017 and our operating business we have to realize there's some resistance that we have to work against.

The 6% to 7% and some of you would call that a conservative assumption, well, there could be a number of factors that will help us, might help us to do a little better. We've said before how foreign exchange rates have been a problem in 2016, more than EUR5 billion in turnover and EUR1 billion in the results. And we hope things will brighten up here on current exchange rates. But it's probably premature to call [a clear roll].

When it comes to product cost savings we will -- more progress I think. And the rollout of the MQB vehicles will also help us. The minimum objective obviously is that the product cost optimization will compensate for the increase in fixed cost. And hopefully even better than that volume/mix/prices could be also a positive impact. But what is still largely unknown is FX and how these operating problems relating to the diesel issue will be around to stay in 2017 and will overstretch us. So that was a 6% to 7% in 2016 before special items. We've had a reasonable result given the current situation. But the operating challenges are not over, come into 2017.

And the cash flow, outflow of the diesel issue, about EUR3 billion that were related to 2016 in terms of cash outflow. As far as the outlook for 2017 is concerned, it's going to be a double-digit amount in billions. And then for 2018/2019, there is the remainder of that. But 2017 is the disbursement year for the diesel issue.

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Oliver Larkin, Volkswagen AG - Group Head of IR [26]

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(Interpreted). Okay now we switch to Horst Schneider, row number four please.

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Horst Schneider, HSBC - Analyst [27]

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(Interpreted). Two questions please, one on China. Earlier this year we've seen quite a significant weakness of their market. Maybe it was VW related, for Audi it was home-grown problems I should say. Now it has been reflected in your guidance therefore once again for this year when it comes to China can we expect growing sales and a proportionate EBIT increase. And can we perhaps hear something for the 2017 dividend out of China?

And then second question on net liquidity. At the end of quarter, four we were EUR27 billion in amount of business and a double-digit outflow is expected this year, just said. Can you make sure from what you know today that we will be above the minimum EUR20 billion of net liquidity for this year?

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Unidentified Company Representative [28]

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(Interpreted). Now your question on the overall year 2017 perhaps the first two months. What we have seen in the vehicle market is an impact of reduced tax incentives for vehicles up to 1.6 liter engines. Because in the second quarter of last year we have seen growth rates of clearly above 20% in that market, related to the overall year 18% of growth. No one had expected that for the entire year. We didn't expect it either. So therefore, we've been performing really well.

The first two months of this year are -- it will -- the result of early purchases that people made last year rather than this. And we would assume that in the second quarter of this year the situation is going to consolidate again. Now overall for the rest of the year of 2017 we would assume a growth rate to the tune of 4% to 5%. And when it comes to the Volkswagen Group, our assumption will be the same growth dynamic as the overall market.

In terms of dividends, last year's result was in the same order of magnitude as it was in 2015. In other words, the dividend, which are distributed in 2017 for the preceding fiscal year, would be expected also in the tune of that same amount.

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Horst Schneider, HSBC - Analyst [29]

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(Interpreted). Okay. I also had a question on net liquidity.

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Unidentified Company Representative [30]

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(Interpreted). It might be foreseeable that we are going to fall below the EUR20 billion temporarily in 2017. However, we are going to have a robust double-digit billion euro amount in the automotive division at all times during 2017. You will have gathered from our previous statements that we will make sure that we go as quickly as possible up to the minimum requirement of EUR20 billion. And I think more elements and details we will share with you later on today.

There is no doubt whatsoever when it comes to growth liquidity we have still many unused alternatives that have not been utilized. So therefore the payments due will be shouldered by us without any problem. And I told earlier the journalist that we do not assume that the EUR20 billion credit line will be extended. It will become mature in June this year. And we are quite confident that also un-securitized bonds can also be placed again by us. But a number of leading issues that have to be taken care of first, because in the information memoranda we have to specify exactly the risks present. And we are quite confident we are close to re-entering that market in due course.

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Unidentified Company Representative [31]

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(Interpreted). Thank you very much. And on it's with [Dr. Hurd] second row please.

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Unidentified Audience Member [32]

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Thanks very much. A couple of questions on so called soft topics. The Jones Day Report seem to suggest quite quickly that it was wrongdoing of a significant number of people including senior executives. It suggested some cultural failings when concerns were raised. I think investors are slight underwhelmed about the lack of progress, tangible progress on culture and integrity. All we've heard today is really that the subject moved onto a new management board member. Have you actually carried out a systematic analysis, what went wrong, why, what role culture played?

In the UK the vote of independent person undertaking such a review we don't have -- we haven't seen any evidence here of outsiders involved in that work. And it would be really helpful if you could be a little bit more specific what's planned, relevant action, measurable objectives also probably explain what will success look like. I can just say for the investors we represent this is extremely underwhelming after more than a year after the crisis emerging. And you just need to better. Thank you.

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Unidentified Company Representative [33]

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(Interpreted). Okay, giving his microphone to [rau Werner. Mr. Mueller will take over.

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Matthias Mueller, Volkswagen AG - Chairman and CEO [34]

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(Interpreted). I must say I'm a bit surprised by how you evaluate what we have done. We do assume that we have been examined by a neutral party. Jones Day for more than one year has investigated this matter. Millions of pages of paper have been analyzed. Many interviews have been conducted. Materials have been submitted to the Prosecutors Office both in Braunschweig and to the authorities in the United States.

And I think you mean the Statement of Facts when we talk about the Jones Day report. It has 22 pages of which describes the situation. And earlier than that in December 2015 we started an internal audit, an examination of that matter and we have followed up from there.

It is also true that our risk management compliance and governance processes for more than a year now have been reviewed intensely so. And from that time onwards the position on the Board of Management on Legal Affairs and Integrity has come into existence, headed by Christine Hohmann-Dennhardt first and now succeeded by Hiltrud Werner.

And you also will know that we will be getting a monitor who will start take up work within our organization. And we are going to partner with them to develop a number of programs going forward that will help us to optimize operations within Volkswagen. So your criticism that you've voiced is implausible to me, sorry.

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Hiltrud Werner, Volkswagen Group - Integrity and Legal Affairs [35]

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(Interpreted). Perhaps I can add that in fact we've done a lot to improve integrity within the Company. There was an in-depth communication campaign involving all our employees. We conduct live chats with our employees. And there was also a campaign at the all-employee meeting. There is also a letterbox. Then there is the sounding board program. This is a central measure of our integrity program in close cooperation between (inaudible) management and the workforce. There are ambassadors and voluntary supporters from amongst our employees.

Furthermore, integrity is also now part of the hiring processes when it comes to selecting and hiring new personnel. What this means, for instance, that this is also involved when it comes to promotions or when new managers need to be appointed for the first time to the Group of Management. So there is a central integrity management process and we also discuss this with the brands and the subsidiaries to roll out this program also across these units.

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Oliver Larkin, Volkswagen AG - Group Head of IR [36]

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(Interpreted). Would you please stick to the agenda? And last question by Charles Winston. And then we'll move onto the Capital Markets Day. Charles?

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Charles Winston, Redburn Partners - Analyst [37]

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Charles Winston from Redburn. Thanks for taking my questions. Could I just follow up on Arndt's question and then actually focus on raw materials. Obviously, commodity prices in the past couple of years have fallen quite a bit. I understand you hedge. But could you give us some guidance as to the impact of what raw mats would have done last year and perhaps what any delayed impact we might see in 2017.

And then just also referring back to the EBIT bridge, it looks as though revenues volume/ price/mix only added about EUR200 million to EBIT in the fourth quarter. But it was a pretty powerful quarter in terms of revenues. I think revenue was up about 8%. In other words, the drop-through from revenue growth to profit growth seems very limited. And I was just wondering if you could perhaps explain that a little bit, as to what was the missing item there. Thank you very much.

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Unidentified Company Representative [38]

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We'll start with raw materials shall we, material costs?

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Unidentified Company Representative [39]

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(Interpreted). Shall we take raw materials first?

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Unidentified Company Representative [40]

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(Interpreted). Well, yes, raw material, here we only hedge only the stock exchange-listed materials, such as aluminum. All the other raw materials such as steel, rubber, etc. are negotiated on a continuous basis with our suppliers. It is right that over the past few years, steel prices in particular have fallen significantly due to the drop in iron ore and coke coal. It seems as this after Q3 2016 this has changed slightly. We are still monitoring the developments. But we are in close contact with our contacts, but we only hedge aluminum because that's traded on the stock exchange.

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Unidentified Company Representative [41]

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With respect to Q4, (Interpreted). Ah yes in English, Charles, we've had conversations on this before. I'm very careful when it comes at looking individual quarters and overemphasizing them in particular. In Q4, we eliminated inter-company profits. And that's an important part of our business.

So the interpretation of the fourth quarter is not really anything that's outstanding or special. There are always differences from quarter to quarter, especially in the fourth quarter. And you always have to put things into context. As far as I am concerned this is a normal or was a normal fourth quarter. Also in terms of CapEx in Q4, there was more CapEx than in the other quarters.

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Unidentified Company Representative [42]

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(Interpreted). Well unfortunately, we'll have to wind up. Thank you very much for your questions. And thanks to the Board of Management for its answers.

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Oliver Larkin, Volkswagen AG - Group Head of IR [43]

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The investor conference is now closed. We start again at 2:00 pm German time in the neighboring Volkswagen commercial vehicles pavilion. For the participants, here in Wolfsburg, please collect all your belongings and join us just a short walk away. For the participants on the webcast now is your chance to grab a coffee and we will see you in just a few minutes. Thank you. And for now, auf wiedersehen.

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Editor [44]

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Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.