Fred Kappler - Head, Group Sales Oliver Larkin - Head, IR Frank Witter - Board Member, Finance & Controlling

Stuart Pearson - Exane BNP Horst Schneider - HSBC Fraser Hill - Bank of America Merrill Lynch Patrick Hummel - UBS Stephen Reitman - Societe Generale Jose Asumendi - JPMorgan Tim Rokossa - Deutsche Bank Arndt Ellinghorst - Evercore ISI Michael Tyndall - Citigroup Christoph Rauwald - Bloomberg Christiaan Hetzner - Automotive News Europe Charles Winston - Redburn Partners Georges Dieng - Natixis Welcome to the Volkswagen AG's live audio webcast and conference call on the results of the first three quarters 2016. For your information, today's conference is being recorded. At this time I would like to turn the conference over to Mr. Oliver Larkin, head of the Group Investor Relations for Volkswagen AG. Please go ahead, sir.

Thank you, operator. Ladies and gentlemen, welcome to Volkswagen's conference call on the results for the period January to September 2016, based on the interim report we published this morning. For today's conference call I'm joined once again by Frank Witter, member of the Board of Management, Volkswagen AG, responsible for finance and controlling; and Fred Kappler, Head of Group Sales at Volkswagen AG. You can follow today's webcast via our website, where you will also found the charts available for you to download. Following the presentations we will take questions first from analysts and later from journalists. Let me now hand you over to Frank.

Yes, thank you, Oliver and a warm welcome to all participants of this call. The Volkswagen Group delivered a solid performance over the first three quarters of 2016. Despite continued challenging market conditions, especially in South America and Eastern Europe and ongoing impacts from the diesel issue our deliveries to customers which includes the Chinese joint ventures, increased by 2.4% versus the previous year to 7.6 million units. This positive development was mainly driven by continued growth investment in Central Europe as well as China. Our sales revenue of around €160 billion came in on the same level as the comparable period in the prior year. Operating profit before special items increased in the first nine months of the year to €11.3 billion, up 10.5% compared to the same period of 2015, corresponding to an operating margin of 7%. Negative special items for the first nine months, including an additional €442 million in the third quarter, totaled €2.6 billion mainly related to legal risks. I will, of course, go through this in more detail later in our presentation. Profit before tax reached €8.2 billion. The financial result, at minus €0.5 billion, was mainly impacted by the negative valuation of derivatives and the lower at-equity result of our Chinese joint ventures. A positive effect came from the income relating to the sale of LeasePlan in Q1. A based effect rose in the financial results from 2015 due to the considerable profit from the sale of our stake in Suzuki of €1.5 billion. Automotive net cash flow of €7.5 billion came in 33% lower than the previous year mainly as a result of lower dividends from our Chinese joint ventures and the sale of our stake in Suzuki of €3.1 billion in cash terms which boosted 2015 against the €2.2 billion we realized for LeasePlan in Q1 this year. Automotive net liquidity ended in the first three quarters at around €31 billion, continuing to ensure a secure platform to manage our future liquidity needs and the soon upcoming outflows relating to the dealer issue. The receipt of the dividends from our Chinese joint ventures of around €3.4 billion was an important driver here, as were the proceeds from the sale of LeasePlan that I just mentioned. In summary, despite challenging market conditions, we're slightly raising our full-year earnings guidance for our underlying business before special items. We now expect an operating return on sales for the Group to come in at the high end of our 5% to 6% range, while revenue could reach the prior-year amount. We will discuss the financial result in more detail in a few moments after Fred has taken you through our sales performance.

I would also like to extend my welcome to the participants of our conference call today. The following overview shows the development of the worldwide car market and Group deliveries to customers of our Passenger Car brands in comparison to the same period of last year. The global car market maintained its growth path in the third quarter of this year, primarily driven by the Chinese market. On the other hand, the global development was clouded by continued market deterioration in Brazil and Russia, that are burdened by difficult economic and political conditions. Furthermore, other key markets such as the United States and Canada lost momentum in the course of the first three quarters of this year. The Volkswagen Group grew with nearly all car brands and recorded increasing growth rates in comparison with the previous two quarters. The major growth driver for the Volkswagen Group was the Chinese car market, where we achieved pleasing double-digit sales growth. As a result, worldwide deliveries to customers of the Volkswagen Group in the first nine months were around 2% above the corresponding period of the previous 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 year-to-date. The overall market in North America benefited from an improvement in the economic situation and increased moderately. While the demand for new vehicles increased in Mexico, the pace of market growth in the United States and Canada slowed down. Deliveries of the Volkswagen Group remained slightly below the previous year's level, caused mainly by the diesel issue for the Volkswagen brand. Nevertheless, Volkswagen Group began to record a rising trend in this region from the first to the third quarter. Year-to-date the sales performance of Audi and Porsche is very satisfying. In Western Europe, a marked increase was recorded in the period between January and September 2016. This positive trend was driven both by segments such as small and compact SUVs as well as the premium segment. The Volkswagen Group benefited partly from the positive development in this important region and showed increasing sales. Nevertheless, in some Western European markets such as Germany, the United Kingdom and France we see some uncertainty due to the diesel issue and, in some cases, also restraints which is slightly reflected in sales of the Volkswagen brand. Developments in Central and Eastern Europe in the first nine months were still heterogeneous. While some car markets in Central Europe such as Poland and the Czech Republic grew, demand in Russia continue to soften due to falling real incomes, unresolved geopolitical tensions, continued economic sanctions and a wide budget deficit. The Volkswagen Group increased its sales volume in this region despite the adverse market situation. Year-to-date, the situation in South America remains tense and resulted in a further decrease in demand. Particularly Brazil, the largest market in South America, is still in the midst of a serious crisis. This difficult environment also weighed heavily on the deliveries of the Volkswagen Group. Furthermore, problems caused by supplies in Brazil limited the sales of all Volkswagen van models. The trend on the overall Passenger Car market in Asia Pacific in the first three quarters of 2016 was above the previous year. Supported by tax relief for vehicles with engines no larger than 1.6 liters and high demand for budget-priced entry models in the SUV segment, China continued to be the important global growth driver. Our brand achieved also favorably year-on-year gains and exceeded the previous year's result. Next I would like to present the performance of our brands in the first nine months of 2016. In the period to September, around 7.6 million passenger cars and commercial vehicles were delivered by the Volkswagen Group worldwide, representing an increase of 2.4% over the corresponding period of the previous year. Deliveries of brand Volkswagen passenger cars increased by 0.6% to almost 4.4 million units. Alongside the strong growth in China, the brand also developed positively in Central Europe. Nevertheless, Volkswagen is facing challenges in several markets due to an adverse macroeconomic environment in Brazil and Russia as well as the limited participation in the small SUV segment in Western Europe. Moreover, the consequences of the diesel issue in the U.S., but also in some Western European markets, weighed on the brand. Since the start of this year, Audi delivered around 1.4 million cars across all models to customers, an increase of 4.5%. Demand especially in Western Europe and China played its part in the positive sales results. Within the product portfolio, the new A4 and SUV models in particular were very popular. SKODA remains on course for growth. From January to September, the brand sales increased more than 6% to 841,000 vehicles compared to the same period last year. SKODA achieved strong growth in the core region of Europe and its largest market, China. A substantial contribution to this increase was provided by the new Superb. SEAT sales volume went up in the first nine months of 2016 by 1.5% to 330,000 units, driven in particular by high demand for the Leon and the new Ateca. Porsche's global sales increased year-on-year by 3% to 178,000 cars. The positive development was supported by high sales in China and North America. Growth during the first nine months of this year was mainly driven by the models Macan and the Boxster. Volkswagen Commercial Vehicles delivered 351,000 vehicles in the first nine months, an increase of 9.1%. The renewed T-series remains the major driver behind this positive sales result. The global truck market above 6 tons that are relevant for the Volkswagen Group has risen slightly over the weak previous year. Nonetheless, unfavorable developments in South America and the Middle East had a negative effect on the overall results. While both MAN's and Scania's sales results were affected by the adverse market situation in South America and Middle East, Scania was able to offset the decrease in these markets behind demand in Europe and recorded an overall sales increase of almost 7%, whereas MAN recorded a slight downturn compared to the previous year. The order books at MAN and Scania for the first nine months of 2016 were slightly higher than in the same period last year. Sales in Power Engineering by MAN decreased by around 7% and reached approximately 2.6 billion. Overall, we expect that the deliveries of the Volkswagen Group in 2016 will be slightly above last year. Finally, I would like to introduce our latest product highlights which show some of the different facets of the Volkswagen Group. Following a successful world premiere at the 2016 Geneva International Motor Show, Volkswagen launched this month it's all new Phideon on the Chinese market. The locally produced, top-of-the-line model positions itself as both a sports saloon with maximum dynamic performance as well as a chauffeur-driven limousine with distinguished elegance. Audi will extend next month its Q family with a compact SUV. The new Audi Q2 is an urban-type vehicle for every day driving and recreation, bundling a progressive design and great driving pleasure with a high level of functionality. Connectivity, infotainment and assistance systems are on the level of the full-size category. With a new large SUV, Kodiaq, SKODA will conquer from early 2017 a new segment, a new customer group for the brand. SKODA's latest model which can be ordered in this quarter 2016, will present all of the brand's strengths, well-thought-out functionality, superior interior space and excellent value for money. The largest boot within its class and the optional third row of seats alone makes the new SUV the ideal companion for day-to-day demands. The new Panamera 4 E-Hybrid by Porsche had its global debut only recently at the Paris Motor Show and is now available for order. This four-door hybrid sports car offers not only sustainability but also performance. The new Porsche plug-in hybrid always starts in purely electric mode and drives without generating any local emissions within a range of 50 kilometers and has a maximum speed of 140 kilometers per hour. The all-wheel-drive Porsche achieves a top speed of 278 kilometers per hour.

Thank you, Fred. Now let's turn back to Frank for a deeper dive into our financial performance.

Thank you. I would start with our Group performance before moving to discuss our brands in greater detail. For the first nine months of 2016, sales revenue for the Volkswagen Group at around €160 billion was at the prior-year level. Continued positive development in our Financial Services business as well as a better mix offset the significant negative burden from foreign exchange rates of €4.3 billion. Operating profit before special items for the Group was up 10.5% to €11.3 billion. Considering the substantial foreign exchange headwind of €1.2 billion after hedging, this is a solid result, helped in particular by the good mix development and product cost improvements. The operating margin before special items of 7% remained above the range of our full-year guidance. Market conditions continue to be tough and we believe we're right to remain cautious with regards to our full-year expectation. Special items of €2.6 billion reduced the reported operating profit to €8.6 billion. As I'm sure you will recall, we booked €6.7 billion of diesel-related issue items in Q3 last year. Within our financial result, the earnings for entities consolidated at-equity, mainly the Chinese joint ventures, came in at €2.6 billion. The Chinese proportional operating profit for the nine months amounted to around €3.6 billion which was just below the prior year-to-date figure. But despite the competitive environment and adverse exchange rate, we can see that the gap has progressively closed as this year has developed. The other financial result came in negative at €3.1 billion. Here I would like to point out that in the third quarter of 2015 we sold our stake in Suzuki which resulted in an income of €1.5 billion which explains most of the difference to the prior-year performance. In addition, the present value effect by applying lower interest rates on even higher provision impacted this year's result to date. Group profit before tax of €8.2 billion equaled a 5.1% return on sales. Moving on to the detailed analysis of the Group operating result performance for the nine months of 2016, this continued to show broadly similar underlying trends to those we reported at the half-year stage. Over this period, the position volume/mix/prices in the Passenger Cars segment reported a plus of around €0.8 billion with mix still the key driver. Negative exchange rate effects of around €1.2 billion, mainly driven by the currency development in countries such as the UK, Argentina, South Africa, Mexico, Russia, Brazil and Turkey, had an adverse effect on the operating result. Product cost savings showed further good momentum with the performance of €2.1 billion mainly as a result of our efficiency programs, purchasing cost improvements and the ongoing toolkit rollout. Fixed costs and startup costs rose at a slower rate by €1.1 billion. Seasonality effects will drive up fixed cost in the last quarter. However, we continue to expect product cost savings for the full year to at least compensate for the impact. Earnings in our Commercial Vehicles division rose by €0.3 billion especially on the back of the good sales performance in Europe. Our Power Engineering division came in flat compared to last year. With earnings higher by €0.2 billion, our Financial Services division maintained its good performance. In total, operating profit was €11.3 billion for the first nine months before special items. The increase in special items to €2.6 billion for the first nine months related mainly to legal risks, predominantly in North America. The increase in Q3 on Group level of around €0.4 billion can to a large extent be attributed to the Audi A3 liter engine issue. For the record, this now brings the total diesel P&L impact since last year to €18.2 billion. Turning to our brands in more detail, the operating performance before special items of the Volkswagen Passenger Cars brand decreased compared to the prior year to €1.2 billion. The challenging market conditions that Fred described in the U.S., Russia and South America as well as negative exchange rates, lower volumes, a weaker mix and higher distribution costs, in part as a result of the diesel issue, had a negative impact. These were partially offset by the positive effects from our efficiency program. Special items year-to-date totaled minus €1.3 billion, mainly resulting from the diesel issue. Audi's operating profit before special items came in at €3.9 billion, close to the result of the comparable period. The unfavorable exchange rate environment, very intense competition, the high outlays for new models and technologies, as well as the expansions of its international production footprint burdens the operating results. Special items related to the 3-liter diesel issue and Takata airbags amounted to minus €0.9 billion year-to-date. On the operating profit at SKODA, it came in at over €0.9 billion, a significantly 28% increase year-over-year. The excellent result which continued the progress seen in the previous quarters, was mainly driven by positive volume and mix effect, optimized product costs, as well as a higher demand for all products when compared to the prior year. SEAT result of €0.1 billion also improved on the back of successful new products, especially the Ateca. Bentley reported a profit of €51 million which was on the level of the prior year. Porsche delivered an increased operating profit of €2.9 billion, an improvement of around 12% driven in particular by continued sales growth, positive currency and mix effects. The operating result for Volkswagen Commercial Vehicles of €0.4 billion improved on the back of increased volume, a better mix and the popularity of the Multivan, Transporter and Caddy. Increased sales and service revenue, particularly in Europe, coupled with an improvement in the mix, helped to drive the operating profit at Scania to €0.8 billion, while exchange rates played a negative role. Special items of minus €0.4 billion relating to the antitrust legal proceedings were carried over from the second quarter. MAN Commercial Vehicles earnings of €0.2 billion were positively affected by volume, improved margins in Europe and the impact of structural improvements. MAN Power Engineering earnings came in lower than prior year on the back of lower revenues. The Other line mainly contains internal postings, especially the elimination of intragroup transactions derived from sales revenue between Group companies, as well as the amount and breakdown of related stock levels held at the balance sheet at the date. As you are more than well aware, when looking back on the trend over recent years, these items can strongly vary. This quarter, for example, was in part impacted by currency effects resulting from the devaluation of the British pound. Volkswagen Financial Services continued to perform well and grew earnings to €1.5 billion, helping to boost the full Financial Services division's reported earnings to €1.8 billion. Let me now turn to the cash flow in the Automotive Division. Operating cash flow for the division over the first nine months was below the prior year at €17 billion. The decrease was mainly driven by the lower dividend from our Chinese joint ventures and less proceeds from the sale of equity investments. CapEx was higher in absolute terms over the nine months at €7.8 billion, while the CapEx ratio came in at 5.7%. We're well aware that this level must and will undoubtedly be improved. However, please consider that up to 70% of our current CapEx is product-driven, some of which -- as is normal in our industry, with long project lead times -- was committed over two years ago. These essential products will create sustainable prospect profit streams in the future. Therefore, it would make no sense at all to stop them at this late stage. Factory commitments such as for Audi in Mexico, the VW Commercial Vehicles Crafter Plant in Poland which officially opened on Monday or our expansion of our plant in Chattanooga for the badly needed midsize SUV, are vital components of our Strategy 2025. These projects, together with more electric vehicles being made available for our customers, are imperative to create sustainable profitability and to secure our future. We have pushed very hard on non-product areas and we will continue to push even harder in order to progressively bring the annual CapEx ratio to a competitive level in line with our strategic target of 6% annually. The adaptation of heavy-duty product line management to intensify our focus on financial returns for each product-related decision is just one example of the key efficiency improvement drivers for us. At €4.2 billion, capitalized development costs were above the prior year by around 28%. Main drivers include our continued focus on the development of more environmentally friendly vehicles, effects from important volume products and the shift to our new powertrains. If you dive into the details, you will see a lot of major upcoming premium products in the pipeline, such as the next-generation Porsche Cayenne and Panamera, the Volkswagen Touareg, the Audi A6 and A7 family and the Bentley Continental. The Volkswagen Group capitalizes the developing cost of products approved for future serious production when certain thresholds have been reached and there is a reasonable expectation that they will bring an economic return to the Group. The capitalization ratio therefore mirrors the multitude of planned products that will generate future profits for us. Just to make it crystal clear, there is no discretion whatsoever with the booking of capitalized development costs. In summary, supported by the sale of our interest in LeasePlan, as reported in the first quarter and the full receipt of lower dividends from China, net cash flow for the nine-month period came in at a positive €7.5 billion. Consequently, net liquidity in the Automotive Division stood at a strong €31.1 billion at the end of September. This gives us a secure platform to manage our future liquidity needs and, in particular, enables us to manage the upcoming outflows due as a consequence of the diesel issue, including especially the settlement on the 2-liter engines in the U.S. which was finally approved on Tuesday evening. For the buybacks and repairs in the U.S., the diesel-related cash outflows will tie into when customers bring their vehicles into the dealerships. The process is expected to kick in immediately and continue through 2017. As the remaining legal settlements crystallize a clearer picture of their related cash settlements, they will emerge. Our solid and robust balance sheet ensures that we can successfully face the future challenges. So, turning to my last slide with our outlook for 2016. We expect that deliveries to customers of the Volkswagen Group in 2016 will be slightly above the level of the previous year, mainly supported by a growing volume in China. However, challenging market conditions continue to persist. In addition to the diesel issue, a highly competitive environment as well as interest rate and exchange rate volatility and fluctuations in raw material prices still pose challenges. We anticipate further positive effects from the efficiency programs implemented by all brands and from the modular toolkits. We now expect the full-year 2016 sales revenue for the Volkswagen Group may reach the prior-year levels. Consequently, we're slightly improving our outlook for the underlying operating business before special items, where we now expect the operating return on sales for the Group to be on the high end of the range between 5% and 6% in 2016. So, ladies and gentlemen, to sum up, as you can see, we have achieved a solid result so far this year. However, as said at the last call, huge further efforts are required to absorb the significant burden coming from the diesel issue and to continue the crucial improvement of our overall efficiency, particularly within the Volkswagen brand. And not to forget, we also have to prepare our Company for the new world of electric engines and mobility, as we outlined in our Strategy 2025. But I strongly believe we're on the right track. Finally, even during tough times such as today, where not every single line item might meet your expectations, we continue to work on your insights and feedback. We're always open for dialog. You can rest assure that we're listening and we will keep on fighting for a stronger and even better Volkswagen Group. Thank you.

Okay. Thank you, Frank and let's take your words as you said it and we're now open for that dialog. Operator, can we now take the first call, please?

[Operator Instructions]. We will now take our first question from Stuart Pearson from Exane BNP. Please go ahead.

Obviously, your guidance is worded with many stakeholders in mind, I guess to put it that way. So maybe just a slightly different question, thinking about Q4 and just the quarterly profit pattern this year. Normally Q3 and Q1 are the weakest and Q2 and Q4 perhaps a bit stronger. Is there any reason why the quarterly profit pattern would be any different this year? So that would be my first question. The second question, just two on the cash flow. Firstly you did mention there that the cash outflow will start or begin with the buybacks. How significant a number should we model, do you think, for that being in Q4? Do you really expect to be able to execute many of those buybacks in the U.S. in the last month and a half or so of the year, once they begin? So will that lead us to, I'll call it a negative free cash flow number for Q4? And then lastly on CapEx, as you mentioned, some of these projects is a few years' lead time. So at what point do you think we can get to the stage where we might see a tipping point in CapEx? Is it still a year away or is it a few quarters away? When do you think we might start to see that evolve? Thank you.

Regarding the guidance, let's start with cash flow. Yes, we expect a negative cash flow in the fourth quarter. We have to acknowledge that significant outflows will start. With respect to the net liquidity, obviously, a lot of those outflows are depending on customers' decisions. But it's a pretty safe bet to say that in terms of net liquidity available at the end of the calendar year, there will be a 2 rather a 3 in front of that number. With respect to quarterly profitability patterns, obviously you know that the second quarter continues to be the strongest. I know that you guys deem us to be conservative with respect to our forecast; and given the circumstances, particular diesel, we're dealing with, we continue to believe that this is the right way to deal with the future. And you might consider us, if you add our guidance up and do your math -- yes, we're a bit conservative, but we deem that to be appropriate. CapEx is certainly something we all pay a tremendous amount of attention to. We have committed to a target in our strategy and we owe you guys a breakdown by brands as well as their respective milestones which we will deliver later this year. So the answer to your fair question is, as quickly as possible, but certainly things are not changing overnight and we shouldn't make stupid decisions, as I described in my speech, related to product which is quite far in the development process. But it is a major issue for this Company and we continue to push very hard as promised.

Just quickly, as you mention it, you talk about the brand margin target still towards the end of this year. I think probably most of us on this call would have expected that to be slipping into next year by now. But you still expect to be able to come with that by the end of the year?

We still continue to plan for that. You all know from the various meetings and discussions we had that our strategy depends on getting a signed and sealed deal on the Future Pact. This is essential not only for brand Volkswagen but also for the entire Volkswagen Group. So I work under the strong assumption that we get to the finish line. The discussions and negotiations are obviously in the final stages, you will recognize from various comments and what you see and hear out of Wolfsburg. So we continue to plan for this year. And obviously, brand Volkswagen for this year, there's a lot to be done. We gave the guidance that we still fight for the 2% margin. We're at 1.6%, so it becomes even harder to get there; but as promised we continue to keep fighting. And obviously the impact from the Future Pact will be seen in later years. Not that much for this calendar year alone.

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

It's Horst from HSBC. I want to ask first a question on your production levels. We're all aware that you had these production breaks in Germany this summer, so in that context I'm surprised that it seems to me that your production ex-China has been up in the third quarter when we strip out the China sales, whereas your sales ex-China were down. So am I right in assuming that there's been some restocking even in Q3, not destocking and that we should see some lower production levels on the back of that in the fourth quarter? And in that context also, I'm surprised why you report here the volume/price/mix effect was minus €300 million for the third quarter. So maybe you can provide us some breakup, what is here behind the minus €300 million? Was it more driven by price/mix or more by volumes? And yes, then on the Others line, we were surprised by the low negative impact from the Others line. I just want to understand what we should expect for the fourth quarter. We see now for three quarters a fairly low level of this Others line; that should continue into Q4, right? Thank you.

Yes, with respect to production, it's true, obviously, we lost some cars from the issues we had with a supplier. It was a particular supplier group that impacted predominantly Brazil and also to a certain extent Europe. But we obviously have a lot of flexibility in our system to make up for what we lost. So therefore, it certainly was a major concern, but we're dealing with it effectively for the time being. On the overall stock situation, we obviously always plan with the ideal stock which is pretty much driven by future expected sales and deliveries to customers. So we obviously also have to take the seasonality into consideration, model year change and all those issues driving those numbers. But all, overall, we feel to be at a reasonable level and therefore, obviously, monitor all those levels on a brand and by market level. But there is currently no major concern, so we feel prepared to take part in positive market developments where we expect them. With respect to volume/mix/price, you were right, there is a volume decline of roundabout 90,000 units in Q3. We had to a certain extent a positive contribution from mix; but in total the Q3 number is minus €0.3 billion. We still certainly have a significant positive contribution for the full nine-month period, as you know.

But sorry, how can the volume effect be negative if the production is up?

Because of China.

Okay, that's included there? Some royalties are included in that line in the volume factors?

If you take our volume, we obviously have -- the China volume is not in our operating result and therefore if you take that out, we were down 90,000 units for that quarter.

All right. So production was down, not up?

The volume on --

The sales volume. You speak for the sales. Of course, yes. Okay, understood.

I'm talking about the sales volume which, obviously, confirms that our overall positive volume development of 2.4% was to a very great extent driven by the success in China, as we expected. We mentioned it in earlier calls that we expect a strong second quarter in China, not only because of the market but also because of our new product which we launched. And therefore we're fully participating in the strong market. But you have to separate for P&L purposes certainly China volume from the rest of world.

But the conclusion would be wrong that now you have got to cut back on production in the fourth quarter?

No.

Because you produced more than you sold in Q3.

Yes, but you also need to take the seasonality, model year changes and those issues into consideration. We adjust carefully and very quickly, if needed, production volumes. But generally speaking, we also need a certain product stock level in the pipeline. So we have concrete plans laid out for the rest of the year and we certainly will adjust on a when-needed basis.

Okay, all right. Then just the last question was on the Others line.

Yes, I mean, the Other line is one I referred to in my speech, Horst. It is one of my favorite line items because it's almost impossible to predict. It basically contains all those internal postings -- and we basically have, obviously, a lot of intergroup transactions and therefore we have to eliminate internal profits, investments, supplies and reserves. These intergroup transactions are driven by a lot of numbers including the mix, but also currency. So therefore I in my speech gave you some guidance that not all, but to a great extent, also related to pound sterling developments, those numbers are basically a mix back for all those various elements as laid out earlier.

We will now take our next question from Fraser Hill from Bank of America Merrill Lynch.

It's Fraser Hill from Bank of America Merrill Lynch. I just wanted to ask a couple of questions about the bridge; and then secondly, a question about your liquidity as you get into the cash out for the diesel provision. Firstly on the bridge, you've had a pretty helpful benefit, as you mentioned, from R&D capitalization. I take your point that there's no discretion over that, but it has been somewhere close to a €900 million benefit for the first nine months of the year. So where do we see that in your bridge? You talked about the product cost-saving bucket as the result of your efficiency measures, but does it benefit that line or do you look at that in terms of the volume/price/mix effect? I'm just not quite sure how we would tally the P&L with the bridge on that item. And secondly, while we're on the bridge, I was interested to hear what your raw material and materials benefit has been this year from lower commodity prices and how you think that's going to progress moving ahead from this point. While I'm at it, I'll ask my third question, on liquidity which is really just to say obviously you have a high level of net income and if you're looking at today €31 billion as you highlighted, you've got a high-teens billion of provision. Are you comfortable with your level of liquidity as you get through paying the diesel cash outs? Really in the context of the rest of the automotive sector, we're looking at most auto OEMs today holding very large net cash balances. On a crude basis, deducting your net liquidity or the provision from your net liquidity, will leave you looking relatively -- with a relatively light cash balance compared to the industry. Does that worry you? Do you think you might need to take measures to improve that position? Or do you feel comfortable today? Thank you.

Fraser, there's quite a few questions there. Just so we've got them all, you are asking about where do we find the R&D impact in the profit bridge? You then touched on I think diesel-related cash flows and liquidity. Did I miss one?

The other one was raw material benefit in the bridge. Can you start with that one?

The R&D impact you will find in the fixed-cost section. This is where we obviously will have a continued impact from all those capitalization. The net liquidity, as I stressed earlier, the €31 billion is certainly a very healthy number and we continue to have this to be one of our priorities, not only because of the outflows related to diesel, but we all understand also others and operating profit that net liquidity is what rating agencies pay attention to. So, we talked earlier about what is our minimum target and we gave you a bridge from the previous €10 billion to a number in the range of €20 billion given the different size of the organization. And we continue to fight hard that we keep a number above the €20 billion and therefore the net liquidity and all related measures is what we pay continued attention to. I hope that addresses your question.

Yes, just the one extra part, Frank, was about raw materials and where do -- how much of the product cost savings was raw materials. I think that was your point, wasn't it Fraser?

Yes, thank you.

No, just a minute please, operator. We've just got -- actually, I'll tell you what; we'll take the next question. We'll come back on the raw materials, Fraser. Just give us a moment. We'll take the next question. We haven't forgotten it. We'll come back to it in a second.

We will now take our next question from Patrick Hummel from UBS.

My first question is related to the outlook for U.S. sales. You were saying that basically the repurchase of the vehicles starts now. I'm just interested in your expectations what U.S. sales figures will do on the back of that. What kind of loyalty do we expect from your customers? And can you remind us when exactly the new midsize SUV is hitting the showrooms in the U.S.? The second question relates to PP&E CapEx. If I get your comments right, the increase year-over-year means that we will not see a decrease for the full year, unlike your guidance at the beginning of the year. So I just wanted to understand what has changed. Have you seen cost overruns on some CapEx projects? Or is it just that you realize that some projects you just need to do, where you were thinking you could postpone them at the beginning of the year? Or what's different and what does that mean for the CapEx outlook in 2017? And the third very quick one, just to clarify. On capitalized R&D, you said there is no discretion on your side and you have a busy premium car launch schedule in the coming quarters. So by when can we expect the capitalization ratio to move back towards historic average levels at, say, around 35% or so? Thank you.

Okay, we'll start, if you'd like, with Mr. Kappler talking about the U.S. outlook; and then we'll come back to Frank for the comment on CapEx and R&D.

During the first nine months, both the brands Audi and Porsche were above previous year, although we stopped selling the diesel engines. Volkswagen was down by 12% the first nine months. We're now in a position that we can launch our, let's say, service campaigns and the repurchase program. This will have an effect on the last two months. To what extent? We will see how quick the action will run. We will see. This is a little bit of speculation. At the end of the year, we will come closer to the previous-year results for all the three brands. Well, one is for sure, the Volkswagen Passenger Car brands will be below the previous year, mainly also that Volkswagen is not able to sell diesel for the time being.

When exactly will your SUV hit the showroom in the U.S.?

I will give you the information just in a few seconds. Q2, in quarter two. It will come in quarter two. Quarter two.

Good, I take up the rest with respect to Fraser -- I mean the effect from commodities you find related to the bridge and the product cost section. With respect to CapEx, we push hard. I laid that out in the speech. We still expect and fight -- and you know that the fourth quarter is a very big one -- that we fight on a percentage basis for a number not to exceed last year's number and in absolute terms a number which hopefully is below last year's number. But there we continue to have hard work to be done and also a limited wiggle room given the product decisions and situation as described. With respect to R&D, we also told you that we continue to have the R&D ratio to be a priority. We obviously will also talk about the respective brand details when we lay out our plans and our paths later on this year. The capitalization ratio depends very much on the product cycles and the development cycles. So therefore they are floating around and I don't think that we will continue to be at a ratio of above 40% in all coming quarters because we currently have those major events which we addressed in the speech. Strategically, we're currently not at the level neither on R&D nor CapEx where we want to be strategically. And therefore we push on both of those line items as laid out.

Did I get you right that you do not think that you're going to be above 40% for the coming quarters?

It will float, but I don't expect all coming quarters to be above 40%. Yes, that's correct.

We will now take our next question from Stephen Reitman from Societe Generale.

I also have three questions. First of all, if we can go back to the earnings bridge and the significant improvement in the product costs in the third quarter compared to the run rate we saw in the first half of the year, I'm a little bit surprised that -- our understanding is that this fixed cost and product cost balance is very much reflective of the situation at Volkswagen Passenger Cars, with a lot of the MQB costs acting as a significant headwind. And as you said, as you're getting more products onto the MQB platform we can expect to see that balance moving more positively. Well, we've seen the balance move positively in the third quarter, but obviously the margin at Volkswagen Passenger Cars was on the light side, at around 1.5%. So if you could maybe comment on that. Secondly, just a question about China. Obviously, we're now getting close to the expiry of the sales tax cut that was introduced in October last year. What indications are you getting about the attitude of the Chinese government and measures that might be taken to replace that or if anything's going to happen in that respect? And thirdly, as you move towards the phase of buying back now the diesel tainted cars in the United States, how primed are your dealers to offer deals to these returning -- these customers to get them into gas cars with special prices now, that might also boost their sales? Thank you.

Good. Yes, let me start with my favorite question, what's going to happen in China with respect to the current incentive scheme? I raised that question two weeks ago when I was visiting our operations in the North and in the South, to our colleagues from SAIC and FWA and I got very much the same answer, that the government has three options, going to extend it, to cancel it or maybe to cut the benefits in half. There seems to be some intention that the last option might be the one they are going to pick, but nobody made a clear-cut statement or had any more knowledge. The market is doing very well, but we all know and understand the importance of the automotive industry for the overall Chinese economy. So we continue to have some hope, but nobody knows. And we currently plan, as you know from us, to be more on the conservative side. So we build our plans on the most conservative assumption and this is that there is no extension of the current scheme. The respective question towards diesel dealer and how they deal with it, our dealers in the U.S. truly have a hard time because before the diesel issues we had for brand Volkswagen roundabout 20% of the sales being diesel. So we obviously fight a significant and even more challenging battle. We're not perfectly well positioned today in the SUV and truck segment. And if you look at our numbers, I think our organization at the dealer is doing in the United States, given those circumstances, a tremendous job. We have deals in the marketplace. It is a competitive one. We obviously have to deal with customer concerns and our objective is to bring back our incentives and customer support measures to be fully in line with our overall strategy in the United States and in other markets, particularly once we have more ammunition with the B-SUV in the most attractive given segment. So we will continue to work with them. And, given the circumstances, I think the overall result is not too bad. Product cost improvements, we have a target that we probably should exceed €2.5 billion for the full calendar year 2015. And commodities were roughly, for the time being, contributing 15% to the current achievement. This is probably also in line with what we have to expect for the full calendar year.

But my question rather was -- given that you made quite substantial progress on product cost, why was that not more visible within the Volkswagen Passenger Car margin?

You know, those numbers are basically the result of all brands. It's a consolidated number and not only attributable to brand Volkswagen. Therefore, we're making progress also on brand Volkswagen, but we also need to keep in mind there are a lot of factors which are negatively impacting brand Volkswagen Passenger Cars performance. They are struggling obviously with the diesel effect in the United States. It costs us a lot of money to be competitive these days. We have Brazil. We have Russia. These are markets where brand Volkswagen traditionally is very strong, but the markets are extremely difficult, so that puts additional pressure on brand Volkswagen. And therefore the margin is by no means where it should be and we have to, obviously, take those issues into consideration. We had significant production losses in Brazil. We have diesel stop sale in South Korea which is an important market for brand Volkswagen. So it's a mixed bag with a lot of -- there's a lot of different ramifications impacting brand Volkswagen. Therefore it is certainly essential for us to get the Future Pact which puts the brand, generally speaking, on a more competitive footprint.

We'd like to move on because time is ticking. I would ask the remaining people just to try to stick to one question, please. So operator, let's go with the next question.

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

A couple of items, please. The first one, if you could comment, please, on pricing dynamics particularly in Europe for the Volkswagen brand. And also if you could please comment on the order book of the VW brand, if it's higher on a year-on-year basis or stable. Then the second will be on cost savings. Frank, you have booked in the third quarter I think the largest amount of cost savings I've seen in Q3 going back six years. So can you explain a little bit? Maybe if it's not in the third quarter, why should we think about €2.5 billion for 2016 to why a lower cost savings in the fourth quarter? Maybe if you could -- so around that maybe explain a bit better what are driving these cost savings. Is it the MQB? Is that the work also with the Bs and with the RPSN, basically looking at the co-aligning of components across Polo, Golf and Passat? What is really going on there? That would be very helpful. Thank you.

Okay, Jose, you got 2-for-1, but we'll start with the VW brand pricing, mix and order book first.

If you look at the Western European markets, we had some slight increases in the industry. Where the list prices are concerned, the competitive environment is very intensive and we see increasing sales promotions activities by our competitors. We as a Group, with all our brands and also the brand Volkswagen had, we participated in these price increases. And of course we're using sales promotions to stabilize our market situation with the total, all our brands and Volkswagen as well. We're moderate in our sales activities compared to the total market average. We could not follow completely the dynamics of the total market in the first nine months. Of course, for the brand Volkswagen there is a certain affect because of diesel. But nevertheless, we could increase our volumes. Our order intake is very stable. It's slightly above the previous year and our order bank is nearly on the same level as previous-year September order bank. So we're quite satisfied with the market developments over there and our order bank shows that we will have a reasonable fourth quarter. Also, the Western European markets.

Yes, Jose, I take up the questions you had on the cost savings. You might consider the €2.5 billion as conservative; that is fair. For the full year, we should remember that Q3 always has been a strong one. You know from past discussions that procurement contracts are reviewed, negotiated, with a retroactive effect. So the individual quarter, as much as we monitor and watch them, but sometimes there are timing issues which just mislead with respect to the full-year expectations. So all in all, Q3 always tends to be a stronger one, but we also wanted to keep the pressure on, particularly, our own organization, on folks. If we exceed the €2.5 billion, nobody will complain. But it is important that it is a continuous focus and effort, as much as we certainly continue to focus and push for fixed-cost improvements.

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

I would only have one, on your plans regarding electrification going forward. As part of the deal in the U.S., you are now also building up the infrastructure for electric vehicles. Would that be something you might consider doing in Europe as well going forward? Thank you.

The overall effort and focus on electrification is a strategic one and we certainly are pushing probably harder than anybody else. Electrify America is something which has nothing to do with our original plans. It's basically part of the agreement we have in place. We certainly negotiate and discuss with other OEMs how we can provide the environment which makes it attractive for customers to consider even more electric vehicles. There are currently three issues which is limiting the interest in most markets, price, range and infrastructure. Therefore it's very logical that we discuss with other OEMs who have a strong commitment to electrification as well what we can do to overcome the infrastructure issue potentially together. But we're certainly not only limiting our efforts to OEM, so we have an open mind when we talk about what we can contribute to improve the situation and the attractiveness.

Oliver, if I just may clarify one point. Frank, you said you still aim to get us detailed KPIs towards the end of the year. Would that be done by a proper Capital Markets Day or more something like the 2025 strategy announcement? Thank you.

Actually, we're discussing it and Oliver will have a strong say in those discussions because he's the voice for you guys. Therefore, we will conclude those discussions once we have obviously the major contribution from the Future Pact signed and sealed; and we will do whatever is possible to find a venue which is most attractive to you guys, too. But obviously, the time window is closing on us. So we will obviously take that to heart. I know that you guys have a preference for such a Capital Markets Day, if I am not misreading the signs on the wall.

We will now take our next question from Arndt Ellinghorst from Evercore ISI.

Just one quick question for Frank, really. You stressed until very recently in investor calls that 6% remains the target for the VW brand, though we all understand the timing has moved away from the original 2018 target. Can you just share with us your latest thoughts here? Is this still something management is really eager to shoot for? It's not really a very demanding target when we compare the VW brand to global peers. I would almost say it's like a minimum expectation from investors -- over time, obviously. And given the most recent news flow -- and I understand where you stand in the negotiations and the Future Pact isn't sealed yet -- but I think it would be important to understand that this is still something management is committed to and what the time frame roughly is. Thank you.

I'll answer. I expected somebody to bring the issue up, so it's good. We have a 6% to 8% -- a 7% to 8% target for the Group which you know. We will post the respective targets for the individual brands in terms of operating margin at those -- at the venue which I described. In meetings when you and others asked what is a fair working assumption for the time being, I said -- as a preliminary assumption, without final Board decision -- 6% for brand Volkswagen Passenger Cars might not be a bad assumption. And I'll stick to that statement. There was this article in the German press and the 4% margin and the respective -- I think there was also a year mentioned. You certainly will appreciate that, particularly in light of the discussions and negotiations on the Future Pact, that I am not going to make comments today which are probably not helping the closing of the deal. But let me also make the point, when you add 1.6% today, I think we all agree that this is not desirable and acceptable. At one point of time when you have, let's call it, the 6% which I described in mind to be the right number to get you, you need to pass a 4% at one point in time. And the question certainly is, how quickly can we get from a margin of 1.6% today to a 4% and then higher thereafter? Obviously what we've got in the Future Pact is essential. I personally continue to believe -- and I am not alone in it -- once we get the Future Pact signed and sealed, once we start implementing and delivering on the commitments which we will have in the Future Pact and everybody will watch what we bring to the table in 2017, I believe once we get this momentum into the organization, once we start changing the way we operate, question our standards, delivering on the commitments we gave to ourselves internally, I'm wholeheartedly believing once we create this momentum we might even will pass more conservative assumptions which we're probably rightly deemed to start with because what you guys also told us in those roadshows, don't put a number out there you're not going to deliver on and you don't believe it. So let's deliver in 2017 and then we will probably have momentum which will allow us to be more aggressive on the years thereafter. But what it is important, that we regain the trust and confidence of many of our stakeholders and you being certainly important one too.

No, no, Frank, I appreciate that totally. But at the same time, a target's to be a stretch, especially when management is being measured and paid on reaching these targets. That's the first point. And the second point is it seems that you're even missing your CapEx target for this year which was €12 billion for CapEx PPE. You're now running above your number from last year and I can bet you will not reach that target. So the question is really about urgency and commitment here.

I agree that we continue to push. We continue to push for the targets and targets should be ambitious. But what we also should keep in mind, that we're ultimately delivering. If you asked -- and you have contacts within the organization at various levels and at different brands. I'm absolutely sure that everybody will tell you how much pressure there is in the organization, how much we push, particularly on non-product investments and the progress we're making. And that we had extremely stiff and ambitious targets in our current planning around TR 65 which we're going to present to the Board soon. But we certainly need the Future Pact signed and sealed in order to be able to go there. But there is a tremendous amount of pressure. And I really encourage you, continue to talk to the colleagues from the brands and not only brand Volkswagen. But I think the message got through, but we also need to make sure that the future is not happening without us and we need to make sure that we have the necessary investments and expenditures in R&D for the future technology which is driving us also to meet the CO2 requirements which are very stiff in all major parts of where we're doing business. This is the environment. But I agree, with the 5.7% CapEx year-to-date I can't be satisfied and we all know how difficult and important the fourth quarter is. But rest assured, we're pushing and the message is there. But we also shouldn't make stupid decisions, as I laid out in the speech which we're not going to do, as you would expect.

We will now take our next question from Michael Tyndall from Citigroup.

It's Mike Tyndall from Citigroup, just one from me. Can we go back to the product costs? I realize that there is some backward-looking element to that because of the supply agreements and there is some raw material tailwind. But I'm just wondering. If we think back to the statements made in June by Matthias Mueller about what you are doing on SG&A, internally has the clock on 2025 already started and you are already starting to see some of the benefits of those programs? Because I guess we have a sense that we're waiting for Future Pact to see the big step forward. I'm wondering what the scale of the opportunity is without Future Pact and whether or not we're already starting to see the benefits of that coming through in that product cost line. Thanks.

I mean, as I described earlier, there are a couple main drivers for the product cost improvements. The continued rollout of MQB is certainly one of them; but also the performance of our procurement departments around the globe is another major, major part of it. So the question on product cost is certainly, as it pertains to toolkits, how much discipline you apply on the rollout of those toolkits. I think we have great products; this is without doubt. But I also laid out at the various occasions I continue that we could take even more advantage of the toolkits we have. And this is certainly something which applies more than anything else to future product, but we certainly also take today's toolkits and optimize them, particularly when we talk about regions where we need to improve our competitiveness also on the product side and product cost side. Take South America, North America being two open flanks, certainly again particularly towards to brand Volkswagen Passenger Cars. I also would like to remind you guys when we talk about MQB that we're still in the rollout. By the end of this calendar year if I take all brands, we're in the range of 30%. The one brand which has the by far highest percentage of cars on MQB is SKODA. If you look at their ratios and numbers, I think we probably will wholeheartedly all agree that they are stellar for a volume manufacturer. There are a number of arguments -- which is also mix, regions, it's the age of your product range. But nevertheless, we should not forget most of their cars are on MQB and therefore the MQB continues to be an asset. And I believe that the rollout is certainly an important part which we continue to do on a worldwide basis.

Okay, time is ticking. I'm very sorry. I know there's lots and lots of questions we need to get through, but we're going to take a couple of questions from journalists now and if we could take the next question from the operator, please.

We will now take our next question from Christoph Rauwald from Bloomberg.

Mr. Witter, you signed a 12-month bridge financing facility, over €20 billion, that will expire at the end of this year, if I recall correctly. Have you made any decision yet if this facility will be extended? Or will you let it expire as you have more clarity about the financial fallout by now? Thank you.

As we explained earlier, we still plan to go back to the unsecured bond market during this calendar year. a decision will probably be made next month, given terms and conditions in the market, but also certainly the reps and warranties we have to make. We will also certainly make a decision about the €20 billion facility within this time frame. So it's a balancing act between capital markets access and the extension of the facility. So for the time being, no final decision. But just so I have it mentioned, there is currently nothing outstanding under the entire facility. It's undrawn.

We will now take our next question from Christiaan Hetzner from Automotive News Europe.

Could you confirm that the €620 million hit from Audi is simply a recall cost for the 85,000 vehicles which would come out to about €7,300 each per vehicle? Many thanks.

The respective provision you are talking about relates to the 3-liter TDI engine. We obviously are in negotiations with the respective agencies and we work with them and we obviously need to wait for their respective resolution on the technical fixes. So we have to work with them and therefore we can't disclose any more detail regarding the status of discussions. The court to the best of my knowledge is scheduled for November 3 to review and make more information available.

We've actually ended up with five minutes to go. If there's -- operator, perhaps you could ask people if they could jump in quickly. We can probably squeeze in two more questions, but people will have to request again access; apologies for that, but we have five minutes to go.

[Operator Instructions]. We will now take our next question from Charles Winston from Redburn Partners.

Charles here at Redburn. I'm glad I managed to sneak under the wire. I'd like to go back to the €300 million reduction in total EBIT in the bridge from volume/price/mix if we could do. At the 2Q stage, you were very clear, pricing and incentives washed each other pretty clearly; there was a small positive impact from volume. And basically it was all mix, probably €700 million, €800 million of mix gain. Can we talk about this 3Q number? Have we got the same the price incentive wash again, so it's roughly zero? If volume is the same, maybe €200 million is mix only? So volume €500 million; is mix only €200 million? Can you give us some sort of quantification here? Because it's such a massive swing from 2Q to 3Q. Thank you.

Yes. A major driver is that in H1 we only had, I think, roundabout 17,000 units more to offer which needed to be offset by mix. And in Q3 alone we had 90,000 units, so that is a major driver. And as markets fluctuate the quarterly numbers -- they have a lot of relevance, but you also should keep in mind when we talk about incentives; you have the model year change in a major market like the U.S.. So you have a lot of different factors contributing. But the volume issue remains to be a major one, as I explained. And there are significant differences in volume terms between H1 and Q3.

Okay, Charles. That was good that you sneaked under the wire. We're going to just take one last call, operator, if that's okay, please.

We will now take our next question from Georges Dieng from Natixis.

It's Georges Dieng from Natixis. The question I have is basically on the capitalization which had an impact at Group level. Could you maybe quantify the impact in the main divisions? Or to put it differently which divisions benefited the most from this higher capitalization ratio in Q3? Is it reflected notably in Porsche and Audi's performance in the quarter? And what should we be looking for, for the remaining quarter? Thank you.

I think we just need to go back to the products which I was referring to. These main product events obviously took place and Audi with the A6, A7 family, A8, Q5; Porsche obviously, the major product lines Panamera and Cayenne; and obviously for the Bentley, Continental and also the Bentayga. So these were the brands most impacted and the drivers behind the consolidated number.

I'm afraid we do need to finish the call here today. I know there's a number of people who are requesting questions. The investor relations team, of course, is ready to take those. and if we don't have the full answers we will go into the Company, find those answers and do our best to get back to you as quickly as possible. So, thank you for your time today. Thank you, everybody, on the call and we'll get back to you soon. For now, goodbye from Volkswagen.

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