Oliver Larkin - Senior Manager of Investor Relations Frank Witter - Finance and Controlling Fred Kappler - Head of Group Sales

Jose Asumendi - JPMorgan Horst Schneider - HSBC Mike Tyndall - Citi Tim Okutter - Deutsche Bank Charles Winston - Redburn Partners Fraser Hill - Bank of America Christoph Rauwald - Bloomberg Christiaan Hetzner - Automotive News Europe Jean Phillipe LeCoeur - Les Ecoste Jan Schwartz - Reuters

Good day, ladies and gentlemen, and welcome to Volkswagen AG live audio webcast and conference call on the results January to March 2016. For your information, today’s conference is being recorded. At this time, I would like to turn the conference over to Oliver Larkin. Please go ahead.

Thank you, operator. And ladies and gentlemen, welcome to Volkswagen’s conference call on the results for the period January to March 2016, based on the interim report we published this morning. For today’s conference call I am joined by Frank Witter, member of the Board of Management, Volkswagen AG, responsible for finance and controlling and Fred Kappler, Head of Group Sales, Volkswagen AG. You can follow today’s webcast via our website, where you will also find the charts available for you to download. Before we start, allow me to remind you that this earnings call relates to the period January to March 2016. Consequently, our analysis of sales and financials refers to this period only. We have, of course, already released our deliveries to customers, including the month of April, and related unit charts can be found in the appendix. Following the presentations we will take questions first from analysts and later from journalists. Let me now hand you over to Frank.

Thank you, Oliver. A very warm welcome here from our sauna in Wolfsburg, to all participants of this call. The Volkswagen Group got off to a solid start in 2016. Although, as you will see in the income statement shows a mixed picture, as particularly exchange rate effects have influenced our reported financial performance. Our sales in the first quarter of 2016 have continued to be characterized on the one hand by an improvement in Western Europe and on the other hand we have seen a continued retraction in South America as well as in Russia, although there things seem to be bottoming out. Despite a challenging market environment and ongoing impacts from the diesel issues, our deliveries at 2.5 million units, which includes the Chinese joint ventures, slightly outperformed the level of the previous year. Our sales and revenue at €51 billion, on the other hand, which excludes the Chinese joint ventures, as we include the results at equity, was in the financial result, decreased by 3.4% compared to the same period last year, particularly due to a negative exchange rate impact of around €1.3 billion. We recorded an operating profit of €3.1 billion before special items, which was only slightly below the level of the prior year, demonstrating that despite several challenges, we have a robust core business. As you all know, within our 2015 results, we have recognized expenses directly related to the diesel issue in the total amount of €16.2 billion in the operating result. This primarily entailed recognizing provisions for field activities and for repurchases, as well as for legal risks. The absolute amount of provisioning, when reported in euros, reduced slightly mainly due to the positive exchange rate effects of around €500 million related to the proportion of the provision which is calculated in U.S. dollars. As the euro-dollar rate moves quarter on quarter, you may see further fluctuations in this position until all the diesel issues, particularly in the U.S., are resolved. This positive adjustment for Q1 is shown in special items. In addition, we further increased the provision for the Takata airbag issue. And finally, we have entered an amount for restructuring in our South American truck business. Overall, special items came in at a positive €0.3 billion. The full equity result, mainly driven by the Chinese joint ventures, came in at €1.1 billion, below the comparable period in the previous year. The Chinese market grew substantially in Q1, partially as a lowering of purchase taxes during 2015 continued to have a positive effect. The challenging competitive environment, however, impacted our reported earnings. Automotive net liquidity ended the quarter strongly at €26 billion, which gives us a secure platform to manage our future liquidity needs. The sale of LeasePlan at around €2.2 billion was an important driver here, while the underlying net cash flow, excluding proceeds from the sale of LeasePlan, was negative. In summary, despite challenging market conditions, we remain fully on track with regards to our earnings guidance for 2016. We will discuss the financial results in greater details in a few moments after Fred has taken you through the market context and our sales performance.

Thank you, Frank. Ladies and gentlemen, I would like to extend a warm welcome to you at my first conference call and present the sales results for the first quarter of 2016. 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. In the period from January to March 2016, the global car market grew at 2.1% a slightly slower pace than for the full year of 2015 but global car markets continue to show a very mixed picture. While the situation in Brazil and Russia remains burdened with political economic developments the demand in Western Europe, China and the USA increased. The sound sales trend of the Volkswagen Group in 2015 has also continued into the first quarter of this year. In view of the circumstances, we are satisfied with our start into the year. Apart from Volkswagen passenger cars, some of our brands such as Audi, Skoda and Porsche has significantly increased the deliveries and posted record sales. The Volkswagen Group's business model with a broad portfolio of attractive brands and products, combined with a strong financial services business, is proving its value for our customers. In summary, our deliveries to customers resulted in the deliveries level slightly above last year's result with 0.6% growth. Despite all the challenges that we face, the Volkswagen Group is expecting deliveries in 2016 to be at the same level as the last year. Now, let us take a closer look at the car market development across the regions compared with the performance of the Volkswagen Group for passenger vehicles during the first quarter of 2016. On a global level, sales of the Volkswagen Group had a sound start, marked by different regional challenges. In North America in particular in the United States SUV continued to be in high demand. Audi and Porsche continued on their growth path. Volkswagen Passenger Cars improved in terms of retail business however the brand could only benefit to a limited extent from the growth in the SUV market. Furthermore, the sales stopped for diesel models and a decline in fleet business have impacted the brand deliveries. In Western Europe the market grew in the first three months. The Volkswagen Group benefited from the positive development in this important region and is posting rising sales despite the unfavorable circumstances of the diesel issue. The Volkswagen Group did, however, not participate in the positive development of the small SUV segment and also generation changes of models influenced of the growth rate during the first quarter. Developments in Central and Eastern Europe in the first three months were mixed. In particular Russia continued to feel the effects of the weak economy. In contrast, first quarter deliveries in the markets of Central Europe, especially Poland and the Czech Republic were very satisfactory. Despite the negative market trend in this region, the Volkswagen Group increased its sales. The car market in Asia Pacific continued to grow. In China on the one hand, the tax reduction for vehicles with engines no larger than 1.6 liters, contributed to this growth. But also budget priced entry models especially in the SUV segment grew strongly. The Volkswagen Group benefited from the positive development in this highly important region and posted increasing sales. The economic and political situation in South America's main market Brazil continues to deteriorate. The ongoing market decline caused among - things by higher interest rates driving up the cost of loans. Deliveries by the Volkswagen Group were also affected and could not match the prior-year level. Let us now move on to the performance of our brands in the first quarter of 2016. Deliveries by the Volkswagen Group including cars and trucks rose by roughly 1%. The Group handed over 2.5 million passenger cars and commercial vehicles to customers worldwide. The Volkswagen passenger cars brand handed over 1.46 billion vehicles to customers nearly on a par with the prior year level while Volkswagen reported the best first-quarter in China and the sales increase in Western Europe the trend in South America and the already mentioned situation United States reduced growth. Audi concluded the best first quarter in the company's history and increased global sales by 4% to around 456,000 cars. Growth during the first three months was mainly driven by strong demand in Europe, in North America and in China. Demand was particularly good for the Audi A4 and the new Q7. Year-to-date Skoda delivered almost 277,000 vehicles to customers which is an increase of over 4%. The positive developments in the core markets of China and Europe with double-digit growth in numerous individual markets also contributed to their record sales figure. Sierra deliveries matched its previous year level around 103,000 cars, with nearly 56,000 new vehicles delivered worldwide Porsche surpassed the previous year figure by almost 10%, the main growth driver for the Porsche brand in the first quarter continued to be the Macan. During the first three months of the year, Volkswagen Commercial Vehicles delivered 113,000 vehicles to customers worldwide, a growth of over 4%. In particular the renewal of the model ranges Cabby and the transporter series in 2015 is taking effect. For the global truck market above six tons, the situation in South America and Russia remained tense. However, a significantly growing demand in Western Europe, as well as increasing registrations in China led to a slightly positive trend in the overall truck market within the first quarter. MAN deliveries were up by about 6% to more than 23,000 trucks and buses driven by strong demand in Europe. Scania sales grew; result grew by over 5% to 18,000 units due to high demand in Western Europe, as well as Central and Eastern Europe. The order books at MAN and Scania of the first three months remained stable at the previous year's level despite difficult overall conditions. Underlying revenue and power engineering at MAN came in at €832 million turnover a rise of around 4%. To conclude my statements, I want to underscore that we have strong brands and great vehicles, a high level of technological expertise, innovative power and global presence. This is shown among other things, our latest product highlights which I would like to outline to you briefly. The new Tiguan, the latest version of the successful compact SUV by Volkswagen, has impressed since the end of this April with new design, great comfort, first-class handling and all-around connectivity. The all-new Tiguan is continuing in the successful ways of its predecessor by already receiving numerous awards and positive feedback in terms of order intakes. Launched in March 2016, the all-new Volkswagen Bora has been designed specifically for the needs of young Chinese families looking for outstanding quality and value for money. The new Bora is a compact sedan which offers a pleasurable driving experience with a fashionable appearance, spacious interior and comprehensive safety. The newly developed Bentley Bentayga, launched in March, combines unique luxury with effortless performance and everyday usability. The brand's fourth model line which is designed, engineered and handcrafted in crew, offers a true Bentley driving experience and showcases innovative technological features. The new open-top version of the Huracan by Lamborghini stands for inspiring technology, outstanding quality and breathtaking performance with open-air emotion. Luxurious comfort with appeal and dynamic design ensures the convertible version of the Huracan is an iconic Lamborghini in its own right. The new Huracan Spyder has been available since early this year.

Thank you, Fred. Now, let's turn back to Frank for a look at our financial performance in more detail.

Thank you. And I will start with our Group performance before moving on to discuss our brands. For the first three months of 2016, the sales revenue for the Volkswagen Group was €51 billion, a decrease of 3.4% in particular from significant currency headwinds, as well as a decrease in sales excluding China. Excluding the exchange rate effect, revenue would have been on a similar level as compared with last year. Improvements came from mix, the further positive development of our financial services business, as well as a positive development in our truck business, despite difficult market conditions within a challenging competitive environment. Operating profit before special items for the group decreased by 5.9% to €3.1 billion, considering the substantial foreign-exchange headwind of about €800 million and our slight decrease in vehicle sales, this is a solid result and demonstrates our robust business model. The operating margin before special items declined from 6.3% to 6.1%. Our Chinese joint ventures which make up the majority of the equity accounted investments, reported a proportionate operating profit of around €1.2 billion. The other financial result came in negative at around €1.4 billion mainly due to negative fair values of financial instruments. Group profit before tax of just under €3.2 billion equaled at 6.3% return on sales. Moving on to the group's operating result performance for the first quarter. Over the course of the first three months, the position volume mix prices in the passenger car segment reported a plus of around €0.2 billion. Negative exchange rate effects of around €0.8 billion mainly driven by the currency development in Argentina, Brazil, South Africa, the UK, as well as in Turkey, had an adverse affect on the operating result. The first quarter showed further good momentum on product cost savings with a performance of around €300 million mainly as a result of our efficiency programs. You can rest assured that we continue to fight for every Euro. Fixed costs and startup costs rose at a slower rate in the quarter mainly as a result of efficiency programs, partially offsetting higher depreciation. As I commented at the recent annual press and investors conference, as the year progresses, fixed costs will continue to grow. However, product cost savings are expected to at least compensate for the impact. Earnings in our commercial vehicles division rose slightly on the back of good sales performance in Europe. Our power engineering division came in flat compared to last year. With earnings roughly higher by €120 million, our financial services division had another good quarter. Special items of €0.5 billion arose mainly from the adjustment of the provisions for currency translation reasons in connection with the diesel issue. On the other hand, we have booked provisions of around €0.1 billion relating to an additional recall for vehicles with airbags supplied by Takata and have booked a small amount for restructuring expenses from the truck business in South America. Turning to the brands in more detail, the Volkswagen passenger car Sprint showed a marginal positive operating result of €73 million, compared with a negative result of Q4 2015. The decrease compared to the previous year was mainly a result of the effects of a temporary decrease in orders for fleet business in relation to CO2 issues at the end of 2015, which we have started to recover already in Q2. Further negative impacts were caused by the North American market and ongoing difficult market conditions in Russia and South America, as well as negative currency effects. On the other hand, the focus on our efficiency programs has made a positive impact. Audi’s operating performance came in at €1.3 billion, 8% below the comparable period. The unfavorable exchange rate environment, as well as high competitive intensity in certain vehicle segments and regions, had a negative impact. The operating result was also burdened by the high outlays for new models and technologies, as well as the expansion of its international production footprint. The high demand for the new Audi Q7 and Audi A4, as Fred already mentioned, positively impacted the result. The operating profit at Skoda stands at around €0.3 billion, a significantly 30% up year-on-year. The excellent result was mainly driven by positive mix effects, optimized product costs, as well as a good market acceptance of the new Superb. Sales results improved, benefiting from continued cost reduction. Difficult Chinese market conditions for luxury imported vehicles combined with the burdens of the launch costs of the Bentayga, drove the Bentley brand to a loss. As the worldwide roll-out of this outstanding car only started at the end of Q1, the positive impact on earnings is yet to come through. Porsche delivered a significantly increased operating profit of around €0.9 billion, an improvement of around 17% driven in particular by continued sales growth. The operating result for Volkswagen commercial vehicles result reduced, mainly due to decreased sales volume in the challenging South American markets. Increased sales revenue, particularly in Europe coupled with an improvement in mix, more than compensated for lower sales in South America, leading to a small increase in operating profit at Scania. Since January 1st we now report MAN’s business area separately within our brand analysis. MAN commercial vehicle earnings were also negatively affected by the higher exposure to the call-ups Brazilian market. Despite this, earnings improved as European sales continued to grow. MAN power engineering grew sales by 4% in the quarter to €0.8 billion. Earnings were almost flat at €48 million. Volkswagen Financial Services had a strong quarter and grew earnings once again to around €0.5 billion, while the full financial services division reported earnings of €0.6 billion. Turning now to the cash flow in the automotive division. Operating cash flow for the division over the first three months was below the prior year at €2.4 billion. Lower earnings-related factors, higher tax payments and negative working capital development were the key components. CapEx remained flat in absolute terms of the first three months at €2.1 billion, although the lower revenue resulted in the CapEx ratio moving to 4.9%. At €1.2 billion, capitalized development costs were roughly in line with the prior year and represented around 37% of the total R&D costs. The main focus is on the development of more environmentally-friendly vehicles, the shift towards electrified power trains, in addition to the roll-out of new models. A significant cash inflow of €2.2 billion arose from the sale of our interest in LeasePlan. In summary only as a consequence of the sale of our interest in LeasePlan net cash flow for the quarter came in at a positive €1.3 billion. Net liquidity in the automotive division stood at a strong €26 billion at the end of March, boosted mainly by the proceeds from the sale of our stake in LeasePlan of €2.2 billion. This amount gives us a secure platform to manage our future liquidity needs. We continue to maintain a solid and robust balance sheet that will enable us to face successfully the challenges in the months ahead. So turning to my last slide with our outlook for 2016. We continue to expect that on the whole deliveries to customers of the Volkswagen Group in 2016 will be on the level with the previous year amid persistently challenging market conditions supported by a growing volume in China. In addition to the diesel issue, the highly competitive environment, as well as interest rate and exchange rate volatility and fluctuations in raw material prices, all post challenges. We anticipate further positive effects from the efficiency programs implemented by all brands and from the modular tool kits, depending on the economic conditions particularly in South America and Russia including the exchange rate development in light of the diesel issue, we expect the full-year 2016 sales revenue for the Volkswagen Group to be down by as much as 5% on the prior year figure. In terms of Group's operating results, you may be wondering about how to model our results with and without special items. We expect the currency effects on the dollar related provisions to remain highly volatile. Positive effects in one quarter may easily be reversed in subsequent quarters, for this reason our outlook remains focused on the underlying operating business before special items where we continue to expect an operating return on sales for the group of between 5% and 6% in 2016. With regard to the margin guidance on business areas our year end 2016 outlook remains unchanged.

Thank you Frank. We will now take questions from investors and analysts keeping time towards the end for questions from journalists. So, operator over to you.

Thank you [Operator Instructions] We will now take our first question from Jose Asumendi from JPMorgan. Please go ahead.

Thank you Jose. Hi Frank, how are you? A couple of points. The first thing is on the profit bridge if you could maybe describe a little bit how enrichment and mix, I guess the negative mix are positive. Can you give any comments on that and details by brand. The second and third item are a bit more strategic. I am reading this CapEx investments or plans that could be announced to boost the EV study of Volkswagen over the next few years. I understand it is basically a multi-billion investment. I'm trying to basically square how do you balance out the investments in the provisional technology and expanding your SUV lineup with additional investments for EV and particularly I think accelerating the investments to develop by technology and R&D. The third item is more related in terms of charting the Volkswagen brand and the progress over the next years and as we think about you preparing the Capital Markets Day presentation for June, maybe a suggestion, and if it could be possible to get some clarity in terms of the profitability of the Volkswagen brand across regions and if not now but in June, could we get more clarity on profitability of the VW brand by region and also what could be the next steps you could take across the different regions within the Volkswagen brand. It would be extremely helpful to be able to chart the next steps that Volkswagen brand is going to take going forward. Thank you.

Okay Jose, thank you. We're just going to run through the three questions to make sure we understand them. First on the profit bridge, the CapEx challenges going forward and for the Volkswagen brand progress in this year and beyond, Frank.

Yes hi, Jose. Let me start with the profit bridge which combines volume mix prices. Pricing and incentives basically was a wash almost for the quarter. We definitely continued to see positive mix effects which are quite important and are the main contributor, you know that we lost some volume but if we net those two elements we have the positive €0.2 remaining result and quite difficult is the foreign exchange situation from 2015 you remember that we continue to have positive variances so we expect and continue to expect headwind for the remainder of the year. This will continue but probably not at the level as we have seen it in the first quarter. Product cost development is positive. We continue to push for it and we certainly have the minimum target as laid out to offset at least for the full year the fixed cost increase which we have to expect for the remainder of the year quarter-over-quarter comparisons obviously have some volatility in there. Coming to your second question on CapEx, there was some speculation in the press. There have been no decisions on that factory you are probably referring to. We certainly have certain various scenarios in our strategic discussions and we certainly consider something like that to be a possible outcome. But at this point of time no decisions on what has been reflected in the press have been made. Yeah, you also certainly raised the question, how are we dealing with the increasing challenges we have in order to deal with R&D expenses and CapEx for electric vehicles and other new technologies? As we discussed in several of our rounds, we need to increase and we are committed to improve our R&D efficiency. We need to be smarter in the way we invest CapEx in order to free up the resources for those new technologies, but also business models. Volkswagen brand profitability, when we presented 2015 results the question was posed on us whether the brand will return to profitability. I think we gave you the indication that this is our minimum target and we accomplished it even though €73 million is a rather small number but it is definitely an improvement from Q4 where we had losses of €127 million. We continue to see a very difficult market situation in North America, particularly the U.S. and Canada and Brazil with South America is certainly also very difficult and I should also add Russia being a very important market to us, but certainly in very difficult market conditions these are definitely the biggest headaches if you look into the regional profitability. But I was also certainly referring to the overall picture around about two-thirds of the foreign exchange headwind also applies to brand Volkswagen we shouldn't forget that. You might remember that we talked about incoming orders to be having been weaker in the fourth quarter. We are recovering or we recovered from that but the impact from the lower incoming orders from the fourth quarter is obviously reflected in the first quarter. And if you compare that first quarter with 2015 we are looking at 75,000 vehicles less on a quarter-by-quarter basis. We have some ramp-up phase for the new Tiguan which will be a great success to us but you also certainly know that ramp-up phases put some additional pressure also on the P&L. And we have obviously the headwind overall from the diesel issue but we'd certainly try to find and continue to find the balance between volume and incentives that in a nutshell whatever reply.

Okay, thank you very much, Frank. A very full answer. Operator, if we go on to the next call please.

We will now take our next question from Horst Schneider, HSBC.

Yes, it's Horst here from HSBC. Thanks for taking my questions. First of all, I have got a question on China, so I want to know if by now you have decided on the dividend payment in China for full year 2015 to be paid in 2016. And then I want to get some more clarification on what happened to the operating profit in China in Q1. I know that last year the pricing was somewhat stronger and I think Q4 you had a provision release, but nevertheless maybe you can give indication if we can expect this kind of result also for the next quarters ahead or if there was any special item which dragged down the results? Then, second question is on acquisitions, we have seen that you are taking first acquisitions and also your truck head has talked recently about the possibility of a larger acquisition. I just want to know your general stance if you can rule out from your point of view, from today's point of view any larger acquisition in the next few quarters? And then, the last one is on an update on pricing maybe you can be a little bit more specific basically, how the pricing developed in Europe sequentially especially not year on year, especially whether the fourth quarter do you see the pricing by now recovering? And also in terms of order intake for Europe, can we expect now going forward basically that we see a bigger sales increase that you stop losing market share already in Q2? Thank you.

Okay, Horst. I'll pass to Frank and we'll come back to Fred for the sales question.

Thank you.

Yes. Hi Horst. Let me start with the dividend. We are in the process of finalizing those decisions. I think we gave clear guidance that we expect dividends for calendar year 2015 being below 2014. And the first dividend should arrive in Q2. So, we didn’t have anything in Q1. The operating profit, we talked for a long, long time about the normalization in the Chinese market, which is at full force, plugging along. What we shouldn’t forget in terms of what do we have to expect for the full year, the first quarter 2015 was, let’s call it the last normal quarter before we truly saw in the entire market, an intensivation of the competition. So the quarter-to-quarter comparison for the first quarter of 2016 is probably the worst from what we have to expect for the full calendar year. But nevertheless, margins are under pressure also in China and we obviously need to find, and continue to find, the right balance, but it is competitive. In terms of truck and bus, the focus is very clearly and very strongly on getting to the synergies between MAN and Scania. This is what we are currently working on and this is what our current priority is all about.

So, no major plans for acquisitions at this point of time, you can rule that out, right?

I am not aware of anybody who is really working on a major acquisition in that field and I should know about it.

Okay, thank you.

Okay, regarding the pricing, the development. We could achieve a moderate price increase in Europe, in Western Europe especially. Of course, we are using sales promotion for stabilization, but as far as we know, we are below the competitive level in Western Europe. In China, we had quite a stable pricing situation. We reduced the sales promotions in the first quarter. We were successful in that. Of course, in other markets, like in Brazil, where you have a crisis and now it was impossible to improve pricing over there. But we are with all sales proportions, below the competitor’s level. Okay, sorry?

How would you describe in general then, the price environment in Europe?

We have a lot of competitive pressure, but we still continue with our normal inflation as we did in the previous years. And we increases our list prices in the first quarter of the year for most of the brands. But, of course, you can see with the sales promotions of competitors, that the competitive environment is strong. But on the other hand, the increase of the total market, we are up by some 6% or 7% of the total market Western Europe, gives some room for these price increases.

Yes, okay, thank you.

There was a question for the order intakes, I think.

Yes, correct.

The order intakes, especially in Western Europe where we have very precise figures, we could see that we have achieved again a level of our order intake in the first quarter on the same level as in 2015. In the first quarter of 2015 was quite a successful one. So we are back on that level with all the brands, including also Volkswagen passenger cars.

Which means in general that also you’re in a situation with the Volkswagen passenger brand in Q1 should be the lowest. In Q1, I mean considering full year ’16 in total, right? So Q1 should be the lowest in this year.

Yes. Of course quarter one sales were influenced, as Frank said, but the order intake of the last quarter of last year. So this has changed, so we again are in quite a stable situation with some optimism for the second quarter.

Our next question comes from Mike Tyndall with Citi.

Hi, it is Mike Tyndall from Citi. A couple questions if I may. I wonder if we could delve a little bit deeper into the pricing side of things because I am getting a little confused between promotions and intentions in list prices. I’m assuming, given the €800 million FX headwind, there was pricing related to inflation. Which I guess, I wonder if you could give us some sense of how much of that €800 million you managed to recapture. And then when I look at your distribution expenses, they have gotten up to roughly 11% of your industrial sales. Is that 80 basis point delta all about pushing? I want to get a sense, I guess of how much commercial damage has been done by the diesel issue, and to what degree you are having to push on sales right now. And then the second question is somewhat unrelated, completely. On pensions, we have seen that go up to now €31 billion-odd, again, a function of interest rates. Thinking about your strategy going forward, a number of your competitors have actually funded their pension. I am wondering what you’re thinking around that at this point in time, given how cheap money is and the fact that is hurting you on the pension side. That's all for me thanks.

Okay Fred, for you first with the sales. And then to Frank.

Again the relationship between pricing and the promotions of sales supports as Frank said, we are nearly on par or we are on par. We have a positive effect in the first quarter where pricing inflation is concerned and of course with the activities on the promotion side where we are still below the competitor's level but if you add the two effects, positive pricing and some more sales support, then you can say we are on par with the previous year situation.

Can I just, quick follow-up, if I may. The provision you took in Q4 last of last year included some sales support. Is that feeding in or are we just apples-with-apples? Basically what you have got on price inflation is more or less offset what you had to do on promotions?

Our activities and which are shown the first quarter in the profit and loss statements are on the normal operative level, so there is no release of any provisions for that. So this is a normal operative business we are doing in the first quarter where promotions are concerned.

Yeah, Mike I think you also raised the issue regarding pensions. Obviously due to the fluctuation in the interest rates we have some volatility there but we continued our position to be fully in line with all national regulations applicable and there is no obligation to add in the foreseeable future extra cash.

Okay.

I think you also raised another question regarding to the bridge. Obviously, the 800 million, yes we offset a certain amount of it but not enough to be on par. So there is a significant negative contribution, which we expect to continue for the year, even though the first quarter might be worse than other quarters to come in that respect.

Our next question comes from [indiscernible]. Please go ahead.

Yes, good afternoon, everybody. A few questions for my side, first one very simple. You had an underlying 6.1% operating margin in the first quarter. You're guiding for 5% to 6% for the full year and it seems that the biggest swing factor FX we had the worst quarter now already behind us and the effect is going to be a bit smaller. So I was wondering what are the negative effects you would highlight for the coming quarters that would bring your margin down into the 5% to 6% range ? And the second question relates to the swing we saw in the working capital. There was a use of cash by about 1.4 billion in the first quarter in the automotive business. I was wondering how you see that going forward. Is that it just seasonal fluctuation that you expect to normalize or is there any reason why we should expect a structurally higher working capital level going forward? And last but not least Frank, you indicated at the annual conference that you are revisiting your KPIs and I was wondering if already at this stage you will be able to give us an update on what the focal areas will be of a revised KPI framework. Is there going to be more focus on cash flow, Is it return on capital. Or what is going to be on the top of the list of your future KPI framework and will we get actually the full details of that already with a strategy review in a couple weeks time or will that take longer to be finalized? Thank you.

Yes, hi, Patrick. Let's start with the KPIs. We will give a clear framework about the key elements of the strategy before the summer break. But as I indicated or we indicated, getting to the level of detailed KPIs and I think at least as important concrete milestones, this will probably be after the summer break given the number of brands and details we want to carefully work through. But as you indicated, certainly key issues will include free cash flow, return on sales, operating margins but we are listening very carefully also what we are hearing from you guys. So we might also want to add one or the other KPI which we currently don't entertain. So we obviously give a priority to that but the timeline is as laid out. You’re correct, we are currently at 6.1% operating margin. There is uncertainty, certainly FX I refer to but we certainly also continue to see the effects of the diesel issue. We have uncertainties in core markets I refer to obviously particular footprint Volkswagen in the United States but we also obviously have Brazil and Russia being all major markets. We know about the seasonality and these quick responses we see in the truck business that cautions us not to change our outlook. But certainly first quarter and the margin which is marginally above our guidance is a solid start and that's why we positioned basically our guidance, and we stick to it, it's way too early to be more optimistic given the environment which I think I carefully described.

Okay. Thank you, and on working capital?

Give me a minute with working capital, I'll come back to it.

Okay. Thank you.

Okay, operator. We will take the next call and we will return on the working capital topic in a moment or two.

Thank you. Our next question comes from Stephen Reitman from Societe Generale. Please go ahead.

Yes, thank you. Good afternoon. Two questions, please, first of all on China. I took your points that the Q1 last year was the end of the normal and then competitive pressures in the market then began to revert to a more competitive market but obviously helped again with the cut in the sales tax in the final quarter. Given the development we have seen in Q1 with a 26% decline, do you expect similar double-digit declines in the China results in the forthcoming quarters or any other factors that might help offset that? And secondly, on the United States I am trying to understand you are still limited in what you can say under the terms of the settlement agreement or the outline agreement you have reached on April 21. But it was reported in the New York Times that Volkswagen is challenging the jurisdiction of the court, the ability to level fines and statutory limitations over some of the vehicles as well. So, If you could actually comment on that as well that would be helpful?

Yeah, let me start with the United States situation. I think there is a very clear and outspoken request to keep all of the negotiations and discussions to treat them extremely confidential. And I think you guys on the call will appreciate us adhering to that request in order not to cause any harm or disadvantageous position of Volkswagen. The Company is committed to do everything possible on behalf of its customer and to minimize the final consequences and damage of this very unfortunate issue which happened in the name of Volkswagen. So we will obviously work under that direction. With respect to China, we obviously have a lot of launch activity in the marketplace. But we definitely see on a quarter-to-quarter comparison basis a bit more light at the end of the tunnel, but this market is progressing and changing so quickly, you are following it very closely, Stephen you see the changes in the segments, you see demand moving very strongly to small SUVs and budget cars. So it is difficult to truly predict a full year, but we continue to believe that Q1 was probably the worst but pressure will prevail for the remainder of this year and probably thereafter.

Next question comes from Tim Okutter, Deutsche Bank.

Yeah, thank you very much for taking my question. Tim Okutter from Deutsche bank. I would have two, please. The first one is on the diesel situation, I understand you cannot touch on the U.S., but maybe moving on to Europe, and can you please update us on where you stand with respect to the recall situation over here? Have you gotten the approval for the Passat, for example? How many vehicles have you recalled yet? And so on and so forth. And then secondly, just very quickly on trucks, the press caught up on the running antitrust investigations around truck manufacturers in Europe again yesterday. MAN seems to have been the whistle-blower so you're probably fine on that end but I think Scania has also not provisioned anything, is there anything you can update us there on with respect to this? Thank you.

Let me start with the truck situation. It is an ongoing investigation. Volkswagen is not directly subject to the investigation, so I cannot comment at this point of time. But we certainly will very closely monitor any ongoing development in that respect and with respect to diesel related to Europe, I will turn over to Fred.

The KBA I have no granted approval for the soft update for the Volkswagen Golf. We had already approval for Audi A4, A5, Q5, SEAT Excel, with a two-liter engine and we started already with Amarok. We are in deep discussions with the KBA, we expect some releases during the coming weeks with the Passat as the next volume model. So we and our dealer organization, which is very important, are prepared during the coming weeks for a ramp-up of all the recall activities. And we are quite optimistic to get a proper release in the coming weeks.

Can you perhaps tell us how many vehicles you have fixed so far in Europe?

We have completed up to now across all the brands, some 50,000 units.

And our next question from Charles Winston, Redburn Partners.

Yes, hi, good afternoon, Charles from Redburn. Two left for me. Just in terms of the China side, quite a big difference between the reduction in operating profit, I think 26%, 27%. And then the post tax contribution associated income, I was wondering if you could explain that difference and whether it will be sustainable as we go through the year, or will the equity side marry up with the operating profit more directly in future quarters? And then actually if I could just go back to, I think it was one of Mike’s questions, which I don’t think we got the answer to, which is in terms of the relationship between distribution costs and sales, which certainly is a percentage increase but also in absolute terms distribution and admin costs in the industrial side virtually flat year-on-year. Can you talk a little bit about that? How much of that flat result was currency? I guess there must be some currency benefit within that. How much of that was a restraint of incentives because we know there are some incentive costs that tend to get put into that line. And just flesh that out a bit because compared to the fourth quarter where your distribution and admin costs were up about €1.7 billion, then to see it flat the following quarter is quite a change. And perhaps if you could talk about your expectation for the trends in that item for the rest of the year. Is 1Q flat result a guidance for that? Or is the first quarter a little bit of an oddity? Thank you.

Okay, Charles. Thank you very much. I will just pass you over to Frank.

I think the one effect you were referring to, the equity result was, we disposed in the first quarter of LeasePlan. We obviously had a one-off effect, an extraordinary profit contribution in the range of €200 million that would explain the difference you are referring to. I think the distribution expenses and sales issue, we continued after the diesel issue to really talk about how we deal from the strategic perspective with this level of uncertainty we are facing. And we said very early, we need to do a balancing act in terms of volume and profitability. So we lost in 2015 1.8% sales. We certainly, we grew sales in the first quarter, deliveries to customers at least. But we also lost some market share. And this balancing act will continue. We are not going to buy market share but we certainly see the headwinds in the cost of the distribution expenses, distribution costs. And this will prevail as long as we have not fully overcome, particularly as it relates to brand Volkswagen, the effects of the diesel issue. But we deem it to be strategically important not to buy market share damaged brands, the brand in particular or residual values. And this balancing act will continue, but we certainly have all the confidence in the world that brand Volkswagen has the inherent strength to overcome the diesel issue successfully.

Next question comes from Fraser Hill, Bank of America.

Hi, good afternoon, it is Fraser Hill from Bank of America. Two left for me, first on the cash flow. Help me understand why you under-produced by 6% or so in the quarter. Why you haven’t seen a benefit to inventories in your industrial balance sheet and therefore also working capital benefit during the quarter, but what is the dynamic there? And then attached to that more broadly, how do you view the cash flow performance of the business in the first quarter? You said the operating performance is a solid start. Is that the same with the cash flow? Or was it slightly underwhelming from your perspective relative to what you might have planned? Second question is on the P&L. You had a few billion revenue decline, you had distribution admin costs were broadly flat year-on-year, DNA that was up and R&D was flat. So it looks like you had a big change in raw material, the more raw material component of the COGS. Is that right? Or really what was driving that €2 billion reduction in COGS in the face of a lot of other cost items that were either flat or increasing? And how stable is that? Thank you.

we can see in Europe at least, that we have a very stable diesel share, whether it is in fleet or in the private market. So there is no substantial change. There was also a question regarding the incentive, what we count as, what we describe as incentives. It is not just cash, it is all the portfolio of promotions we have, whether it is additional service contracts or whether are campaign cars or product enhancements. Everything is covered under our continues under the cost of promotions.

Okay, thank you.

I think I also owe still Patrick an answer on the working capital question. For the outlook of the working capital, we expect negative effects influenced by outflows of provisions due to the diesel issue. Positive effects will come from the decrease in inventories. Overall the change in working capital will be negative in 2016, particularly because of the mentioned outflows of provisions.

And your next question comes from Victoria Greer from Morgan Stanley. Please go ahead.

Hey, guys, sorry, it is actually Harold. A couple clarification questions for me. And I missed a little bit earlier of the call. But two things. Just on mix, volume and price, you have come up with either a very small number or a small positive number and I just cannot make those numbers add up. Your production year-over-year is down 170,000, your pricing, specifically in the U.S. where we have detail, is significantly worse. And so on that basis I am expecting global pricing to be worse. So can you give us some detail that actually matches on those numbers so we can make some sense of that one? Ditto on FX. €800 million seems a huge amount on FX. Maybe you can give us a little bit of detail into how that breaks down for currencies. Presumably you were hedged in Q1 last year so it is difficult to see how the U.S. dollar-euro has deteriorated year-over-year. And then lastly, also in terms of detail again, can you give us some idea of what happens to the accounting for the joint venture profits between EBIT and net? Because again, that seems to have changed very sharply in Q4 last year. It’s changed again in Q1, and we just want to understand how we forecast that net going forward relative to a much lower EBIT margin base, please.

Thank you, Harold. I think we have actually touched on these already in the call today. But maybe Frank will run over those very quickly again.

Starting with the FX, obviously the main driver Argentina, Brazil, South Africa, the UK, as well as Turkey. We expect that to continue even though not at the level we have seen it in the first quarter. You refer to the United States. It is a, for brand Volkswagen, a particularly difficult market but we shouldn’t forget that we also run very successful in the United States Porsche and Audi and also Financial Services. And pricing, luckily not only consists of the business in the United States, if we take all markets together, we have been able to price. There was some obviously offsets by incentives, but in total the outcome was for mix volume and price, slightly positive. With respect to FX and all that stuff, we don't provide more details for competitive reasons.

Can you tell us at all what the impact of dollar-euro would be quarter on quarter? Because we were still expecting that to be sharply positive year-over-year.

I think as I mentioned, we are not in the position to provide more details. But obviously, it contributed to a certain extent, but our hedging policy was certainly a balance to it.

Okay. And Frank, just one comment on the Chinese equity versus the proportion of entity profit again as we discussed with the LeasePlan impact.

We had a one-off around about €200 million positive effect from the disposal of LeasePlan which will explain the difference you were referring to.

Perfect. Guys thank you very much for that.

Okay, Harold, thank you. And we will take one more question from analysts before we switch over to journalists.

And your next question comes from Christoph Rauwald from Bloomberg.

Good afternoon. I do recall comments from the annual earnings press conference that the 6% margin target for the Volkswagen brand, in theory at least still valid, but it might take a year or two longer to get there. If we look at the year 1Q results, it looks increasingly like a stretch. When do you expect the brand to be able to reach the 6% return on sales on a sustainable level?

That is a very good question that I would love to be in the position to have the final answer yet. But certainly, I have a diesel myself, we basically both said this is something not yet finalized because our process of defining the concrete KPIs for each and every brand and also the milestones which your community is obviously very eager to get. We both said that 6%, notwithstanding final decisions in the Board, don't seem to be the wrong number. But we also give a very clear indication that particularly due to the diesel issue it is unrealistic to assume that in 2018 the brand would be there. So, it is part of the process to determine when the 6% or whatever final number the Board will decide on is to be accomplished. But what’s important is that we get into the systems the necessary steps and commitments to get there. Whether it is a year earlier or later is certainly important but most important is that we have the underlying structural improvements in the brand and in the way we run the business.

And our next question comes from Christiaan Hetzner, Automotive News Europe.

Hello, -.

Yes, we can hear you, go ahead please.

Thank you very much. I had two questions. First of all, could you going back to the profitability of the VW brand, could you give me an idea about where the brand's profit margin might have been were you to strip out some of these incentives that you had to ramp up? And you strip out some of the Dieselgate related costs you might have had to pay to other brands to reimburse them. Secondly to go back to the issue about this battery plant investment, there have been reports saying that we are talking about investments of €10 billion much at that level. And that would be about 10 times the size of the normal green fuel car plant. So, could you give us any idea about the size of the possible investment that you confirm could be an outcome and what you would be building that for, what kind of scale, sales, batteries, any additional detail on that front would be very helpful. Thank you.

Sure, hi, Christiaan. Let me start with a better investment. As I mentioned earlier, this is pure speculation. This has not been confirmed by the company. We are certainly discussing in our strategic analysis very carefully, what is strategically important for the company in the future to do in house or to outsource, what we should invest in order to make sure that we have a competitive product offering in the market. And therefore the EV and battery technology is critical and it is important. But those numbers and everything related to it is not official and by no means confirmed by the company it came from other sources. You talked about brand Volkswagen and the what if discussion. It is really hard to extrapolate the diesel issue out of the total performance. What I said earlier is even without diesel, we would currently discuss a profitability level which we would not deem to be satisfactory. Notwithstanding the diesel issue which obviously placed an additional burden and challenge to the brand. So we are talking about the general need to improve the brand's profitability level and efficiency. But certainly on top of we have to work through the implications from the diesel issue and when we talk about the fossil and diesel-related impact, that belongs to the brand which develops the engine and this is brand Volkswagen and therefore they are contractually agreement that every other brand concerned basically charges the related expenses to the brand which is responsible.

outflows, expenses, those were the reimbursement costs for VW brand and other brands?

I mean we talked about at the end of 2015 about 16.2 billion related to the diesel issue. The bulk majority of that amount belongs to brand Volkswagen. So, in that respect brand Volkswagen has by far the biggest share of that number and the internal charges are not being disclosed.

Okay, thank you. We have time for perhaps one or two more questions. Operator, the next journalist please.

Our next question comes from Jean Phillipe LeCoeur from Les Ecoste. Please go ahead.

Hello from Frankfurt. Again some questions relating to VW margin. It would explain a part of the decline in margin Volkswagen costs by higher marketing expenses and related to the topic of diesel. Can you please once again elaborate? Is it that you are granting special rebates so to guarantee a level of production and then of employment at the Wolfsburg unit? The first question. The second one, you explained the positive impact of €0.5 billion in provisions related to the diesel thematic. This positive impact of 500 million is not included in the EBIT of 73 million. Is it correct or is it maybe please give me this quick answer. And finally, the recall campaign, I am understand you correctly that at this time 50,000 cars have been repaired from around about 8.5 million in Europe? So, do you still expect to finish this campaign during this year of 2016? Thank you.

Yeah. Let me start certainly the €0.5 billion is an extraordinary item and therefore not included in the €73 you are referring to. You talked about the VW margin and the incentives, I think I explained earlier in the call that we, the brand Volkswagen overall lost in major markets, market share. This is the result of us also trying to balance volume and profitability. We have sub vented interest rates in the marketplace, we have competitive leasing offers, but also we have what we called trust and loyalty initiatives, free maintenance service contract, that type of stuff. That type of its incentivation is from our perspective in line of what brand Volkswagen stands for. It is not harming residual values which we consider to be very critical for a brand like Volkswagen. So, when we talk about incentives, we try to stay and continue to stay below competition. But when we incentivize, we tried to do it in a smarter way than putting money into the glove box. And for the campaign business I will hand over to Fred.

Up till now we finished the 50,000 cars, so we expect a lot of releases by the KBA. So there will be a ramp-up of the campaign in the second half here and we expect at least that we get all the releases in Europe for all of our models and that the majority of cars will be repaired during the year could it could be that there were some cars left for the first half of year 2017.

Okay. The 50,000, is that for all of Europe at this time?

The 50,000 figure was Europe, all Europe.

Okay, thank you, Fred. We will now take our last question. And for those of you who are still on the line, our apologies, but time is running. But our last question now please, operator.

Your last question comes from Jan Schwartz from Reuters.

Yes, hello here, from Hamburg, good afternoon. Just a very brief question for Mr. Witter. Will you please could help me to get a feeling what are you going to expect from June 21 when it comes to this decision in San Francisco? Do you expect any further financial burdens from the compromise you're going to do to present together with the United States?

Yeah. Hi, Jan. Obviously there is no way that I am going to speculate about the outcome and what Judge Breyer is going to decide. But you certainly followed very closely the recent public statements he made. From my perspective there is nothing to be added. When we presented the 2015 financial statements we basically confirmed that we included all known risks related to the emissions issue on a worldwide basis that includes legal risks. And we haven't changed those numbers in any significant manner during the first quarter.

Okay. Thank you Frank and thank you, Fred. Thank you all for joining our call here today. This closes the call from Volkswagen from Wolfsburg. Goodbye.

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