Oliver Larkin – Senior Investor Relations Manager Hans Dieter Potsch – Chief Financial Officer, Head of Controlling & Accounting and Member of Board of Management Christian Klingler – Head of Sales & Marketing and Member of Board of Management

Horst Schneider – HSBC Jose Asumendi – JPMorgan Stephen Reitman – Societe Generale Kristina Church – Barclays Stuart Pearson – Exane BNP Arndt Ellinghorst – Evercore Fraser Hill – BofA Merrill Lynch Charles Winston – Redburn Partners Adam Hull – Berenberg Philippe Houchois – UBS Alexander Haissl – Credit Suisse Christopher Rouault – Bloomberg Chris Bryant – Financial Times

Good day, ladies and gentlemen, and welcome to Volkswagen AG Half Yearly Report Live Audio Webcast and Conference Call. For your information, today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Oliver Larkin. Please go ahead.

Thank you. Ladies and gentlemen, welcome to Volkswagen's conference call on the results for the period January to June 2015, based on the half yearly report we published this morning. For today's conference call, I am joined by Hans Dieter Potsch, member of the Board of Management, Volkswagen AG, responsible for Finance and controlling; and the member of the Board of Management Volkswagen AG responsible for group sales and marketing, Christian Klingler. You can follow today's webcast via our website, where you will also find the charts available for you to download. As usual, following the presentations, we will first take questions from analysts and ensure there is enough time later for questions from journalists. Let me now hand you over to Mr. Potsch.

Thank you, and a warm welcome from my side to those of you joining this call. Our sales performance in the first half of 2015 has continued to be characterized on the one hand by an improvement in Western Europe and on the other hand the situation in Russia, South America and literally also in China has become increasingly difficult. While vehicle sales declined by 2% in the first half, sales revenue continued to grow strongly in the second quarter building on the strength of the first three months supported by positive exchange rates and mix effects. Operating profit before special items increased robustly by 13% for the first half of the year with an operating margin of 6.4%. restructuring measures at MAN, which we are showing separately to aid [ph] comparability of underlying earnings, reduced the operating profit flatly so that we remain at a 6.3% margin as last year, but on notably higher revenues. It should always be recalled that our sales in China have somewhat limited impact on the operating result through imports and part sales as the majority of the sales was in the market and the associated earnings are included through the equity accounting within our financial result. However, the notable slowdown in the Chinese market in June as well as divergent growth between the different market segments over the last month has led this imprint on our results. Despite this, we were able to grow the equity result slightly above a record first half 2014, benefitting from the euro renminbi exchange rate movement versus last year. The valuation of derivatives which we will go into more detail later, drove the overall financial result lower. Consequently, profit before tax came in 1.5% down at EUR7.7 billion. Strong cash flow also saw the receipt of the major portion of dividends from the Chinese joint ventures and the outflow of dividends to our own shareholders in the quarter, in combination with a hybrid note issued earlier this year resulted in a robust balance sheet to support future growth. To sum up, remain on track both with regards to our shorter term earnings guidance for 2015 and supported by the accelerating results from our future tax program, our longer term view out to 2018. Further details on the financial results will follow in a few moments after Mr. Klingler has taken you through the market context and our sales performance.

So, ladies and gentlemen, I also would like to extend a warm welcome to this conference call and present the first half year sales result for 2015. The following overview shows the development of the worldwide car market and Volkswagen Group deliveries to customers, of our passenger car brands in comparison to the previous year. The growth in the global car market has slowed down further in recent months resulting in a growth rate of 2.6% for the first half of 2015. Despite the positive developments in Western Europe and the United States, the political and economic difficulties in emerging markets such as Russia, Brazil and the more recent slowdown in China continued to adversely affect worldwide growth. The Russian economy is facing the effects of the high volatility of the ruble, the low oil price and the ongoing sanctions, which has a negative impact on the car market. In Brazil, mounting inflation and rising interest rates led to a market downturn. There are currently no indications that we will see substantial improvements in the economic and political situation in these markets for the remainder of the year. In China, the economy is entering the stage of the so called new normal. This economic slowdown and a volatile stock market provide an uncertain environment. The market is at a turning point with segment shifts towards low price segments and towards less developed rural areas. The level of competition has become much more intense too. With an ongoing challenging market environment, a huge level of deliveries to customers remained broadly stable compared to last year's result. Let us now move on the deliveries of the Volkswagen Group for passenger cars in comparison to the car market on a regional base in the first half of 2015. Deliveries so far were characterized by mixed regional markets trends. In the first six months, the North American car market was marked by positive stimuli from low energy prices and the improving economic situation. In particular, in the United States, pickups and SUVs continued to be high demand. The Volkswagen Group increased its deliveries in North America. Audi and Porsche again achieved favorable year-on-year gains and the Volkswagen brands also exceeded its previous year's result. In Western Europe, especially in Germany and the United Kingdom, a market increase was recorded in the period between January and June 2015. The Volkswagen Group benefited from the positive development in these important regions and shows increase in sales. In the first six months, growth in Asia Pacific slowed down compared to the previous year, especially in China growth rates of the total market declined in the course of the year and that's the negative in June for the first time for many years. The overall market situation became more tense, affected by rising competitive pressure with increasing discounts as well as a strong demand for low priced SUV and MPV models of local brands. These challenges also had an effect on deliveries of the Volkswagen Group resulting in a sales level slightly below the previous year's period. In view of continuing weak economies, in South America, the car market remains negative over the last six months. Significantly declining demand for passenger cars in Brazil, also impacted our deliveries. As one of the largest automotive manufacturers with a strong position in the market the Volkswagen Group was more severely affected by the continuing tense market conditions. However, the introduction of localized models such as the Volkswagen Jetta and the Audi A3 in this region will support the Volkswagen Group in the future. The total car market in Central and Eastern Europe continued to decrease significantly due to adverse political and economic development in Russia. Growth in other markets such as the Czech Republic could not offset the market trend in this region. Within this negative environment the Volkswagen Group performed better than the market. Sales in the rest of the world have grown compared to last year. In particular, the Volkswagen Group in Turkey achieved a double digit growth in deliveries. Next, I would like to turn to the performance of our individual brands in the first half of this year. The Volkswagen Group, including our passenger and commercial vehicle brands once again reported more than 5 million deliveries worldwide, almost on the same high level as last year. The deliveries of Volkswagen passenger cars declined by 3.9% in a tense and mixed market environment. The biggest challenges were the previously mentioned segment shifts in China with a declining addressable market for the brand as with our -- the more intense competition. Furthermore, with a strong presence in Brazil and Russia, the Volkswagen passenger car brand was more affected by the negative market trends. In the United States the brand did not fully participate in the positive development of the SUV and pickup segment. Nevertheless Volkswagen increased its deliveries in Western Europe, Mexico and Turkey. With 902,000 vehicles Audi's worldwide deliveries were almost 4% above the previous year. Strong growth was achieved by the now globally available A3 family. The brand enjoyed strong demand in United States, Germany and the United Kingdom. SKODA's worldwide deliveries increased over 4% to 544,000 units. SKODA recorded strong growth in China, the Czech Republic, Spain and Turkey. The Octavia especially contributed to this positive development. Compared to the previous year SEAT delivers growth by over 8% to 216,000 cars. This increase was mainly generated by high sales in its home market of Spain as well as in Italy and Turkey. Porsche has sold 140,000 vehicles worldwide with a strong growth rate of around 30%. The positive development in markets such as China, the United States and Germany were supported above all by the [indiscernible]. Bentley delivered 4,600 vehicles from January to June, a decline of 11.7%. The decline in luxury segment in China was a significant factor behind this development. Now, I would like to continue with the commercial vehicle brands of the Volkswagen Group. With 223,000 units from January to June 2015, Volkswagen Commercial Vehicles achieved a 2.4% increase in deliveries, despite a model change for the Transporter series and the Ducati, worldwide deliveries remained largely stable and the brand achieved significant profit in key markets such as Germany, the United Kingdom and Turkey. However, recent negative developments in Brazil and Russia left the marks on the brand's deliveries. The global truck market above 6 tons has also been affected by the strong negative market trends in Brazil and Russia, with both recording high double digit declines. In this overall challenging market, MAN sold 50,000 units worldwide and was 13.5% down in comparison to the previous year. In spite of the considerable sales increase in Western Europe, MAN could not fully compensate the significant downturn in Brazil and Russia. Scania delivered 37,000 heavy trucks and busses to customers in the period to June; a decrease of 3.7%. The increase of deliveries in Western Europe and the Middle East could not offset the losses in the declining markets of Brazil and Russia. The order bookings of MAN and Scania are below the previous year, in the first half of 2015 in the context of a continued tense truck and bus market. Underlying revenues in Power Engineering at MAN came in at $1.8 billion which is 11% above the previous year level. Now, I would like to introduce our latest product highlights which will strengthen our market position. With the newly developed Gran Santana introduced to the Chinese market this June, Volkswagen targets new customers. The newest member of the Santana line-up inherits the Santana's reputation for durability and quality, while adding the dynamic contours of a hatchback and the practicality of a station wagon. Launched just last month from the market, the new SKODA Superb is driving the brand forward with expressive modern design and its best in class roominess, with top comfort, impressive low emissions, innovative connectivity and typically SKODA simply clever details, the brand's flagship will attract new private and business customers. The new Ibiza which will arrive at dealers in late summer 2015 will further support SEAT's current momentum; new engines, additional safety systems and above all, a completely new line-up of connectivity and infotainment, make the Ibiza family one of the best offerings in its class. The sixth generation of the successful Transporter model series from Volkswagen Commercial Vehicles launched this month is packed with new features for better safety, improved comfort and convenience. The new Transporter range offers greater driving dynamics in combination with improved fuel economy. With its private customer model version's Multivan and California as well as the five business body types of transporter, the brand fulfils all individual customers' needs.

Thank you, Mr. Klingler. Let's turn back now to Mr. Potsch for a more detailed look at our financial performance.

So, let's start with our group performance before moving on to discuss our brands. Over the first six months of 2015 revenue for the Volkswagen Group was up strongly to almost EUR109 billion, an increase of 10.1% of which exchange rates contributed around one-third, with higher mix and a good performance from our financing activities making up the remainder. Operating profit for the Group was up 13% at around EUR7 billion before special items, with operating margin of 6.4%. Restructuring costs at MAN of EUR170 million, only had a light dampening effect on the overall earnings growth, which came in at a net EUR6.8 billion operating profit with a net margin of 6.3% flat year-on-year on notably higher revenue. The passenger cars division reported a 6.9% margin near the top of the guidance range for the year. Within our financial results, earnings consolidated at equity, mainly the Chinese joint ventures came in at EUR2.2 billion slightly above the same period last year. The proportionate operating earnings of the Chinese joint ventures also grew slightly. The other financial result recorded sharply negative movement. This is primarily due to the market to market of derivatives in our foreign currency hedging portfolio. Allow me to spend a minute, explaining the details behind this. For the purposes of hedge accounting, following the IAS 39 rule book, the evaluation of our hedging contract is split into two components, a kind of intrinsic value, which is recorded in the other comprehensive income and recognized within the operating result at maturity and an interest rate component recorded and recognized in the other financial result. The interest rate component of course is quite volatile at times of sharp movements in euro rates as we have seen recently, particularly versus renminbi rates. However ex the maturity of a given hedging contract the cumulative impact of the interest rate component is close to zero. Therefore, and perhaps most importantly for today's discussion, these effects sum up to a temporary negative effect in our financial result in the order of a magnitude of around EUR500 million. In summary, the overall financial result came in at EUR843 million. As a consequence Group profit before tax was a fraction below the prior year level at EUR7.7 billion and equalled a 7% return on sales. For the first six months of 2015, earnings per share were slightly down at EUR11.06 per ordinary share and EUR11.12 per preferred share as you can see in the chart on the back of the slightly lower net earnings and a higher share account. Now, let me turn back to the Group operating result performance for the first half. Over the course of the first six months, the position volume mix prices reported a plus of EUR0.1 billion, and improving model mix was the main driver as well as positive development in pricing, which offset the impact from the lower sales in Russia and Brazil as well as difficult market conditions for exports to China. A strong British pound and U.S. dollar were the main drivers behind the net gain from exchange rates of EYR0.5 billion as volumes produced in our model of toolkits continued to climb and our Future Tracks program at the Volkswagen brand in particular increasingly kicked in, product cost savings continued the upward trend with a further reduction of EUR0.7 billion in the second quarter, bringing our year to date performance to an impressive EUR1 billion, and while it would be extremely ambitious to expect us to maintain this strong momentum, be assured that we are fighting for every euro. Fixed costs, the start-up cost increased by EUR1 billion over the first six months as our investments in new products, drivetrains and factories in recent years including in capitalized research and development costs moved into the production phase and the associated depreciation charge rose. Higher market related costs were also registered. Consequently, product cost savings and fixed cost increases were in balance for the first half, a position we will strive to maintain for the balance of the year. Earnings in our Commercial Vehicles/Power Engineering division were flat before taking account of the restructuring measures at MAN. Our Financial Services division lifted operating earnings by EUR200 million. Summing up, operating profit for the first half of 2015 came in at a record EUR6.8 billion despite the challenging market conditions and the MAN restructuring charge. Let me turn to the brands in more detail, at EUR1.4 billion, an impressive increase of 41% and reporting margin of 2.7% for the first half, the Volkswagen Passenger Cars brand was able to rise above the challenges of the following markets in Russia, Brazil and now also China. Leverage from a strong European market performance and a continued renewal of the product portfolio were core drivers alongside structural cost improvements from the Future Tracks initiative as well as an increasing benefit from MQB as the share of cars on the toolkit continues to rise. SKODA continued its impressive run of sales records and strong earnings posting an operating result of more than EUR0.5 billion from January to June, for the first time, with a margin of 8.1%. Sales recovery continued with another profitable quarter with a plus of 52 million for the first half. Despite carrying the launch costs of the new Q7 the renewal of the new A4 family as well as other important model launches in 2016 including the new factory in Mexico, Audi's profit momentum continued to impress. At EUR2.9 billion with a 9.8% margin, Audi made a significant contribution to the Group's earnings. Porsche too continued to impress with an operating result of EUR1.7 billion for the first six month, alongside a margin of 15.7% on the back of continued success of the Macan model. Bentley earnings were down at EUR54 million as lower exports to China and upfront costs for new model launches held earnings back. Volkswagen Commercial Vehicles earnings were close to the prior year at EUR268 million, despite absorbing costs for the launch of the new Caddy and the next generation Transporter. Scania's earning's up slightly at EUR503 million, proved resilient in the face of significant falls in the Brazilian and Russian markets. MAN's earnings at EUR185 million before restructuring costs, reflect the sharp downturn in the Russian and Brazilian markets. Special items line includes costs relating to the announced restructuring of MAN's European activities to improve the overall efficiency. Our decision to show these under the heading Special Items reflects feedback from investors and analysts to be able to measure the underlying earnings momentum separately to one of restructuring costs. Volkswagen Financial Services grew earnings by just under EUR200 million to EUR1 billion despite an increasing regulatory burden mainly on the back of higher volume. Let me now turn to cash flow in the automotive division. Operating cash flow for the division over the first half of the year was strongly ahead of the prior year at EUR11.6 billion, apart from a robust rise in the operating profit, this is mainly explained by the improvement in the dividend from China, the inclusion of a higher depreciation charge in the profit and loss statement which is of course not cash flow relevant and the adjustment from the other financial result, we discussed a few moments ago which is a valuation rather than a cash driven accounting entry. CapEx involved absolute terms and expressed as a ratio to automotive revenue, was up over the first half of 2015 at EUR4.7 billion and 4.9% of automotive revenue respectively, investments in our production footprint and in our product portfolio were the main drivers behind that. At EUR2.2 billion capitalized development costs were below the prior year and at 32.6%. The share of R&D costs capitalized was also down on the prior year period. In summary, net cash flow for the first six months was strong at positive EUR4.8 billion. Net liquidity in the automotive division stood at EUR21.5 billion at the end of June, boosted by the strong net cash flow generation and after considering the dividend paid out of EUR4.8 per ordinary share and EUR4.86 for each preferred share following our annual general meeting in May. To conclude today's presentation, let me now turn to our outlook for 2015, which you can read in full within our interim report. With a Group operating return of 6.4% for the first half of the year, with four special items, we've clearly demonstrated a broad brand and product portfolio at Volkswagen has enabled us to weather the storm of turbulent emerging markets and thus far, we have the brands successful models as well as the strategies and resources to succeed even in difficult market conditions. We are, as ever, cautious despite these excellent figures, as in particular, the slowdown in China picked up towards the end of the second quarter and it will take time for the market conditions to become more favorable. We remain fully committed to grow both in terms of sales revenue and operating profit, however, we have lowered our formal guidance on deliveries to customer to the level of the prior year, recognizing the framework conditions in China in particular and the weak Brazilian and Russian markets. Disciplined costs and investment management and the continuous optimization of our processes underscored by the continuing success of our Future Tracks initiative remain integral elements of the Volkswagen Group's Strategy 2018 and will be essential in the achievement of our goals.

Mr. Potsch, thank you very much. We will now take questions from analysts. We would ask that you restrict yourself to just two questions to allow everyone to ask a question in the time available.

[Operator Instructions] We will now take our first question from Horst Schneider from HSBC. Please go ahead.

Yes, good afternoon and thanks for taking my questions. So, I want to restrict myself down to the following two. So, first of all, when I look at your Others consolidation line, and also looking at your volume mix effect that you report in the presentation, I mean, it's negative for the second quarter and the Others line has become quite negative as well, maybe you can explain us a little bit more what is behind this high level of elimination and especially what can we expect going forward from this line, is that now a structural increase or they're just more one off, I mean from an external perspective, it seems as if you've just put money from Others into the Volkswagen Passenger Car brands, so maybe you can give us here some education, what has happened there? Then the second question is related to China, as you can imagine, I mean, we have seen the weak June sales rates. You mentioned, just in your final remarks that it time before the market will improve. So, I just basically want to know what you think unit sales -- how unit sales will develop now in the next few months. Was June sort of exception or can we expect a similar run rate also in the next 2, 3 months and how you would react to that in terms of pricing? Thank you.

Thank you, Horst. So, the two questions you have are referring to the Others consolidation line on the brand results and whether there is a cross impact with the Volkswagen Passenger Car brand and how this might develop in future months, and I guess for Mr. Klingler then will come to that in a moment, the China sales development in the next month. So, we'll start first with Mr. Potsch and the Others consolidation.

So, the Others consolidation line quite normally includes the elimination of intercompany profits. This goes in line with the movement in terms of the stock being either increased or decreased. If you look at the balance sheet, you would easily recognize that there was quite a significant stock built up in the neighbourhood of EUR4 billion and this of course triggers the respective compensation in the Other line, and to say this very clearly, this is by no means related only to the Volkswagen Passenger Car brand, it's of course related to the stock built up, which is being supported by all the group companies. The other element I would like to bring to the table here is that, of course, as a matter of fact, in the system we're in, it means that if the gross margin improves as it did then of course there is a higher elimination to be done as compared with times when the gross margin is more on the weak side. So, mainly it's these two items which triggered a higher level of elimination in the Other line as compared to previous periods.

So, sorry then, to get on, I mean, is it going to stay that high or it's just now the one off because the inventories have temporarily increased or I mean the gross margin probably is supposed to stay high as well, so going forward, we should expect the higher eliminations number right?

You need to understand that this is a pretty volatile number and element, and expectedly, it should remain on a relatively high level and then move down again once we move closer to year end.

Okay. Thank you.

So, if I try to answer the question of China, please allow me to attack the question a little bit broader and starting with the general situation in China itself. So, it's very clear that in China the new normal is about to be installed. New normal means a lower economic growth rate. It means as well, that there is in terms of conditions in the markets, a higher pressure, and it means as well that in terms of market mix, the changes which are coming up. So, in general for example, pretty simply spoken, we have some kind of mix which is going down from the top the stronger to the smaller cars. There are several reasons for this. One is, definitely that for the bigger cars, the customer's having a little bit less motivation to buy. They're making less money as well in terms of the global political situation, they're a little more prudent but as for let's say, simple basic facts which is particularly due to the legislations in China for the Tier 1 cities, which means the bigger cities, more than 15 million inhabitants where more and more cities are giving out restrictions, like for example, last December on the 30th of December the city of Shenzhen has put out their -- a very clear registration limitation. In that respect, the first half of year 2014, was particularly strong, because some of the cities have been suspected to make limitations in terms of registrations. Some of them have had them afterwards, some not. So, that is just for the base effect. On the other side, we see that the growth is coming stronger in the Tier 3, Tier 4, Tier 5 cities, and therefore as well, to a lower level of income. When you see then, the general market it is first time in a long period that the market has declined in June. This is of course something which is due to the general economic situation as well as some of the restrictions which I just mentioned and we expect that the second half of the year in general, in terms of the general market will not have a substantial growth. So, we believe there is still a cumulative growth end of the year of 7% -- 3%, 4%, 5% that seems to be logic, but it's not a dynamic growth which used to happen before. This is always under the condition that a particular stimulus coming from one or the other party. If we, then go forward and look about the situation for us, we believe that we will end the year around the results of 2014 in terms of volumes, could be more, could be less. That is, a part that we believe could happen and this is as well triggered by the fact which is as mentioned and the situation where we see, particularly the Chinese manufacturers with low budget cars like some SUVs and MPVs. They're getting some success particularly in the Tier 5 and Tier 4 cities. In terms of pricing, I think that was a little bit, as for your question, it is clear that the pressure on pricing is strong in 2015 than it used to be in 2014, that is very easy to understand, when you see the general market conditions and as always, we try to be as prudent as we can, but we cannot exclude of course to go for further price [indiscernible].

Thank you, Mr. Klingler. Let's move on now to the next question please.

We will now take our next question from Jose Asumendi from JPMorgan. Please go ahead.

Thank you very much. Just two items. The first one on currency. Please, Mr. Potsch if you could please just give us some steer in terms of the currency tailwind in the P&L, expectations on a full year basis and also the currency impact if any on the Chinese result. Second for Mr. Klingler, on the Chinese market, I mean if there's not much growth in the second half this year, excepted, and in the light of the sales trend we're seeing on the Volkswagen brand in the first half, would you potentially consider the market, the overall Chinese market to slightly contract in 2015 and if so how would you react to that? Thank you.

Okay. Thank you, Jose. Two questions then. The first one is looking at the currency tailwind into the second half of this year and whether there is any currency tailwind in the Chinese results and then staying with the topic on China to Mr. Klingler looking out to 2016. So, we'll start with Mr. Potsch if that's okay.

So, first of all the question on currency as you recognized, we have a positive effect which we were able to book in the first half, comparing with first half 2014, of course, we need to understand if we want to talk about the full year that the currency framework in 2014 changed quite substantially into the second half, so the size of the tailwind should move down quite substantially. So, we still expect a positive contribution on that side for the second half, but clearly lower than the one which we were able to book in the first half. On the Chinese result, there is of course a certain effect coming in, from the currency, it's clearly at more than 10%.

I will try to answer your second question and of course it's pretty complicated to look 18 months ahead, particularly in a market, which is China. We do not expect for the time being that we talk here about a declining market in 2016. We still believe there's a positive momentum in the market. We do expect that the trend in terms of growth will be of course much smaller than it used to be. So we still believe there could be growth rate of between 2% to 4% but please let us wait a little bit for the next month to come when we can be a little more precise.

Thank you, very much.

And we'll take the next question, please.

We will now take the next question from Stephen Reitman from Societe Generale. Please go ahead.

Yes, good afternoon. Again on China, first of all, if you could explain a little bit about what is going on in the joint ventures, because what it seems to me quite apparent, is that there's quite a difference in the performance over the two joint ventures, and even when I'm looking at the Volkswagen brand, so it appears that Shanghai Volkswagen has managed the more difficult Chinese market in a much better way than FAW when I look at the sales of Volkswagen from China -- Shanghai Volkswagen, it appears to be almost flattish in the first half of the year, whereas for FAW-Volkswagen sales, they seem to be down about 14%. So, comment a little bit about what is going on there. If you can talk about maybe some cost -- what cost measures you're looking at in terms of now that things are going a bit -- the growth is slowing down in China as well and in general also about, in terms of actions you're taking to -- for your products in terms of bringing vehicles that maybe if this is a move towards more SUVs and this being a trend we've seen in China for some time where the share of SUVs has risen from about 14% to 28% between the beginning of 2013 and today. How are you reacting on that? Thank you.

Thank you, Stephen. I guess, we're staying with the subject of China and the question was around the difference in the performance of the two joint ventures, maybe a little look at some products which are coming through this year and then turning more as well to the cost side in China please.

So, as you mentioned in your question, there is a market in the first half of the year 2015, where the growth is more oriented to the SUVs and to the MPV segment. So, the FAW, the northern joint venture has at least in the brand Volkswagen that was your question, no SUV so they don't take any advantage in terms of these developments. And on the other side, we have new products launched in the first half of the year in the south in Shanghai like the new Lamando which has started in January and which has taken its path into the volume shape. So, you can see that there is, I think a good explanation particularly due to the product launches and product situation in the joint ventures. On the other side, what you're asking is how do we react? The reaction is not because of 2015 first month. We have of course identified the SUVs as being one of the big orientation not only by the way in China but in general and we will bring over the next 12, 18, 24, 30 months a lot of cars which will fit these conditions particularly in the SUVs.

Thank you.

Maybe I can add a little comment on what we do structurally, and that's mainly two important issues. One is of course, as Mr. Klingler pointed out earlier on, we possibly are moving into a more normal situation with regard to Chinese market, framework conditions as compared with the past and I think, we have been talking long and expecting this kind of situation, and this essentially means that what is very normal in other markets and manufacturing locations, is clear that there needs to be more emphasis given to the cost side of the business and in all the forces need to know be more active whether it's in building cars or selling cars, doesn't really matter. You recognize that there is a bit of a difference between our joint venture in the north and the joint venture in the south and this possibly characterizes that one is a little bit better prepared to deal with this more normal circumstances as the other party. Again, we're executing significant programs not only since yesterday and that's why we are pretty optimistic to defend a very attractive bottom-line and that gives me the opportunity to say that with all the comments we are of course receiving on the Chinese situation, I think, we should not forget that we are still operating on the basis of an extremely healthy business model.

Thank you. Operator, next question, please.

We will now take our next question from Kristina Church from Barclays. Please go ahead.

Yeah. Thank you for taking my questions. Kristina Church here. I've got two questions. Coming back to the operating profit bridge and the product cost lines, I know you said that the EUR700 million wouldn't be strong in terms of saving in the second half of the year. I was just wondering how that number split between MQB and Future Tracks, and in terms of going into 2016, where we should start thinking about that line accelerating to. Then in terms of my second question related to the inventory build-up that you talked about, just wondering how much more flexibility you have in production given the outlet you've been talking about for lots of emerging markets in terms of rightsizing your inventory levels in the remainder of the year. Thank you.

Thank you, Kristina. The questions coming there were regarding the profit bridge and the product cost savings and whether there was possibility to look at that by MQB and Future Tracks with perhaps a peak into 2016. Then a follow up question looking at inventory and production flexibility and what that would look like as we go forward.

First of all on the profit bridge and the product cost savings mainly and as I mentioned already, there's a good contribution by the extended use of the MQB platform and of course, also a substantial part, which came in by the execution of our efficiency programs. Now, as I said already, in our conference call at the call for the first quarter of the year, we do expect a savings potential coming in from the Future Tracks side of around EUR1 billion and as the program progresses, I think there is an opportunity to save even more and for the first half, which is part of the EUR1 billion shown in product cost savings of course, a significant part is included, significant three digit number which came in from executing the Future Tracks program. So, we are absolutely on track with our efficiency programs, which gives also a good indication that we can perform as targeted for 2016. We're almost finished in terms of taking a decision on the measures which we need for 2015, we will now start working on fundamental measures on top of the ones which are already decided for 2016. So, I think this program is really up and running well. On the MQB side, as I said already, there is extended use of the platform also at Volkswagen Passenger Cars, we're now operating at a level of around 30%, relative to the volume where as you know in one of the other situations like the one in SKODA, we are passing over the 40% level already. So, that's why it doesn't come as a surprise that the performance at SKODA is specifically positive, but we also have to say that the clean of, the difficult situations specifically in Brazil and Russia, the performance of Volkswagen Passenger Cars was significantly positively influenced by the extended use of the MQB modular platform.

Your second question was in terms of stock and whether we have the flexibility to come to an inventory end of the year or let's say in the next few months which seems to be appropriate. First, a big bunch of the stock you see on the balance sheet seems absolutely be in line with the additional sales particularly in Western Europe, so there we don't see any major issues, and in general, we have the necessary flexibility to come to an inventory we desire.

Thank you.

Thank you, Mr. Klingler. Let's move on to the next question now, please.

We will now take our next question from Stuart Pearson from Exane BNP. Please go ahead.

Good afternoon and thank you. So, two questions I guess. Sorry, to come back and be a bore on China, but, I was a little bit confused. I think you mentioned a few questions ago, you were optimistic to defend your China profits there at a healthy level, but I guess, most of us would agree by global standards, even if they half, that would still be a healthy level. So, I'm just struggling to understand how bad you really think the situation is for margins looking into the second half, particularly when I look at the China dividend which, if I understand correctly was declared for EUR4.5 billion up from what, EUR2.8 billion last year. So, just trying to understand really how you see profitability developing and just the thought process behind that rather large dividend. Then the second question is actually turning to the Financial Services business. Obviously, very strong numbers as we have seen elsewhere both on the revenue line items in particular, but profit as well, just wondering if you could talk about the sustainability of that and exactly what's been driving that. Thank you.

Thank you. So, the questions were on China again, looking at the margins in the second half and the impact on future dividends and then secondly looking at the financial services and the revenue and profit and how sustainable that will be in the balance of the year.

So, to the first question on the Chinese situation again -- again as I already said, we are definitely continuing to work in a pretty healthy framework nevertheless. The market is normalizing. That's why there are some uncertainties with regards to volume and as Mr. Klingler said, we cannot rule out some price effects coming in from that situation, which clearly then would feed through the bottom line also. Nevertheless, we expect still a good development profit wise but have to take into account a profit level, operating profit level in China, which is slightly below the level we have seen in 2014. On that basis, I don't have to say -- we clearly can calculate with another impressive dividend for 2015. On the Financial Services side, you recognized that we were operating quite successfully. I think all the parameters are in place to continue on that level, I mean, the current interest rate framework is only partially supportive, so I think that's really good performance of financial services, but we're able to increase the penetration rates and through the opportunities down the road, so I would assume that we will be able to continue on that profit level towards the end of the year.

Okay, so just to understand, of the EUR5.18 billion operating profit you reported last year, you'd expect to be slightly below that for the full year?

Yes.

Okay. Thank you.

Thank you, and we'll take the next question please.

We will take our next question from Arndt Ellinghorst from Evercore ISI. Please go ahead.

Yes, thanks a lot and good afternoon everyone. Firstly, Mr. Potsch if you could just give us some color, by when you're going to update the market on the most recent restructuring or reshuffling activities within the VW Group? There's been a lot of speculation mostly in the German press that we might hear something in September, so I assume that you're going to present something late September or maybe October, and could you give us some color, how deeply you're looking into your structure or whether this will be pretty much of a non-event, at least from a capital market perspective. Then secondly on the China dividend, I think the two JVs declared a dividend of EUR4.6 billion so far this year, up almost 50% year-over-year and it's a little bit hard to understand with all the negativity and the stuff that's going on in the market, why the JVs are hiking the dividends to that degree and you know just give us some color what's behind that dividend increase and alongside this, if I take that out of your industrial auto free cash flow, the Group is hardly generating any free cash flow and we're seeing huge working capital moves and you might still have to cut production more, so could you in that context also then talk a little bit about the consolidated ex-China dividend free cash flow development for the rest of the year? Thank you.

Okay Arndt, thank you for your questions. Looking at restructuring and the comments of whether or when we will be talking to the market and announcing some movements on the corporate side and the moving back again to China and the dividends, you were asking firstly, perhaps so explanation as to why it's so high, how the movement goes through the working capital and finally what the cash flow was outside of the dividend impact coming from China? So, perhaps first we'll start with the restructuring comment, Mr. Potsch.

Well, I mean, obviously as we all know, there is a lot of talk on the restructuring issue. I think it's something of a more normal nature where a company has to adapt to the development which had been taking place in the meantime. I think, if any changes need to be announced it's going to happen during the remainder of the year. The second point, dividend pay-out of China, is rightly said, declared dividend in the neighbourhood of EUR4.5 billion for this year and we need to understand that we still are producing pretty significant net cash flow in China which enables us on the one hand to of course fund the operating business, secondly to support the very significant investments which we are executing in China, and the thirdly of course to pay out a substantial dividend. So, from that side and on the basis of the comment I made before that we do assume a profit level for this year just slightly below the prior year level. I don't see a reason why there should not be a substantial dividend pay-out also next year. The other question, free cash flow generation going forward, I think we had a quite acceptable first half 2015, I think, we committed, so far that we're looking at free cash flow 2015 close to the level we had reached in 2014, which I think was not a bad level. If you are trying to judge the second quarter numbers, you'll always need to take into consideration that there is a very substantial pay-out in terms of bonuses for our employees, which traditionally is being paid out in the second quarter. So we are fully on track even doing better in terms of free cash flow generation as targeted in this respect in spite of a significant investment level we can expect as I said already, free cash flow level for the full year, pretty close to what we were able to produce last year.

All right. Thank you.

Thank you, Arndt. Let's move on to the next question please.

We will now take our next question from Fraser Hill from Bank of America. Please go ahead.

Yeah, good afternoon. Fraser Hill for Bank of America. Just two questions then, so on China, I just really want to come to the phrase you keep using about the normalization of the market. I think you discussed earlier the impacts on margins in the second half of this year, which isn't really where I want to focus or what I'm interested in. What I'd like to hear is your thoughts on normalization of that margin as you look out, let's say the next three to five years. I mean, when you look at the profitability of your joint ventures, 20% [indiscernible] last year, I think when we look at the rest of the global car market, mid-single digit margins looks pretty much normal for most other markets and most other businesses outside of what we've seen in China in the last few years. So, can you talk about that? I mean, is that really what looks like a more normal run rate for any business in China over the medium term. Why wouldn't we start to see companies on a four or five year view potentially come back to more normal global levels of margin? Then secondly, just more of a house keeping point. I think you mentioned earlier there was a 10% FX benefit to the China proportion of operating profit, was that for H1 or Q2. Thank you.

Okay Fraser. So, we're back on China again. Looking at the normalization of the margins, looking out a little bit into the medium term 3, 4, 5 years and come back on the question of the foreign currency benefits on the profitability whether it was for the quarter or for the half year.

So, first question is of course, a pretty difficult question because it's much less related to what's going on in terms of the automotive market, it's much more related to what kind of economical framework are we going to see in China going forward and I think it's not worth to talk along on the situation because you are all aware of that situation, there are a couple of uncertainties in place when we look at the most recent development in the stock market or whether we look at the growth rate which are showing some signs of weakness nevertheless. If we take the experience gained so far then the Chinese government has always found approaches to stabilize development going forward and the second element I can add to this is that mobility is still a very, very high value in China and that's is why under the assumption that the Chinese economy continues to grow with levels on top of 6%, which is more likely than unlikely I would see at least in the base scenario I think we can still assume a relatively attractive car market nevertheless with the increase on the supply side normalization will continue on which will create price pressure, but as I said, before also, we should not forget that this market for most of the past years was in a moat to distribute cars rather than sell cars, and part of the normalization of course is also not only to accept the situation as it is emerging but also to take entrepreneurial measures to deal with that situation. One is of course to move into a more push moat in terms of selling costs, the other element is to intensively work on the cost side of the business and there are very significant cost potentials which we can release. We should also not forget that there is a significant potential in terms of the aftersales market, the used car market and certainly also in terms of an increased penetration of financial services, so strategically speaking, I think the likelihood is still very high that we can assume significantly attractive market also for the next three or five years to come. Then quick comment on my statement with regard to the exchange rate effect on the Chinese operations that referred to the first half of 2015.

Okay. Thank you Mr. Potsch and apologies to those who are waiting, but we're going to reduce this now to just one question per analyst to give everybody a chance to get their questions in. So, operator if you could take the next question now, please.

We will now take our next question from Charles Winston from Redburn. Please go ahead.

Good afternoon. Just the wrong side of the wire. My one question is just to try to understand the volume price mix move in the second quarter a bit more on the bridge, I mean, let's talk about Europe as opposed to China for a minute. Europe normally manifests itself in very good mix gains within the volume price mix. We've seen that in the past few quarters and also Europe's continuing to be very wealth, compared to the emerging markets. Why did that volume price mix go negative in the second quarter, because the mix should've been good, the pricing side in emerging markets should've been good, was there a one-time effect in there in terms of -- I know that provision charges are sometimes put in volume price mix or indeed on the last call, I think you talked about the other and eliminations line also having an impact on the volume price mix part of the bridge. I just fail to understand that better, because the business trends suggest that it should've been positive but obviously it was a negative in the second quarter. Thank you.

Okay Charles, apology to you, you found the wrong side of the wire, but you just wanted to check on the volume price movement in the second quarter. Mr. Potsch?

So, I think to give a little more light to the situation, I think we're relatively clear the volume could not be the big contributor ex-China to the volume part of this column. Then on the price side, I think we're working quite successfully, Mr. Klingler and his team to organize a couple of price increases, certainly to a good extent more inflationary nature but also some structural price increases mainly in Europe, but the biggest part plays on the mix side of the business and there again, we have to split between the country mix and the product mix side. On the country mix side and this is [indiscernible] I could say, we can say that we are more or less zero on that side for the simple reason that it was possible by the positive development in Europe to compensate negative developments with regard to Russia, South America and the FBU business, China and then the big positive as I said already is the product mix side where we're able to sell and upsell cars increasingly mainly in Europe, but also to North America and this holds true for cars representing positions in higher level segments but also the whole equipment side of the business was operating very, very successfully and we see a good chance of this path being continued on with all the new model introductions and if we take the experience of the most recently introduced Passat model, the new Passat on the Volkswagen Passenger Car side and the success we have with this model, we are pretty optimistic and we see significant profit potentially coming in from that side also with the new cars introduced in the next few months from Volkswagen Passenger Cars, Audi, Porsche and SKODA mainly.

Okay, thank you, Mr. Potsch.

Sorry. Sorry to interrupt, but why therefore was it a negative impact in the second quarter? You've just talked about zero volume, positive price, zero country mix, positive product mix and yet the volume price mix has a negative impact in the second quarter. I'm sorry, I don't follow.

I was commenting on the first half, not the second quarter. Of course, elements can shift from the one to the other quarter, but there are no one off effects included there.

Okay. Thank you.

Okay Charles, I guess you got back into your second question. Let's move on now to the next question, please.

We will now take our next question from Adam Hull from Berenberg. Please go ahead.

Hi, good afternoon. I was going to ask about Europe, which I think is 60% of your revenues on a '14 consolidated basis. Now, for my one and only question, on the VW Passenger Cars, you did [indiscernible] in Q2. Like Q1, could you give us a little bit of a feel for within that, what the losses are in Brazil and Russia and maybe you could highlight how strong your order book is on the Passat and the Touran and how pricing is developing for the VW brand in Europe? Thanks.

Okay, Adam. Thank you for your three questions in one and we will start with a look at Brazil and Russia where the Passat is heading and comment on pricing as well.

So, a quick one on the negative contribution coming in from Brazil, Russia and the FBU business China which was running on a low basis than in the same period of last year, this being a three digit amount, so not necessary to say that, if we just put these elements to a zero situation it would have meant that Volkswagen Passenger Car brand would have operated on a quite reasonable margin level. If we talk about the new Passat, the new Passat order intake is for us, very, very satisfying. We are very happy about the performance of the car. The mix is very good. The reception of the customers is very good. So, frankly, it's above our expectations how the car is performing. You did asked about the Touran, I'm sorry the new Touran is just starting so there's not to talk about that. We had the launch start in September. So, probably we can give you some information about that not before October, November, but I think the budget's very important. The direction of the press is enthusiastic. The reaction as well from the journalists, but as well as from the customers who have seen the cars, have tested the cars is as well enthusiastic. So, we're very, very optimistic that this car is making its way as well as the Passat did. So, in terms of pricing for Europe, we still have a satisfying situation in that term, so we believe that we can have some momentum in terms of pricing. So, we don't see any -- let's say negative pressures on it.

Has it improved sequentially in Q2 versus Q1 for your VW brand particularly?

In terms of what?

In terms of the pricing conditions.

I would say, frankly to say, I would say pretty stable. I don't see major changes in the market between the first and the second half in Europe.

Thank you, and operator to the next question, please.

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

Yes, good afternoon. My question is on the profit bridge you give us every quarter for the past several years though pretty much every quarter, the product cost improvement is pretty much lost to the increase in fixed and start-up costs and it's better than in the years '11, '12, but at what point do we see or can you give us some guidance at one point, we'll see firm improvement in the product cost above the increase in fixed cost, because as I look at it, as the global sales or volume is throwing down, you continue to make volume and grow volume dependent by keeping up the increase in the fixed cost. So, at what point should we see a clear diversion between the two? Thank you.

Thank you, Philippe and your question was around the comparison often made in the market between the product costs and the fixed costs and when will we see a move more on the product cost side.

Quite frankly speaking, as you very well know, we are preparing another growth phase for the Company, in terms of a very significant number of new products which are being prepared for the introduction. We are working through the renewal of our two major modular platforms MQB MLB. Of course, we are currently absorbing an enormous level of development work to make the Company fit to meet future regulatory targets specifically on the CO2 side, just to name a few issues which are currently boosting investments and so far costing than consequently depreciation, and so far, for this year and next year, we'll have to leave with these levels. I think we can be confident that with then a more pronounced use of the new platforms, in absence of these structural increasing factors, we will see a domination of product cost savings against an increase in fixed costs.

Okay, thank you and we'll take one more call from analysts before moving across to journalists. Thank you.

We will now take our next question from Alexander Haissl from Credit Suisse. Please go ahead.

Good afternoon. This is Alexander Haissl, Credit Suisse. I had just one quick question on SEAT if you'd give some more light where margin contracted by 70 basis points sequentially. I do understand that the government subsidy program phase 7 was ending in April and phase number 8 is smaller in scale in terms of support from the government. Has there been any change in the market in Spain in terms of incentives or in terms of pricing? Or is it more corporation has declined in March as you've seen in SEAT in the second quarter. Thank you, very much.

Okay, a question on SEAT and its profit development.

Actually, we are very pleased with the development of SEAT in terms of the market position we can say SEAT in the meantime can enjoy a relatively robust situation as you know, the Southern European markets are recovering and SEAT continues to play a very positive role there. Also in a more central part of Europe, SEAT is improving, so that, I think heavily supporting positive development at SEAT but clearly we are also at SEAT in the forefronts of new model introductions. So, also there was some impact on the fixed cost side which hindered another improvement.

Sorry, just to clarify. Have you seen any change in dynamics in the Spanish markets since the government subsidies have been scaled down by EUR500 since the beginning of the second quarter or are these dynamics in Spain unchanged for SEAT front?

We didn't see any measurable impact after that measure was taken away.

Thank you.

Okay? So, we'll now move on with our call today to our journalists. So, operator if you could introduce the first journalist?

We will now take our question from Christophe Rouault from Bloomberg.

Yeah good afternoon everyone. Mr. Potsch could you maybe explain a bit more why you're sticking to a revenue guidance of an increase of up to 4%, when after six months you reported a 10% gain. Is there a chance you're going to lift this revenue guidance at the third quarter result or is there some sort of major hit possible in the third or fourth quarter?

Okay. Thank you, very much. The question was around the guidance on revenue for 2015.

The reasoning behind us keeping that position is that as the devaluation of the euro started in the second half of 2014, the currency impact in the first half of 2015 year-on-year is higher and the improvement will slow down over the years and as explained earlier on, in the EUR10 billion improvement in turnover, there is more than a EUR3 billion piece influence included coming in from the currency. This is going to slow down in the second half.

Okay, thank you.

Okay. Thank you, very much and now the second question from a journalist please?

We'll take our next question from Chris Bryant from the Financial Times. Please go ahead.

Yes, hello. Just a very quick question. Just clarifying something you said earlier. Did you say that you expect Chinese volumes for the Volkswagen to be flat in 2015? Did I understand that correctly? So, no growth at all in volumes in 2015? Thank you.

So, the question was around Chinese volumes this year.

So, what we said that is that Volkswagen Group should be around the result of last year, plus or minus, that is the concept we made just an hour before.

Okay, thanks.

Okay, well thank you very much, ladies and gentlemen. Thank you for spending the time with us today and we're saying our goodbye from Wolfsburg. Thank you.

That will conclude today's call. Thank you for your participation ladies and gentlemen, you may now disconnect.