Oliver Larkin – Volkswagen AG, Group Head of Investor Relations Matthias Müller – Chief Executive Officer and Chairman of the Board of Management of Volkswagen AG Frank Witter – Chief Financial Officer and Member of the Board of Management of Volkswagen Aktiengesellschaft

Michael Tyndall – Citi Tim Rokossa – Deutsche Bank Jose Asumendi – JPMorgan Arndt Ellinghorst – Evercore ISI Stephen Reitman – Societe Generale Horst Schneider – HSBC Adam Hull – MainFirst Patrick Hummel – UBS Daniel Schwarz – Credit Suisse Harald Hendrikse – Morgan Stanley Philippe Houchois – Jefferies Christian Ludwig – Bankhause Lampe

Thank you, operator, and welcome everybody to today’s webcast and conference call, which follows the publication of our annual report and our annual press conference this morning here in Berlin. We trust this new format is more inclusive and efficient for all participants. I’m delighted to be joined today by our CEO, Matthias Müller, Chairman of the Management Board; as well as Frank Witter, CFO; and Fred Kappler, Head of Group Sales. Matthias will now say a few words followed by Frank, before we dive into your questions. So Matthias, it’s over to you. Matthias Müller: Thank you, Oliver, and good afternoon, everyone, also from my side. I would like to use this opportunity to give you a quick overview of what I regard as the core of our annual summary. Against all odds, 2017 was a very successful year for us. It was a year in which our group went back on the offensive, with plenty of new models from all brands in all markets pushing major strategic initiatives with new confidence. Together, Strategy 2025 has turned out to be a powerful catalyst for change, which was long overdue. Many milestones of our plan for the future have already been met, and we are pushing for more. I believe over the last 2.5 years, we have demonstrated that this company is strong enough to overcome even the heaviest setbacks and that we can and will play a major role in shaping the future of mobility, in spite the burdens from the past we still have to cope with. I’m very proud that our operating business is stronger than ever and that our group’s financial situation is so robust. Under challenging conditions, we managed to improve nearly all of our key performance indicators. All of our 12 brands and financial services contributed to this excellent development. Obviously, the increased freedom we gave to the brand is paying off. At the same time, we are working together on many key projects much more efficiently than in the past and that is something we intend to intensify, and I’m well aware that these scale effects correspond to real bottom line improvements. The fact that we are in such a good position today is first of all, the result of true persistence and great teamwork, and I’m really grateful for that. Now it is up to us to keep it moving. We must not allow our success to impede us from changing further. Our industry is at a turning point. Standing still is not an option. We must push forward. Change is necessary, not only in terms of new technologies and the business models of the future, but also regarding our own attitudes and corporate culture. I’m well aware that some of you might ask whether a real culture shift will ever happen at Volkswagen, a huge and complex organization like ours. But I assure you every setback only strengthens my determination to push for change because it is worth it and because this is the basis for future success. Over the past year, we again strengthened our endeavors for our compliance, integrity and value-based management, and our efforts are paying off. I do sense everyday that we are indeed moving step-by-step. In 2018, we will speed up this change process. This includes driving Roadmap E, these initiatives for autonomous driving and for new mobility services and digitalization. And of course, it also includes making today’s products and technologies better and better. We still have a long way to go, but we won’t lose pace. We won’t lose determination. Ladies and gentlemen, I really welcome and appreciate you supporting us on this fascinating journey. And now I would like to hand over to Frank to say a few words.

Thank you, Matthias, for opening this part of today’s event. I know the guys on the call much appreciate that you are taking the time to make yourself available for our Q&A session. So welcome to all of you also from my side. I’m sure that all or most of you listen to the messages from this morning. Nevertheless, I have a few more points to make briefly at the level of detail you require tends to be a touch more. For me, personally, I was pleased with the 2017 outcome. I can tell you honestly that at midyear, I did not expect such a boost and for example, the continued push on R&D and CapEx really paid off. Looking forward, I have always said that related to these 2 top KPIs, the years 2017, 2018 and 2019 will be a dogfight, and I haven’t changed my view. I would like to pick up on the 2018 outlook statements Matthias made this mining. Some of you, it seems, have been a little disappointed since we published the group headlines back on February 22. Nevertheless, I believe the outlook is where it is for very valid reasons. WLTP, Worldwide Harmonized Light Vehicle Test Procedure, I love it, the major challenge that hasn’t been really on the radar for investors until now. It brings a significant risk that could lead to some temporary reduced model offerings. The testing procedure itself is more time-consuming. At the same time, there is a bottleneck with the required testing capacities across Europe. And the balancing of production and sales through the changeover will likely drive inventory significantly higher in the first half, although we hope to get this down again by the end of the year. Overall, this scenario indicates a financially stronger H1 compared to H2. The drive for more efficiency in CapEx and R&D will also continue, although we are expecting a modest bump up in the numbers in 2018. There’s a need to invest today in e-mobility and new technologies if we want to be standing here in 10 years' time. Furthermore, from our point of view, we should rather spend money now if the other choice means paying significant CO2-related fines in the future. Cash generation and liquidity is, of course, still a top priority, but we cannot ignore the diesel outflows that have been made this year and the working capital effects from the temporary inventory build I just mentioned. On top of that, we are still on negative outlook for Moody’s, so protecting a decent automotive net liquidity is a must. Coming back to the overall outlook. I think you know us enough by now, we won’t promise something we can’t deliver. So let’s now see how the year unfolds. I’m already looking forward to your upcoming – to our upcoming meetings and lively discussions with yourselves. As you know, we do listen and we do care. So enough talking from my side. Now Matthias, Fred and I are looking forward for taking your key question.

[Operator Instructions] And we’ll take our first question from Michael Tyndall from Citi.

It’s Mike Tyndall from Citi. My first one is to Mr. Müller, the stimulation to diesel. You’ve been fairly vocal about the importance of diesel and that it is a necessary technology as we move towards the 2020, 2021 target. The media, on the other hand, is pretty much struck with the rhetoric saying diesel is bad. So I’m curious to know in your view, how do we reeducate the public about diesel? How do we get them onboard, understanding that Euro 6 and they are actually clean diesels as it were? And then the second question, just in relation to WLTP. Is there a market share opportunity here? I mean, presumably the challenges that you face, the industry is facing, you have much greater diversity than everybody else. So if it is a question of diversity being reduced, do you end up having a competitive advantage potentially on the back of this tradition to WLTP? Matthias Müller: Coming to your first question, which was in terms of diesel, as you mentioned it, I’m firmly convinced that diesel will get, let me say, renaissance. Why? The diesel Euro 6 from the Volkswagen Group are clean and they fulfill the requirements of the law in beginning of 2020, and we will invest a lot of money in the development of the next diesel generation, which will come to the markets in 2019. But we are firmly convinced that the diesel has a great future, so – and we have to convince our customers that they do right decision if they buy diesel. Of course, you mentioned it, diesel is important to reach the CO2 targets beginning in 2020 because the other solution, which could be in fuel is electrified cars, but I suppose that the infrastructure for high volume of the charging infrastructure for the electrified cars will not be enough at the beginning of the next decade. So this is the reason why the Volkswagen Group is doing well. There are efforts to promote diesel – modern diesel engines. And of course, I want to mention it, the gas oil and natural gas and engines. The second question was in terms of WLTP. Fred will answer it.

Yes. With the changeover from NEDC to WLTP, Volkswagen is meeting, of course, the requirements of the authorities. And Volkswagen and all the brands of our group started to work on this topic at an very early stage. Binding measurements has only been possible since the law with its specific legal requirements came into force. The measurements are being made in line with the coordinated cross brand time schedule, and we have quite a number of brands, so it was, for us, also a very high organizational task. And we are adding to this task, also, our ambition to reduce complexity of our powertrain range. We are confident that we will be able to determine all the values required within the transitional phase, apart from the type testing itself, which is longer – the process longer with WLTP than the previous regime, each engine transmission combination passes through an approval procedure with a number of participants. Excellent factors which are beyond our control play a key role in this process. This includes the availability of the technical service, the test stands, the capacities of the approval authority is concerned. And our brands offer their customers a wide variety of models variance in the equipment options. The advantage is that all customers can tailor their cars in accordance with their wishes as a result. They also expect individual consumption data. And that connection with the change over to WLTP disadvantage cars for high degree of detail and measurements approvals, which need to be completed in only 13 months. Although the law only came into force at the end of July last year, the changeover is all ready to be completed during September this year. And your question is whether there is a market share opportunity in that, I think it’s too early to say, but you can be assured that we are well prepared for the new regulation regime.

Thank you.

Our next question comes from Tim Rokaka – from Rokossa, sorry, from Deutsche Bank.

Yes, thank you very much. It’s actually Tim Rokossa from Deutsche Bank. I have 2 other questions, but I’d quickly like to follow up on Mike’s diesel question because I thought that was quite interesting. I think he was referring much more to the fact that how you can encourage and restore trust among consumers in this technology again. Could you do – could you imagine to do something similar to BMW offering customers the change – the chance to return the annually bought diesel vehicles should they be impacted by traffic bans? That would be that question. And then my 2 questions are on a potential change in group structure, Mr. Müller, you said this morning when we asked about a truck IPO, potentially that you would inform us once if you’re ready. Let me rephrase this slightly. So do you generally share the view that reduced complexity and size of the group could be helpful in today’s fast-moving world? And could you confirm that Truck & Bus is at the higher end of your asset reviews? And then Frank, just quickly on the free cash flow, obviously, pretty impressive underlying numbers last year. I believe you told us you expect a relatively similar dividend from China going forward, CapEx is expected to remain relatively low in percent of sales. Are you happy to give us a guidance on the underlying free cash flow for this year? And if not, is it fair to assume that free cash flow will develop in line with earnings? Thank you.

Head of IR I think we got three questions there on diesel and structure, I think Matthias will pass those to you and then we’ll come back to Frank for the cash flow. Matthias Müller: I will do it. So the first question was in terms of diesel. Let me point out, the latest ruling of the Federal Administrative Court in German, Bundesverwaltungsgericht, is relevant only for Germany and not for other European countries. It allows German cities to impose inner city driving bans for diesel engines in – if these driving bans are appropriate. And if driving bans represent the ultimate ratio for this is to improve air quality. Therefore the ruling is not at all a general driving ban for diesel engines. And the court differentiated possible driving bans in accordance with Euro classifications as follow, till September 2019, driving bans can be imposed under the different conditions where Euro four engines and after September 2019, also for Euro five engines. Euro six engines are not affected by any driven ban, and this is important to get this information to the customers. Volkswagen AG would like to point out that it sells, since autumn 2015, exclusively vehicles these Euro six diesel engines. We would like to stress that the measures defined at the national diesel forum such as software update for Euro five and Euro six diesel engines was sales incentives as in environmental and future incentives program to call, Umweltpramie, are showing immediate positive effects as ex pollutions are already decreasing in affected cities. Volkswagen AG supports the VDA position that software updates versus hardware solutions show a much quicker efficiency and avoid increasing CO2 emissions. Moreover, Volkswagen AG is heavily engaged of the investment for sustainable mobility for the cities striving for further optimization for inner city air quality by optimized traffic management systems, higher, better electric vehicle acceptance, including the improvement of better e-mobility infrastructure and other. So coming to the second question, which was in terms of governance. There are numerous press articles about the truck holding and plans for listing IPO of the truck division and what are our plans? Currently, we are focusing on implementing our strategy and on driving the transition from a start-up company into a more mature for professional integrated corporation. We keep all options open on our way to a global championship in terms of Truck & Bus. And third question? Frank, please.

Yes. Thanks, Matthias. On the free cash flow, I thought we can confirm that this is one of our top KPIs, and everybody on the board and senior management takes it very serious. Let me also confirm, because I know that you’re always looking for the medium term, I continue to confirm for CapEx and R&D that the 6% for 2020 is what we are still striving for and what we assume to be able to deliver. 2018, you got, I think, a glimpse of the reality we are dealing with. WLTP will have an impact on inventories. I mentioned earlier that we hope to be back into balance by year-end, but that certainly also depends on customers coming into the door. We will have diesel outflows also in calendar year 2018, not to forget. To give you an idea, we are talking probably €3.8 billion, €3.9 billion for the full year, and I also talked about the modest bump on the ratio and absolute numbers for CapEx and R& D. This is what we assumed. I think we did very well in our dogfight in 2017, but it was a dogfight till December 31, to come in at the ratios which we assumed. We know exactly that the dogfight for 2018 is at least as tough as in 2017, but that’s what we are in business for. So you have our commitment that we will fight for free cash flow, but I certainly – I’m not sitting here today that I can confirm that the €10 billion is exactly the number we are going to hit at the end of the day, but we will work hard.

Thank you. Matthias Müller: Thank you Tim. So next one, please, operator.

Our next question comes from Jose Asumendi from JPMorgan.

Thank you. Jose Asumendi, JPMorgan. The first one for Matthias, please. Can you give us any practical examples of how the decision-making process at Volkswagen has improved or accelerated by – either by – probably by region? And then can you talk a little bit about Brazil and North America, so who is running these operations? And how do you ensure that the, sort of, right decisions with regards to product launches are being executed? And then second block please, for Frank. Can you help us a little bit with the volume price mix, a little bit color around that, what happened there in the fourth quarter? And then second, can you talk a little bit about the losses you have in North America and Brazil? I believe you mentioned that in Brazil, you’re making several hundred million. So are there losses in North America larger than what you’re making in Brazil? And can you just give us a bit of a road map with regards to the product launches that are going to help you cut these losses in 2018? Thank you.

Jose, thank you. You got four questions in there. The practical examples on change that was the first. I think the one on Brazil and North America is very specific for Volkswagen, perhaps we could leave that for Dr. Diess to handle that and to discuss with you guys tomorrow. We shouldn’t steal his thunder. And then I leave the last two points from volume mix price and the losses in North and South America to Frank to touch on. So Matthias, maybe the practical examples of change? Matthias Müller: And so as I understood your question, you mean the decision-making process within Volkswagen. And as I mentioned earlier, we have sort of tried to decentralize our decision-making processes. We gave much more power to our brands. And if we interpreted the figures right, we can see the first results. Some examples. What we tried to do is less hierarchy and as well as in vertical also in horizontal way. We have to be more agile. We have to more innovative. We have to get more criticism, and we have to learn from our mistakes we made in the past. This is – the last one is very important issue. We also mentioned product management. What we have in every brand is now a product management like – I found it is within Porsche that we had, for example, heavy product management for the 911 Panamera or the Cayenne and now, in the past, with the Mission E. We have also for – product managements within VW, within Audi and within the other smaller brands. And this works very, very well because this is in terms of the view of the customer and does not only take care for technical solutions but also for the requirement of the customers and very important in terms of the financial figures and time schedules.

Okay. Maybe wrapping up the pieces, you asked the question regarding Brazil and The United States. I think you know Federal is – also has been a matter of fact in 2016, but also continued in 2017. Brand folks on passenger cars lost significant amounts in those markets, no surprise. We made progress in 2017, but we still have significant losses in both markets and the minimum target we want to achieve is to be at breakeven at the latest in 2020. The other aspect I think I heard, how do we make sure or how does the group make sure that the decisions regarding individual markets like Brazil and North America are heading in the right directions? I mean, you know the general principle, the group steers the brands and the brands steer the regions and markets. That is the overall principle, but certainly the Brand board takes liberty to request very thorough reviews with the individual brands, and we certainly go even a level deeper in the respective product and investment committees. So we have a very clear picture of what the brands are doing, even though we stick to what we said the brands are steering the markets and the region. If you take a quick look at what were the main drivers in Q4 on the operating result, clearly, volume and mix, these were the two main items I would cite here. But you know from the past, I’m always a bit reserved when it comes to what drove an individual quarter, I rather look at the longer-term development, but volume mix price were certainly also on our side in the fourth quarter of last year.

Okay. Thank you Frank. Next please.

Our next question comes from Arndt Ellinghorst from Evercore ISI.

Yes. Thanks a lot and good afternoon. Two questions, please. The first for Mr. Muller. Do you actually observe a consensus on VW’s Supervisory Board to support your strong ambitions and views to change the group’s structure? And if so, moving forward, what do you think that consensus might be on the Supervisory Board? And then just there was a headline on Bloomberg just now from an interview you gave where you said that you’re going to make a decision in asset reviews in the couple – in the next couple of days or weeks. Could you give us a bit more insight into what that might be about? And secondly, for Frank, please. We saw a really nice improvement in clean profitability last year from 6.7% to 7.4%. Although when we dig into the details of the annual report, it seems that most of the progress really is related to market factors, as you just mentioned, volume mix, also SG&A costs. But we see very little progress in the group’s core efficiencies. So labor costs still roughly at 17% of revenues. Material costs up by roughly €10 billion from 75.4% to 76.9% of sales. So when do you expect we can see more meaningful effect to improve – to really improve the group’s core cost base? Thank you. Matthias Müller: Arndt, thank you for your questions. To your first question in terms of Supervisory Board, our Supervisory Board and – of management are committed to the portfolio optimization we are negotiating. So let me say, all options are open today. We will let you know at that time. I said in the interview, yes, it could be days, it could be weeks, it could be months, I don’t know. We have to be patient because this – as you know, this is a complex story, and we will take all the time we need to get a good decision. And it’s not only a question of Truck & Bus as you know, it’s a question of the governance of the whole Volkswagen Group. There’s no fire sale, and fire sale is not necessary. Thank you.

Arndt, first of all, you surprised me a bit that I didn’t get a challenge from you on the overall guidance for 2018, but there might be room later. Yes, cost improvements. Just a reminder that in the bridge for 2017, we obviously have product cost improvements, this €0.6 billion in the books. But material costs is a challenge, actually, as we speak, the developments on steel and other relevant raw materials. But in the medium term and I would like to stress something, which are also related to this morning, we are still in the continued rollout of MQB, which is a very critical part of our puzzle. We have been around about at 40% overall, all brands bundled together. That means only 40% of all products worldwide have been on MQB. That showed increase by another 10% by the end of this year and also further progress in 2020 – in 2019. So that is important. And on the labor cost side overall, it should be mentioned that the future picked, for example, for Volkswagen brand passenger cars is geared towards to 2020. So most of those related effects will certainly occur as planned and as to be expected at a later stage, but it is certainly part of the recovery program for most important brand, but it certainly – we need to continue to push, but this is basically the way I would describe the past and today’s world.

Thanks Frank.

Thanks, Arndt.

Lets go on the next question please.

Our next question comes from Stephen Reitman from Societe Generale.

Yes, good afternoon. A couple of questions on SUVs, diesel and also on Fiat, but all are crumbling together. Looking at your CO2 average for 2017, which you published in your report today, there’s slight deterioration. You’ve gone from 122 to – you’ve gone from 120 grams – to 222 from 120 in 2016. You’ve – I would guess that’s partly – that’s relating to the mix, a higher share of SUVs in your sales and low diesel sales. If I look at your projections for – by 2020, I think you’re looking to increase the share of SUVs in your mix in Europe from about 20% in 2017 to about 34%. And I guess, you want to be expecting diesel to be down as well, just following with the trend, maybe not falling as fast as like they’ve been falling in 2017. Just what other options you have in terms of electrification, mild hybrids and the like? And how much of that is going to be part of the mix because I would guess the pure battery electric vehicles will still form a relatively small part of the sales figures in 2020? And secondly, on Fiat, I’m still making about a 1% margin in the fourth quarter. You mentioned earlier in the – during the press conference how Fiat was also transitioning quite fast on to MQB. And obviously, we’re seeing improving use of mix in SUVs as well. So I was wondering at what stage do you think we should see Fiat beginning to get margins, which are more akin to another brand come to life, for example, like SKODA? Thank you.

Coming to the CO2 values for 2017, I think this was the first question. Yes, the higher share of SUV has an effect on our CO2 values and at the same time, this was a tendency, not just in Germany, but also in some other markets. We have a reduced take rate for diesel, both accumulated and slightly higher CO2 value for 2017. The share of SUV will continue to rise. We just in the launch phase of some additional SUVs, like the T-Roc from Volkswagen, we are owner from Fiat, some others will follow. On the other hand, I think Matthias Müller made it very clear in the press conference, of course, we are absolutely committed also in the year 2020 for the compliance of our CO2 values. Of course, alternative powertrains are the way we are going to go in the next years. The full electric cars from 2018, 2019, we will launch some in 2020. We have quite an avalanche of new models, but at the same time, we will introduce a step by step a number of hybrids, especially plug-in hybrids, which are very favorable in terms of CO2. So – and at the same time, we think the CO2 issue will also give a certain opportunity back to the diesel that the diesel mix will increase again with Euro 6, WLTP engine, I think we have a perfect portfolio in that as well and don’t – we should not forget that we have the CNG engines available for a number vehicles. So there will be a change in the powertrain mix in the direction, especially of hybrids and electrical cars. And with all these effects, pretty sure that we can reduce the CO2 emission to the level we need to reduce in 2020.

Okay. Stephen, yes, I take the easy question as it relates to Fiat. I mean, first of all, I think on the bottle, as we truly appreciate the fact that we don’t report sales numbers in red ink anymore. That has been a matter of fact for the longest time. There are a couple of issues, which we need to remember. First of all, Fiat is a rather small brand. This is certainly something, which is putting a tremendous amount of cost pressure on the brand. On the other hand, this is also important since, also one of our top KPIs, Fiat is very strong on return on investment. So this is a brand, which also learned over time to be very efficient. We also need to keep in mind other than the volume limitation, the regional footprint is quite limited. It’s pretty much in all European brand. There are certainly other volume sold outside of Europe, but at a rather lower level. I think the good – the better mix on SUVs will definitely help in the years to come, but there is a huge volume gap to SKODA, for example, and also labor costs are different between Spain and Czech Republic. But at the end of the day, we strongly believe that the product decisions and the strategic decisions the board have been making on the level of Fiat are definitely turning the tide, but interception is improving. Brand image, which is extremely important also in terms of pricing. So that it will take time, but Fiat is committed to catch up with the other volume brands in our group.

Thank you.

Thank you.

Thank you, Frank. Thank you, Stephen. Lets take the next question please.

Our next question comes from Horst Schneider from HSBC.

It’s Horst here from HSBC. Thanks for talking my question. I have got three question, please. First of all, on this revenue growth guidance. You say in 2018, you want to achieve as much as 5%. You target at the same time for 2020 – for the time frame 2016 to 2020, at least 25% revenue growth. So your 2018 guidance implies that 2019 and 2020 revenue growth is going to accelerate, and I want to understand why that is? Or if by now, due to the FX development, the 25% revenue growth guidance already too ambitious maybe? Or maybe also why isn’t 2018 not higher? That’s, of course, the implied question. Then the other question that I have is, since you have got this revenue growth as well in 2018, I still want to understand why you don’t have margin increase. So maybe you can break that down by your earnings, which items? How you expect volume price mix, FX and variable and fixed cost to develop in the cost of 2018? And the last question that I have is on electric vehicles, and you said you did a contract with all your battery suppliers or most of your battery suppliers. I want to know if the statement is still valid, that you said that the packed price per kilowatt hour is going to be below €100 by 2020? Thank you.

Okay, Horst. You’ve got to good few questions in there. I think the first one is going to be on revenue growth and what the drivers are within the overall mid-term context. And then another – I guess, another question for Frank was on margin increase or the position in 2018. And then coming back to battery electric vehicles and €100 per hour, which we will pass to Matthias.

Okay, let me start. The revenue guidance for 2018. I think we talked at various occasions about the challenges for the calendar year, but you are right to assume that headwind from foreign exchange is a key driver, which leads us with – leaves us with the current guidance for the full calendar year. We are not changing the medium-to long-term guidance as provided during the Capital Markets Day. Yes, margin, you took over from earned, 6.5% to 7.5% would lead us with, notwithstanding what part of that range ultimately to be achieved, but if you take the revenue, that still leaves us with very substantial operating profit, but we definitely gave this guidance in full light and full understanding of the challenges, which we have to manage and the better we obviously do that, but not all of that is under our control. If you do a little deeper dive into what’s driving the 2018 numbers. I mean, volume mix price is certainly on the positive side as well as product cost improvements will help us, but we are up against, obviously, fixed cost increases due to the – particularly due to the investments we did in the previous years. And I also mentioned currencies to be not our friend, most likely. And that is the combination, which leads us to the guidance as provided.

About which FX burden we talked in here for 2018, roughly if the rates stay where they are right now?

The – on currency?

Yes.

No, it’s four-digit negative million euros.

Okay.

Yes. I mean that was – the four-digit reference was in total, I think the usual suspects, US dollars, real, to a smaller extent, probably the ruble, Mexican peso, this is round about what we are looking at.

Okay. Okay. All right. But it’s right that you expect now the acceleration of growth in 2019 and 2020, that’s the right interpretation, right, of everything?

Let’s do the guidance for the individual years between 2020 and now when we are closer to, but I confirmed the medium-term outlook and – but they are still – I mean, take the exchange rate effects, which have quite a significant impact on – given our international footprint. So the medium-term guidance is still intact but obviously, headwinds need to be managed and this is certainly not an easy task given the numbers we are dealing with.

Thank you.

Okay. Let’s switch to Matthias now on batteries. Matthias Müller: You asked for the battery costs in terms of electrical vehicle. And whether we have been able to finish contracts, less than €100, below or – below the €100 for 1 kilowatt hour, and frankly spoken, I can confirm that number.

Okay, interesting thank you.

Thank you, Horst. Thank you, Matthias. Let’s move on please.

Our next question comes from Adam Hull from MainFirst.

Hi, good afternoon. Three questions. Firstly, on R&D, obviously very low capitalizing rate, 32% in Q4. I understand there is going to be a fairly low rate into 2018. Maybe if you could just give us a bit more of an indication of that obviously 40% last year and I think, 42% the previous year, obviously, hurting your P&L, maybe give us some reasoning, what that is? Is that more on electric cars, et cetera? Secondly, on financial services, a strong Q4, but could you just give us a feeling for what your lease exposure is, say, to German Euro 5 cars, just to get a feel for the sensitivity to possible bans? And then finally, with regard to the diesel crisis cash payments. I think Q4, the payment, was – was it €2.0 billion, I think less than the €2.5 billion you suggested in Q3. And are you saying that €3.8 billion to €3.9 billion in 2018, is that the whole amount? You have been previously indicating €4.5 billion to €5 billion. Or should we see something negative also potentially in 2019? Thanks.

Okay. Well back to standard conference call, Frank. I think that’s three questions for you.

So yes, let’s start maybe with the diesel payments, first. For 2018, the number I made reference to is a full year number. So of round about €3.8 billion, €3.9 billion for the full year, and there’s also around about €1 billion to be expected in 2019. This is currently the best guidance we can give, but those numbers are floating because it has to do with legal exposure and also the numerous technical solutions, repairs and buybacks we have to manage. So there is volatility in those numbers but this is currently the best guidance we can provide.

Can I just ask if that is the net or just the out payment?

This is the net outflow. So then with respect to the capitalization, we obviously came down from, I think, 42% in 2016 down to 40% for the full calendar year in 2017. The way I would describe it is what we are seeing now is a normalization of our capitalization ratio, which traditionally was closer to 35%, 37% than the numbers you have been seeing in 2016 and 2017, particularly driven by the array of products at a very late development stage, which is, obviously, also preparing ourselves for future market success with the cars being launched in the near future. So in that respect, 2018, we should see a continued normalization more in the 30s than – or the numbers should be have the 3 in front rather than the 4. And If I’m not mistaken, around about 36% to 38% is the number I’m remembering from the top of my head, that should be probably the 2018 number in terms of capitalization. So if you want to – good news in terms of not burdening the future to the extent. So – and I think I shouldn’t forget the question on EU 5 vehicles, around about 14% of the entire portfolio is related to EU 5 vehicles in Germany. Let me also shed some light on the discussion because sometimes it tends to be a bit one dimensional. Certainly there is currently, pressure on the residual values for leasing cars. More in Germany than probably most other markets, but we also need to look at the portfolio aspect of it. So first of all, only a portion consists of those cars. And secondly, if people don’t show that amount of interest, at least temporarily, on diesel, they tend to lean then to gasoline, and if you look at from a portfolio perspective, prices obviously have increased on gasoline cars made, may it be our portfolio or to dealer portfolios. So there is an offset and the word isn’t just black and white, and it isn’t all negative. Even though, certainly the earlier we get clarity on the driving ban for diesel cars and hopefully, the avoidance thereof, then obviously, we are pretty comfortable to assume that there will be a normalization in the way demand for diesel cars develops, used and new.

Can I just confirm, you obviously review the portfolio at the end of the year, and say you’re comfortable with having, I guess, made some adjustments at the end of the year, because you’re giving guidance for flat profit this year, even if there is maybe possibility of diesel ban on financial services?

No, actually not only just annually we continuously, so to speak, monthly update and validate our assumptions and so that’s a continuous monitoring process, and you can rest assured given our overall conservative approach also in the financial services community, that we are properly reserved for the potential risks within our portfolio, but let me reiterate again, it is a portfolio consisting of costs depreciating and appreciating in value. So it’s a combination of and the picture isn’t as grim as some folks might have assumed.

Great thanks.

Our next question comes from Patrick Hummel from UBS.

As nobody else has said it, let me say the format is great, I like it a lot, and I think we all appreciate that it’s much more efficient than the prior format. I have 3questions left. The first one is actually for both Frank Witter and Matthias Müller. It’s related to the free cash generation, you did an underlying €10 billion free cash generation in 2017adjusted for the diesel outflows. Your 2020 guidance is also €10 billion, at least. Your CapEx and R&D ratio guidance for 2020, you said you firmly stand behind that 6% target, which implies a further reduction. And we have to expect a 20% revenue growth between now and 2020. Isn’t it time to revisit that €10 billion free cash flow forecast? Or what are we not seeing, what am I not seeing that would be such a drag to free cash generation if you meet the other KPIs? My second question, Frank, I think you said before that the first ID model in its first full production year should be an EBIT breakeven car. As we are getting closer to that lunch, it’s just 1.5 years or 3 years away, from now, would you still make that statement? Have you firmed up things to say that with a high degree of confidence? And my last question is relating to the battery contract you have already signed so far. Are you actually assuming the raw material price risks for those batteries? Meaning cobalt prices, nickel and manganese, is that your risk or is it the battery supplier taking that risk? Matthias Müller: First of all, thanks so much for the compliment. We will give it to our employees. Thanks.

Yes, free cash flow. The guidance for 2020 is great – €10 billion or greater. So from today’s perspective, in all fairness, there’s nothing to be added. That leaves room and I think, at least as I – as long as I have been working for Volkswagen, I started late 1992, I don’t think we ever gave such a concrete guidance on something you deem to be increasing to – you seem to give even more attention to than ever. So no – nothing to be added from today’s perspective. All electric cars, and this is what we said, of those for – with based on MEB and the new platforms for full electric vehicles, they are requested to have a positive contribution and nothing has changed. Batteries, we certainly have firm contracts for the first cars to come, including obviously, the Audi e-tron later this year and for Porsche and also the first couple of cars on the MEB but certainly, those contracts cover the first wave of those full electric vehicles, and there is volatility in the prices as it pertains to us directly or indirectly to the supplier – to the suppliers. So it is certainly something which is not cast in stone but this is typically to all the other raw materials, which are relevant for our products. So that’s pretty much the picture on the batteries. If I can add to what Frank said, what we try to have is, of course, long-term contracts. And for the first wave, we have a solid position, but at the end of the day, we will look whether we get the new technologies where we need less of raw material, for example, cobalt. On the other hand, we have to take care that the extraction of these raw materials, I think is a much – could be more efficient as it is today.

Can I just ask a little follow-up on the procurement strategy because you have been in the market trying to source some of the raw materials directly? Based on what you just said with all the uncertainties about the mix of the different elements in the battery cell, do you still think it makes sense to source the raw material directly? Or are you shifting the strategy towards just having the battery contract and then it’s basically the job of the sale supplier to procure the raw materials? Matthias Müller: From my point of view, it’s better to give this responsibility to the Tier 1s which can do it better. As you know, we have just started our Center of Excellence to get a better knowledge about cell production on its own in SEAT Ateca and I suppose we need some time to have knowledge, which is comparable to, let me say, Samsung, LG or CATL. For the – as Frank mentioned before in the first wave, and this will be for 3 to 5 years. We are in a good position, and we are confident with our contracts.

Okay thank you very much.

Our next question comes from Daniel Schwarz from Credit Suisse.

One follow- up question on WLTP. Is it possible to quantify the working capital effects for the first half that you have baked into your guidance? And do you think if the whole industry is building up inventories in the first half, could that result in a very challenging pricing environment in the second half? And the other question would be on the dividend. The payout ratio declines for 2017. Do you expect this to go up from now or only when oil diesel payments are made i.e. the 30% target, is it more hockey stick like? Thank you.

Okay. I think we start there with you, Fred. Pricing, if that’s okay. And we’ll come back to Frank for the cash flow. Matthias Müller: Yes, okay. I think the WLTP, I think you asked about the working capital effect in inventories. I think it would be irresponsible to really give you a number since our internal calculations are still floating around. I mean, we obviously have workforces on a group level and on brand level to optimize the situation and to minimize any potential risk out there. And I think we see that we make progress and sometimes, we have setbacks. So therefore, I think it would be inappropriate other than confirming that it is a challenge, but our job is to minimize related risk. Dividend payout ratio. I think 2017 or 2019, depends how you look at it. I would exclude the one-off €1 billion effect and argue with the 219, which is, at the end of the day, pretty much doubling the amount to being paid out to the shareholders, and we continue to confirm, as we did this morning, that we have a strategic target of 30% payout ratio, which we confirm and at previous occasions, I also laid out that this is ideally to be achieved within the 5-year time horizon of our current planning ground. And after being pressured, I also confirmed that this is not necessarily meant to be at the 5th year, hopefully, earlier but no more guidance can be given at this point of time, the strategic target is confirmed.

Well there was a question regarding the possible pricing effect because of the changeover to WLTP. First of all, definitely it’s logistics challenge we do have. We are talking off of volume in the European market for us of 4 million cars and actually, of course, we have to sell out the complete pipeline of any of that vehicles and we have to fill the pipeline then for September onwards with WLTP. So it’s – yes, it’s a logistical challenge for us. We are well prepared for that, we organized that, we planned for that. We do not see considerable pricing effect with the changeover to WLTP because it’s a process where all the industry is going through, so all the competitors are – the situation is the same. We have organized at that, and we think we will manage that, at the end, it will be a successful changeover.

Okay thank you.

Okay thank you Fred. Lets move on to the next question please.

Our next question comes from Harald Hendrikse for Morgan Stanley.

Two quick questions for me, if you don’t mind. One, on the content question, can you just talk a little bit more, you’ve added now SCR technologies to make sure that all your vehicles meet the Euro 6d on the WLTP, can you talk a little bit more about the extra costs and what impact that’s having in 2018? I suspect there might be a little bit of a part of the EBIT margin question that I think a lot of us have. And then secondly, diesel, diesel residuals, sorry, but my favorite subject. Can you talk about a little bit more in total about all of the movements we’re seeing in diesel? How much residuals you’ve charged in the Financial Services side? How much you’ve taken against the provisions in the Automotive business? And maybe whilst we’re on the provision subject, could you give us a little bit better breakdown of exactly where those provisions have been spent on? You’ve had some very, very big numbers this year, can you give us a better breakdown of exactly what those buckets are, if you don’t mind? Thank you.

Let’s start with the residual value question which you raised. I think, first of all, we need to look at it, if we take all Europe, not – the development is not identical in all the different markets, for example, the share of diesel cars was in – the new car portfolio in Italy actually has increased, while in most other markets, the share has decreased. So if you look at the portfolio for the Financial Services unit, we have a total of around about 2.6 million cars with a direct residual value exposure, of which around about 1 million relates to diesel. The exposure is closely monitored and since we manage the entire portfolio of cars, this direct residual value exposure, we have no concerns from everything what we know today that those reserves are well in excess of the potential risk out there. And I would like to continue to stress the point, there are plus and minuses since gasoline-related cars are picking up, and we still think that the driving been discussion, particular if the entire community is able to reduce that risk and therefore, the headaches for the customers is also bringing things more back to normal even though we thought that we’ll see a little accelerated trend out of diesel over the next 10 years, even though we also confirm that diesel will be important for the future. All those costs, referring to, SCR and other elements, are already taken for the Euro 6 vehicles and that change to Euro 6 already happened in 2015, so I don’t think that there’s anything extraordinary you need to be worried about. Matthias Müller: If I can add to the last word of Frank. As far as I remember, the huge debt was in 2015 coming from Euro 5. And as far as I remember, it was a 4- digit amount. And via the solutions of Euro 6 from C to D, it’s maybe only software.

Okay. Perfect. Thank you very much And is it possible to give us any more breakdown on the sort of big bucket breakdown on the total provision spend to give us an idea exactly what it’s been spent on and exactly where the cash is going out of the door?

Yes. Harald, we have an analysis, which we’ve posted – a detailed analysis on our website. We can share that directly with you. We’ll take that offline. And if anybody else has any questions, please email us, and we can go through that. That’s quite a decent analysis in the back of annual report in the notes. I guess, you’re still struggling through the 400, 500 pages to get there. But we can certainly give you some direction after.

Okay. Thanks for that.

Operator let’s take the next question please.

Our next question comes from Philippe Houchois from Jefferies.

Yes, good afternoon, thank you. My question was, I think, Frank, you mentioned on the press call this morning that we might be – you might have to recapitalize the Financial Services more, I think, down €1 billion earlier in 2017. I think you had indicated you will reorganize the Financial Services to make them self-funded. So if you can explain that a bit more and why you would need to recapitalize Financial Services further in 2018 or 2019? The second question is going back on the WLTP. You’re going through the process of getting your cars rehomologated, can you give us an idea of what kind of the step-up in the CO2 output of cars you are getting on the WLTP versus any DC. And whether that gap, let’s say it’s 10% or 15% or 20%, that will carry through 2021, so that we know by how much you may have to rebase your compliance calculations in the next phase post 2021, if that makes sense? Thanks you.

Yes. No, let me first – and I’m very happy that you raised the issue on Financial Services since there might have been a misunderstanding. We, obviously, had the €1 billion capital increase in 2017, that already happened in the first quarter. The structural change is actually meant to optimize and to reduce future capital needs, which Automotive would have to pay into Financial Services. So going forward, we are – we definitely significantly through the structural change, reduced our need for more equity from Automotive. And for the time being, there’s nothing planned on top of the €1 billion you have been seeing. So the structural change is definitely favorable in terms of Automotive net liquidity. I think Fred is talking about the CO2 effect. But let me also come back quickly to the WLTP because obviously, we achieved what we wanted to achieve to put the attention forward to it. It is something, which doesn’t apply only to us. It applies to the entire industry, and you know us from the first Capital Markets Day that we have been very straight and transparent regarding what the industry is up and against. Talk about the CO2 compliance, challenges, the challenge of electrification and I think most of you will very well remember our discussions at the Capital Markets Day and thereafter. And I think our objective always has been to be upright and transparent. And the way you should look at WLTP, we are managing as hard as we get – as we can to reduce any negative implication. We have been very transparent and want to be transparent but everybody else, they’re also dealing with the same challenging in the industry. And therefore, I think it’s important that we pay attention to it, that we are shedding light on it. But on the other hand, we certainly are no different than anybody else and I think we have also quite a bit of experience, and we have a great portfolio and also a better- positioned portfolio in terms of segment penetration and therefore, it is certainly a challenge but hopefully, we are not putting it out of perspective because it is something which doesn’t belong to Volkswagen only.

Yes, understood. Matthias Müller: Yes, another hand on the equation to WLTP coming from any of the calculation transforming to WLTP, as far as I know, we have around 3 gram, which is founded by the system as it is. So we have to work very hard because the transformation is a very complex algorithm, which I cannot explain and talk. But we can give you, let me say, a transformation plan, which explains it in total.

Okay. And if I can go back briefly on the Financial Services side. Is it too much to hope that we might – that you might be able to release capital from the finco into the group? Or is that too much to hope for?

I think from today’s perspective, I think – I wouldn’t go that far. You know that we – obviously, Financial Services is a core pillar and with the expected growth on the Automotive side, you also should expect future growth on the Financial Services side, but in an optimized structure as it pertains to the capital needs. And this is the way I would look at it. I wouldn’t go overboard in terms of expecting capital reductions at this point of time because Financial Services will grow with Automotive and their job is to obviously supplement the offering on the Automotive side from our various brands.

Okay. Thank you very much.

Thank you, Philippe. And operator let’s take the last question please.

Our last question comes from Christian Ludwig from Bankhause Lampe.

Yes, good afternoon. Two quick questions to the end, for me. Mr. Müller, you presented this morning in your presentation the CapEx for the next 5 years. If I add that up, it’s €124 billion. You also gave a breakdown for 2018, which is putting together, based on my note, €26.4 billion. How does that combine with your CapEx guidance that’s going to be below 7% again for this year as Frank Witter said and what am I missing here? That will be question number one. And question number two. IFRS 16 coming up, you said in your report that it’s going to support EBIT, could you give us an indication how much that positive EBIT effect is going to be in 2018? Thank you.

Sorry, we didn’t quite catch that second part of your question. Could you repeat, please?

That was IFRS 16, the change in leasing accounting, in your notes you stated that it’s going to support EBIT and impact financial results, just want to get an idea how much EBIT effect that’s going to have?

Okay. Well let’s – we’ll kick off with a CapEx question, and we’ll come on with the IFRS in a second.

Okay. Yes, let’s start with respect to the CapEx and R&D. When we talked about PR 66, solely CapEx and R&D for e-mobility ,autonomous driving, new mobility services and digitalization, this is around about €34 billion up to the end of 2022. For 2018 only, CapEx and R&D for conventional vehicles and drive train portfolios, this is the number which relates to the – this is a content which relates to the around about €20 billion. And then the next 5 years, there’s a total of those referred to €90 billion.

Okay. So that’s CapEx and R&D, not only CapEx, understood.

That’s correct. The IFRS 16 regulates the accounting of all leases, which basically is – the novelty is that also the lessee has to account for it. We would see a capitalization of the usage rights of the leased property, and on the other hand, the recognition of the corresponding financial liabilities. In order to give you a flavor, we’re certainly still calculating the numbers in terms of interest on lease payments, we probably talk a low 3- digit figure, and this is only effective from 2019 onwards.

Okay. Thank you, Frank. And if we want to dive into IFRSs, the team will be more than happy to take those questions from the guys as well. So it’s down to me to thank the participants, Matthias, Frank and Fred for joining the call today. Thank you for joining on their webcast. It was a different format than before, we would like to, and will take your feedback afterwards. But with that, it’s a goodbye from Berlin. Thank you very much.

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