Oliver Larkin - Group Head of Investor Relations Frank Witter - Member of the Board of Management Christian Dahlheim - Director Group Sales

Tim Rokossa - Deutsche Bank Arndt Ellinghorst - Evercore Horst Schneider - HSBC Jose Asumendi - JPMorgan Stephen Reitman - Societe Generale Daniel Schwarz - Credit Suisse Adam Hull - MainFirst Georges Dieng - ODDO BHF Mike Dean - Bloomberg

Good day, ladies and gentlemen. And welcome to Volkswagen’s AG Live Audio Webcast and Conference Call on the Third Quarter Financial Results 2018. 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 Group Investor Relations of Volkswagen AG. Please go ahead, sir.

Thank you, operator. Ladies and gentlemen, welcome to Volkswagen’s conference call for investors and analysts on the results for the period January to September 2018 based on the interim report we published early this morning. For today’s conference call, I’m delighted to be joined by Frank Witter, Member of the Board of Management, Volkswagen AG, responsible for Finance and IT, and as newly appointed Director of Group Sales at Volkswagen AG, Dr. Christian Dahlheim. Christian, it’s a great pleasure to have you here today. As always you can follow today’s webcast via our website, where you will also find the charts available for you to download. Most of you will have followed the webcast from this morning’s press conference. So our aim for this event is to dive into enough detail to satisfy your specific needs as investors and analysts. Following the presentations we will gladly take your questions. So let me now hand you over to Frank.

Thank you, Oliver and very warm welcome to all participants of this call from my side too. We will present today pretty sound numbers to you and you know me good enough that good numbers do excite me. The good numbers, the very best news today is for me personally is that Rupert Stadler will be released from jail. I'm very grateful for the decision of the Munich court and very happy for Rupert and his entire family. Before we dive into the numbers, let's just touch on the WLTP topic, as we anticipated some of the effects have been outlining since the beginning of the year who have now been materialized. Just to frame the story. It has been quite an unusual year so far, especially in the quarter just ended. Our sales and financial performance in Q1 and Q2, they’re very successful. Then you saw the extraordinary high registrations across the market in Europe in July and August, followed by a significantly negative swing in September. The introduction of the new WLTP homologation causes waves more or less across the whole industry. This of course caused some pain in the European market, which as you know is normally a key contributor with high margins. Christian will touch on this in a second. I'm sure that you can imagine that for us the legacy legal issue was a contributor to delays in getting costs to the WLTP homologation cycle as considerable resources have been otherwise tied up. And if you're self critical, our model offering is still too complex and it's another factor behind some delays. We've used the range of measures to get on top of WLTP. We eliminated third combinations from a model offering. We also took some tough decision on limiting production in our factories and we have also bank cars [ph] awaiting certification. This has led to issues for customers, dealers and importers, as well as our employees. We are grateful for their flexibility, support and patience. As the fourth quarter develops more and more costs are being released and production is getting closer to normal. To be realistic, we will still be seeing some effects at least into Q1 2019. Financially this has meant lower production and consequently sales with some unfinished cars being stored until the WLTP homologation is complete. Despite this, and I think this was quite an achievement, we remained profitable in Q3 and still managed to generate positive automotive cash. Coming to the financial highlights year-to-date. We are able to report an underlying operating result for Q1 to Q3 of €13.3 billion, a touch ahead of the prior year, leading to an operating margin of 7.6% before special items. A couple of weeks ago, we announced that special items of €800 million would need to be booked relating to an administrative order imposing a fine issued by the Public Prosecutor's Office of Munich II against Audi AG, bringing the year-to-date special items to €2.4 billion. After special items, the operating results came in at €10.9 billion for the first nine months. Our unit sales year-to-date have remained strong at €8.1 million and sales revenue at €174.6 billion is still 2.7% above the prior year. The equity result which was mainly driven by the Chinese joint ventures came in at €2.4 billion, up 2.9% on the level of last year despite FX headwinds. The financial result improved by almost €2 billion. Key drivers included an improved interest rate result, currency impacts, derivative evaluations and realisations, as well as IFRS 9 related accounting changes. This drove profit before tax up by 22% to €12.5 billion, equivalent 7.2% return on sales. The profit after tax was at €9.4 billion. Automotives net cash flow before diesel outflows came in at €6.7 billion. It might be a bit tight, but we remain on track for €9 billion for the full year. Diesel outflows amounted year-to-date to €3.3 billion substantially below the previous year's outflow - outflows of almost €14 billion. We ended the quarter with a robust €24.8 billion of automotive net liquidity. As you might have heard me confirms this morning, we are not changing the group margin guidance for the full year before special items of between 6.5% and 7.5%. Despite the challenges of the year, we remain fully on track on our set of KPIs. After special items, we still expect the operating margin to be slightly below the corridor. Let me now hand over to Christian to lead you through the details regarding our sales.

Thank you, Frank. And thank you Oliver for the warm welcome. Ladies and gentlemen, I would also like to extend a warm welcome to this conference call. And it's my privilege to present you the sales figures for the first nine months of this year. We’ve understood your feedback and therefore I will focus just on the major sales aspects, further details will be available upon request at the investor relations team. The following overview shows the development of the worldwide passenger car market and Volkswagen group deliveries to customers for passenger car brands in comparison to the previous year. The global car market decreased in the third quarter, which was impacted by the growing market decline in China due to the trade conflict with the US and to shrinking North American markets. Moreover, financial crisis in Turkey and Argentina marked by strong currency devaluation and high inflation that to decrease in total demand. Year-to-date, the worldwide demand of passenger cars therefore grew only slightly above the prior years levels. After Volkswagen groups record first half year and followed by further strong summer months, volume development was dampened by weak September figures, mainly due to the WLTP changeover in Western Europe, which we had been expecting. Moreover, the effects of the mentioned market decrease in China, as well as developments in Turkey and Argentina negatively impacted the third quarter performance. Year-to-date period the Volkswagen group handed over a record of 7.6 million passenger cars to customers worldwide, representing a growth of 4.1%. That's outperforming the worldwide market growth of 1.2%. Although there are regional differences, now let’s take a closer look. Let's start with the North American market, which remained slightly behind the level of last year with a moderate decline in the third quarter. The ongoing yet weakening slump of Mexican demand, as well as a slight pooling of the high US market negatively impacted the region's growth. However, Volkswagen Group increased deliveries in the U.S. by 4.5%. This growth was offset by a further decline of deliveries in Mexico due to the tense market conditions. As expected, total demand to Western Europe in the third quarter was mainly influenced by the WLTP change over. While the sell out of NEDC type tested vehicles resulted in strong results in July and August, almost all markets suffered substantial losses in September, the WLTP test procedure was implemented. However, thanks to the outstanding figures report since the beginning of the year, deliveries could be increased by 3% year-to-date, while the total market grew only by 1.4%. Total market in Central and Eastern Europe kept growing at double-digit level in the third quarter. All markets contributed to this growth, as Russia as the key driver. We could also increase the deliveries of our brands, again with Russia being the main impetus. However, sales performance was dampened as WLTP changeover had a negative impact on certain markets as well. In South America the market grew slightly within the third quarter, but lost some momentum compared to the first half of 208. While Brazil maintains its double-digit growth, Argentina lost almost a quarter [ph] of its market volume due to the beginning recession. Within this environment, our brands could participate on the growth in Brazil and extend market share Argentina, reported by strong results of the new products such as the Virtus and the Polo. Demand in the Asia Pacific region decreased more and more in the last few months, especially in September. As mentioned this was impacted above all by China, 7.5% down in the third quarter compared to last year, main reason was the increasing uncertainty among consumers, as a result of the continuing tariff dispute with US. This development will pose challenges for the remainder of the year. However, year-to-date these effects could be absorbed by strong first half year figures, leading to a slight growth of 1.2%. Deliveries to Volkswagen group in China and the region as a whole were affected by this market development, recording a slight decrease in the last few months. However, again thanks for the strong performance in the first six months, we increased deliveries by more than 5% in the year-to-date period. Allow me now to move from regions to the performance of our group brands. Let's start with the Volks. Since the start of the year the Volkswagen group handed over a total of 8.1 million vehicles to customers worldwide, passenger cars and commercial vehicles. Despite the anticipated effects of WLTP, a new record representing an increase of 4.2% versus the prior year period. The Volkswagen’s brand delivered 4.6 million to customer’s worldwide year-to-date. The most successful first nine months ever for this brand. Third quarter was on the one hand impacted by the anticipated changeover to WLTP in Europe during September, which was however softened by strong summer months. The brand obtained WLTP approval for high volume variance and expects changeover to be virtually completed by the end of this year, with an expected return to stronger sales results from November onwards. On the other hand, the third quarter performance was dampened by market related declines. That's just a negative development in China that I just mentioned, as well as a decrease of deliveries in the crisis markets, Turkey, Mexico and Argentina. However, these setbacks could be compensated in part by the again very positive development in Brazil and Eastern Europe. Year-to-date the brand remains above the prior years figure with a rise in deliveries of 2.9%. Move over to Audi. Since the start of the year, Audi delivered around 1.4 million vehicles to customers, an increase of 2.0%. Here again, year-to-date result was dampened by a decrease of deliveries in Europe in the third quarter due to the switch to the WLTP test cycle. Moreover, the ongoing model changeovers within Audi models initiative, especially in Europe [indiscernible] figures of the first nine months. Despite negative market circumstances during the last months main driver for growth was China, but the brand increased deliveries by more than 15% year-to-date, thus reaching a new delivery record. Moreover sales in North America remained strong, particularly in the US, but the brand kept growing at a record level. SKODA finished the third quarter on last year's level and sold a total of 939,000 vehicles to customers in the first nine months, thus exceeding previous year's result by 7.8%. While the WLTP conversion had a negative impact on sales performance in Western Europe in the third quarter, the brand recorded further growth in the key markets Russia and China. Key growth drivers on the product side, were once again the news SUVs, Kodiaq and Karoq as well as the Karoq L, so the long version that is available exclusively in China. Fiat stayed on its growth path in the third quarter and delivered a record of 416,000 vehicles since the beginning of the year. That's making it the fastest growing brand in Europe. Despite the WLTP implementation, the brand could again achieve double-digit growth in almost all major European markets. Furthermore, Algeria again delivered a substantial contribution to the brand sales performance with a new Ibiza. It is also worth mentioning that SEAT together with the new Chinese joint venture partner, just introduced an attractively priced electric compact SUV another brand named Soul. Porsche further increase sales in the third quarter and ended up delivering 197 to customers – vehicles to customers in the first nine months of 2018 growth of 5.7%. The performance was particularly favorable in Western Europe and China both year-to-date, as well as in the third quarter alone. In the U.S. sales declined in the third quarter due to the sellout of Cayenne models, but still remain moderately above last year's period on a year-to-date basis. On the product side the Panamera family and the 9911 Coupe contributed to the growth. Finally the so far successful integration introduction of the new Cayenne makes us confident for further growth. After a strong second quarter growth of Volkswagen commercial vehicles lost some momentum in the third quarter. Year-to-date the brand ended up delivering 371,000 vehicles slightly more than in the same period of last year. For the new Crafter in Europe, as well as the Amarok series in Western Europe and South America contributed to that growth, especially the Caddy in Germany and transporters in Turkey experienced some setbacks. The demand for trucks above six tonnes now available markets increased year-on-year. While the truck market in Western Europe increased slightly, demand in Brazil and Russia was significantly higher than the previous year's level. Yet-to-date, those MAN and Scania registered higher deliveries in almost all important regions. MAN supported by the positive developments in South America and Europe continue to grow in a double-digit level and delivered 98,000 vehicles worldwide. Scania delivered around about 69,000 units, growth of more than 7%. Let’s now take a look in the next months. After a difficult September in Europe, due to the switch to WLTP deliveries in October will still be affected. Nonetheless for November and December we foresee stronger sales results in this region as we expect the WLTP changeover at all brands to be gradually accomplished and virtually completed by the end of the year. The tensions in the Chinese car market due to the ongoing discussions on import tariffs will remain challenging for us. However, we will introduce a broad set of new compact SUVs in Q4 enabling us to reach new customers. The market situation in Turkey and Argentina will remain tense as well. We continue to observe this development very carefully and take appropriate action. On the positive side we foresee further growth in Brazil, thanks to newly introduced models and ongoing positive market stimuli. In the U.S. we expect further improvement, thanks to our SUV range which will continue to expand. Despite the challenges mentioned, we're expecting a sales result moderately above last year. Last but not least, let me now introduce you to a few model highlights which have been successfully introduced to the market in Q3, for which we have high expectations. First is the new Audi A6 Avant, which marks the first our model in Audi's new design language. Its interior is even more spacious than that of the previous sets of model, improved efficiency it combines various driver assistance systems with the powertrain management of the standard mild hybrid system. The all new Audi Q8 combined suspiciousness and ergonomics typical of an SUV, with the elegant body line of a two door Coupe. The general two dimension interior state of the art operating suspension technologies, as well as intelligent assistance systems make the Audi Q8 a convincing companion for business and leisure.

Thank you, Christian. Now let's turn back to Frank, who will start with our group performance before looking into the brand's in more detail

Yes. Thank you, Oliver. As mentioned already over the first nine months of 2018 sales revenue for the Volkswagen group was close to €175 million, an increase of 2.7% compared to the prior year. We benefited in particular from the strong start to the year, which means we are still ahead despite much more volatile Q3, more than compensating for €1 billion - for €4 billion drag on the top line from the strong euro. Looking closer at 2.4 billion special items, 1 billion of these relate to the payment to the Braunschweig public prosecutor earlier this year. We also topped up our legal provisions by around €600 million in Q2 and as mentioned earlier just lately and administrative order imposing a fine was issued by the Public Prosecutors Office of Munich II relating to Audi and therefore a further €800 million had to be recorded in Q3. The financial result improved by close to €2 billion to come in at positive €1.6 billion. Our Chinese joint ventures which make up of the majority of the equity accounted investments reported a proportionate operating profit of €3.3 billion, marginally up on the prior year. On the back of a highly competitive environment and FX deterioration, this was a decent achievement. We had equity impact in the P&L also came in slightly up even though the result was dampened by a translation effect from the stronger euro. As you’ve seen through the quarters this year, the other financial result was significantly less negative year-to-date due to a mix of factors. The interest result improved significantly by €0.6 billion, as interest expenses were lower and fair values on derivatives – on derivatives had a much less negative impact, mainly due to IFRS 9 changes. Moving on to look into the group operating results performance for the first nine months in more detail. The position volume/mix/prices in the passenger car segment reported a plus of €1 billion. Comparing the third quarter to the bridge, I presented on the H1 call, this position declined by just €0.1 billion in the third quarter, so was WLTP impact. In reality our trend from the first half should have driven a further increase in volume mix price from the positive €1.1 billion we reported at the half year stage. The fact that trend dropped back by €0.1 billion hints that the impact of WLTP in this position alone is clearly over €0.5 billion in the quarter. Taking a year-to-date perspective, volume remains a key driver. Exchange rate effects had a small negative impact of around €0.1 billion so far this year. This shows a decline of approximately €0.3 billion in the profit bridge for the quarter. As you know global currencies remain very volatile. Let's see how the rest of the year pans out. Rising material prices limited our product cost savings to €0.2 billion year-to-date. Fixed costs and start up costs have risen year-to-date by around €1.3 billion. These costs in particular relate to the higher R&D charge hitting the P&L of €0.9 billion. This most made up of €700 million euros from applying a lower capitalization rate to a flat cash R&D spend and €200 million euros higher depreciation of previously capitalized development. A further roughly €250 million depreciation from the CapEx is another component driving the fixed cost position. And we should not forget that there are other pressures on disposition too, including costs of the ownership - monitor ship program, as well as the strengthening of our control functions. As ever this area remains a key focus of our efficiency goals To wrap up this chart, and as mentioned earlier, we had to book visa [ph] related special items totaling €2.4 billion year-to-date. Turning to our brands in more detail and here you will see WLTP as a key driver in Q3, especially for all volume brands. Volkswagen Passenger Cars managed to achieve a slightly positive operating result in Q3 following a stronger first six months, not to bet given the circumstances. With an operating margin of 3.7% year-to-date based on an operating profit of €2.3 billion for the first nine months, the impact of WLTP in Q3 was obvious and we shouldn't forget that the negative exchange rate impact on the brand too. As further homologations are coming through, the brand is stepping up production and we can expect a reasonable bounce back in Q4. Audi reported an operating profit, again before special items of €3.7 billion, slightly below the prior year, also its WLTP and an increase in fixed costs being a key factor. SKODA posted earnings of €1.1 billion versus €1.2 billion for the prior year period. FX and negative effects of WLTP, especially on country mix were key headwinds. At €237 million SEAT’s results remained above the prior year figure. We had positive SUV volume and mix effects more than offset the WLTP challenge. Bentley reported an operating loss of €137 million. Ongoing delays in the ramp up of the new Continental and negative FX impact were the main causes. Porsche delivered an operating profit of €3.2 billion versus €2.9 billion in the prior year period. Volume growth and a very good mix drove the result. At over 18% the Porsche margin continued at a very high level. Volkswagen commercial vehicles came in just over €0.6 billion, slightly below the prior year nine months. The move to WLTP had earnings back and exchange rates proved to be a further headwind. These could only be partially offset by positive mix and lower product cost. Scania increased volumes, achieved a stronger performance in the service business and had positive FX impact. This altogether contributed to the operating profit of around €1 billion. Underlying MAN Commercial Vehicles earnings increased but the exit cost from the Indian market of round about €115 resulted in earnings coming in slightly below the prior year at €222 million euros. MAN power engineering came in higher at €142 million. Expectations of a weaker fourth quarter have led to a lowering of their outlook for the full year. Volkswagen financial services had another strong quarter with year-to-date earnings coming in at €1.9 billion, up €150 million. This is fully in line with the earnings of the full financial services division which also reported slightly higher earnings at €2 billion. At negative €974 million, the famous volatile Other line came in much lower than in the first nine months of 2017 and also versus the trend in the first six months. As you know, the volatile position consists of the elimination of entire company profits, as well as the earnings from the non-brand companies, such as Porsche Salzburg, as well as PPA cost allocation. As production should recover in Q4, we expect to see this position to return to a normal trend. Let’s now take a closer look at the underlying automotive net cash flow development from January to September, which on an underlying basis came in at €7 billion. I think you heard us a few times by now. Cash remains king, despite the significant WLTP challenge from the disrupted production and sales, including cash tied up in unfinished goods such as cars awaiting homologation, we still managed to book a positive automotive net cash flow in the quarter. Excluding some minor M&A, as well as diesel outflows, net cash flow in the quarter was just short of €1 billion positive, highlighting the continued focus. Let's now mo move on to CapEx and R&D. As a starting point in the bridge, the cash flow from operating activities came in at €14.9 billion. In relation to CapEx at €7.9 billion this was €764 million above the prior year. As I've been saying since November last year, this slight bump was expected with the aim of avoiding emission fines down the road. The CapEx ratio for the first three quarters is 5.3% versus 4.9% last year. The negative impact of FX on our top line mathematically increases the ratio of course. The year end is still pretty close, and while we fight for every euro, I'm still confident that we will come in within our full year guidance of 6.5% to 7%. In relation to R&D, total research and development costs or cash spent if you want to come in flat year-on-year at €9.85 billion. At €3.5 capitalized development costs they are well below the prior year in absolute terms. This shows the ongoing trend of less capitalization in the balance sheet and corresponded to a higher P&L impact of around €700 million. To get the full P&L view, you need to add a further €200 million for higher depreciation for previously capitalized R&D. From a capitalization ratio viewpoint, the trend to a lower number we have seen in recent quarters continued with 35.6% year-to-date versus 42.8% for the corresponding period in 2017. Moving to the bigger picture. For the full year cash flow generation we are pushing on all levers forward to deliver €9 billion automotive cash flow we set out as the target. It's tight but we will fight on to the last day. Net liquidity in the automotive division stood at a robust €24.8 billion at the end of September. Our successful capital market issuance of hybrid bonds contributed to €2.75 billion to liquidity in Q2. On the other hand, we record €1.25 billion hybrid bond in September for a net year-to-date positive of €1.5 billion. Diesel-related cash outflows were €3.3 billion so far this year. We expect up to a further €2.3 billion in Q4, including the €800 million administrative order issued by the Public Prosecutors Office of Munich II. As business volumes pick up in Q4, as I just mentioned, we expected to generate positive net cash to get to our cash flow target. With this in mind, we can expect to exceed our minimum target for automotive net liquidity of at least €20 billion this year. So turning to my last slide, was our outlook for the full year 2018. We still expect deliveries to customers of the Volkswagen group in 2018 to be moderately above the level of 2017, amid continuing challenging market conditions. We still expect the full year 2018 sales revenue for the Volkswagen group to be up by as much as 5% on the prior year figure. In terms of groups operating return on sales before special items, I'm happy to confirm that our guidance of 6.5% to 7.5% is still valid. With regards to the group operating return on sales after special items, we anticipate that we will come in moderately short of the expected range. In closing, if I compare the global economic framework condition from today to 12 months ago, life certainly seems to have got even more challenging. There are new issues around tariffs, possibly directly impacting us, the U.S., China tariff dispute is impacting local demand in China as we speak. New terms of trade in NAFTA region is another concern, as is of course Brexit, in Turkey, Argentina, I think I could go. Mixed up with this, it clearly strengthened euro makes our exports more expensive and reduces the benefits of our overseas earnings. And the debate on CO2 and especially NOX has intensified, this very ambitious targets in discussion. Let's not forget to mention that the local industry here in Germany just kicked off an aggressive campaign to replace older diesel cars which would cost money especially in 2019. But ladies and gentlemen don't get me wrong. As a company, we have made great strides in the last couple of years. Even with all the problems of WLTP in Q3, we still booked the profit and generated cash. We will work very hard to meet our guidance for 2018 in earnings, cash, as well as CapEx and R&D. We are continuing to push our Future Track [ph] program, it’s a Volkswagen brand and you have heard ambitious comments from the Dr. Diess. We are confident for much closer cooperation of our luxury brands too. With the capital markets a readiness program at TRATON has advanced and is fully on track. We are making enormous efforts in the fields of e-mobility and digitalization. The e-tron from Audi is here and the Porsche Taken – Taycan I should say probably, and Volkswagen I.D. family will be here in the next 12 months. Groundbreaking cars that would take us into a whole new dimension. So you see a lot of a lot is happening. As management board, we believe we can manage these challenges. It's certainly tough, but doable. Yes of course, it's not a walk in the park and you know us by now, let's stay realistic when it comes to targets and goals and goals but we are up for the fight.

Okay. Thank you, Frank. We will now take questions from investors and analysts. Operator, it's over to you.

Thank you. [Operator Instructions] We will now take our first question from Tim Rokossa from Deutsche Bank. Please go ahead.

Yeah. Thank you very much. Good afternoon. It's Tim from Deutsche. Frank, can we talk a little bit more about free cash flow please. In the context of everything that's going on you know, profit warnings left and right in the sector, you achieved a pretty solid result in Q3. You now have €7 billion underlying year-to-date, you have €9 billion free cash flow target for the full year. How should we think about the ingredients for Q4 in terms of working capital balance, earnings growth and diesel outflow? And related to that also, can you help us understand the cash impact of WLTP that we have seen so far. And then secondly, Frank either also for you or maybe Christian maybe for you, this morning and also just now you spoke about the normalization of demand in Europe, post October for most brands. Now we are basically in November. Is that something you see in your delivery shadow as we speak so to say or is that an expectation for the coming weeks? Or asked differently, how much a surprise potential do you see to your assumption with the WLTP issues are now pretty much behind us? Thank you.

Okay, Tim. Two or three detail questions, just to make sure we got everything there. You were asking really about the drivers of cash flow in the fourth quarter, in particular related to WLTP cash impact. And then I think your second part there was looking at demand in the fourth quarter and how we see the world. We'll start with cash flow and Frank we'll go to you, if that's okay.[Audio Gap]

There you go. So sorry, troubles with the mic. So I’ll start again. Tim, it's Christian. Just to take your last question first, the WLTP question, to clarify guidance, September and October have both been weak months, also October is due to non-availability of WLTP cars, we expect as I said a normalization in November and December. Because then most engine gearbox combinations will become available, which will of course mean we will still see some impact in the first quarter in terms of waiting time for customers, but we will have most engine gearbox available. So again, September, October still negatively impact in terms of sales. That's a reason why we see only a chance for moderately above last - above last year, as we see a recovery in November and December.

So yeah, Tim let me pick up the aspect of cash you raised. I think, I heard you also confirming that we are positive about the fact that besides the special circumstances in Q3 we have been able to generate a positive number. We expect us to bounce back and confirm the €9 billion, that’s certainly requires us to have better inventory situation. We have the number which I gave fuel at the last call, at times up to 100,000 cars in stock, so to speak. WLTP related we are improving here. So with a normalization in production sales and deliveries that certainly is a major driver, assuming that the other key drivers of the cash flow generation are not detonating significantly, which we obviously don't expect. So the cash - the impact of WLTP is particularly in the inventories and with the normalization that should give us a pretty good shot at €9 billion in total. Obviously, net of diesel related out - payments and M&A activities.

Okay. So if we - if we think about bounce back of working capital, we think about higher earnings, maybe slightly improved pricing or so in some regions. Why shouldn't you make more than €2 billion in the final quarter?

Yeah, but Tim we shouldn't forget CapEx and R&D are expected to come in at a higher level than in ‘17 and a lot of that is coming through in the fourth quarter. So from today's perspective of the €9 billion it's definitely not a walk in the park. We commit to it and don't give up, but realistically with the seasonality we have in our business this is probably a pretty good number. And I would be very pleased if I can confirm it at the end of the calendar year.

Okay. Thank you very much to all the three of you. Thank you.

Thank you, Tim. Next question please?

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

Yes, thanks. Good afternoon. I am Arndt Ellinghorst from Evercore. Two questions quickly. The first one is on distribution expenses. Frank, you've made some really good progress this year. The decline by €1.3 billion ratio is come down from nine point - 68.6% [ph]. Can you give us some color how much more potential there is in that line. It's a very significant you know, north of €20 billion cost line that we don't speak about very much, but that's been the biggest line of improvement so far. What do you see as a normal ratio for distribution expenses for the business moving forward? And secondly, I think it's fair to say that most of us have been waiting for a Capital Markets Day or something to be announced. What are your thoughts, when should the company go out, present itself potentially an update on the targets, Herbert Diess have now been CEO since April this year. I think it's a fair expectation from investors to go really and meet the new CEO. I know you've been on the road quite a lot, but what's your thought regarding timing of the Capital Markets Day? Thank you.

Let's start with the second question. I think it's a fair point, that you certainly want to hear the big boss. I think it was important that Herbert made himself available for the H1 call. I think that was very much appreciated, also recognized the notion this morning that you want even more of him. I can definitely confirm that he's very committed to the communication to investors and analysts and we certainly will work hard to make himself available. Capital Markets Day is not yet fixed. We will continue with our venue regarding the planning ground. I think that was very much appreciated that we - that we were providing more details on the most recent short and medium term decisions and plantings of the group. But Oliver and myself will continue to convey to Herbert the need to be even more visible. But I also would ask for your mercy because he has his hands full and you can also mention that the political environment and scenery requires a lot of attention from him. But we will discuss with him what's possible and realistic and that's my promise. With respect to the distribution expenses, I think I need in line with a full transparency which we are providing you also some bad news so to speak to put things into perspective. We talked about the currency exchange impact, which on the revenue side was negative, but as it pertains to cost we had around about €500 million positive contribution and we also had to do two changes in the accounting loss reclassification between some of the line items, who round in the range of €450 million positively helped the distribution expense line. And we also should not forget that in 2017 we had 5 months of the PGA Group being included. So I think that's important to recognize. Although all the numbers are not to bad, if you keep in mind that WLTP obviously caused quite a bit of disruption also on the logistics side we incurred incremental and extra distribution costs. But I fully agree with you and this is an area where a lot of money to be safe, and you can rest assured that we have a strong focus on that line item.

Okay. Maybe [indiscernible] Frank managing total distribution cost is a key element that we will continue to measure in the future and also of course look at out - the way we structure sales from retail to wholesale to see if we can become more efficient.

Okay. Thank you very much. We'll take our next question please.

And our next question comes from Horst Schneider from HSBC. Please go ahead.

Yeah, good afternoon and thanks for taking also my questions. The first question that I want to raise is - and we had this discussion already at the Q2 results. I still don't fully understand this WLTP effect, especially in 2019. And today in the press call you briefly elaborated that there might be also in Q1 a kind of negative impact. My understanding would be that the negative impact that we had this year becomes positive tailwind, same magnitude next year just because the effect doesn't repeat. And for Q1 I would assume since you have this catch up effect on volumes that the effect could be even positive. So maybe you could clarify a little bit if the impact will be positive or negative, and maybe also to which extent? Then the other question that I have more forecast related questions. On the other slide you said, the lines will normalize in the fourth quarter. So I want to understand what means normalized. I mean, last year Q4, the burden I think was something like €1.9 billion, in other quarters the burden is just several hundred million. Maybe you can be a little bit more specific about the impact? And on the other financial results, the run rate that we are seeing now for two, three quarters is that the normal run rate we should work within our model? Thank you.

We suspect cost to be WLTP issue. It's more than anything else, an inventory situation. And still to a certain extent the question of availability of engine gearbox combinations. So we are certainly going to ramp up production, but you have lead times in the pipeline and therefore inventory in dealer lend might in some instances still be on the low side, which is the limiting factor besides the fact that certainly we probably will not be at 100% off and in gearbox availability at all brands there's a variation. And just to give you a flavour, the fourth quarter in particular will be an issue for Audi and Porsche, more than probably for the volume brand. What we shouldn't forget WLTP as a new procedure and we will basically have each and every year new levels to be achieved. That means the testing is not one-off 2018 issue, it is an ongoing procedure even though the disruption should be significantly less than what we experienced in ’18, but an increased level of workload and complexity is still to be there and therefore the continued pressure on the entire organization to reduce complexity and optimize the engine gearbox offering is a must and will continue. But the effects are not entirely gone, particularly Q1, it's the area of concern. But WLTP work is ongoing. It is – that’s what I called it the other day in internal meeting, it is the new normal, but it shouldn't be as bad as in ’18.

Sorry for 2019 you mean the transition to €60 for example is in the next….

Exactly right. So the other line if you try to follow the seasonal trend, Q3 was exceptionally low. We've seen in the fourth quarter round about ₹1 billion in ‘17. My best guess that we should see moderately higher number for Q4 18 with the uncertainty that I certainly don't fully know and can't predict at this point of time how much of the plan we laid out in terms of production increase, sales and retail, and deliveries is fully executed. There's more volatility then normally, but at least to give you a flavor of what we should think of with respect to the other line for Q4.

Moderately higher versus last year, correct?

Yeah. I expect a number which is higher than it was in the fourth quarter of ‘17.

Okay. Other financial result. Is that - now run rate that we are seeing for - I think now two or three quarters, it seems to be structured and lower burden, is that is going to continue in the next few quarters as well, that's a generally run rate, lower run rate that we have by now?

I mean, at least for the - I mean, there's a lot of mark-to-market valuation which in currency effects in there, but I think quite positive to say that the total financial results for the full year should be significantly ahead of last year. But the volatility is tremendous in those line items, as you know from the currency. We have obviously - we also have a IFRS 9 effect in here which is in a way positive for the financial result, but we year-to-date September we had €3 million negative in the operating result. And also commodities are an area of concern – was a high degree of volatility too.

Okay. Thanks a lot. Thank you.

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

We will now take our next question from Jose Asumendi [JPMorgan] Please go ahead. Your line is open.

Hi, Frank. Its Jose, JPMorgan. And just a couple of questions please. I think you're printing in excess of 3.5% margins on the first volume brands with losses in Latin America, in North America and with challenges on WLTP. So I think as we fast forward into 2019, clearly as WLTP should be behind you, I think, there are going to be two areas of focus here, one, North America and two, into Brazil. So maybe you could just elaborate a little bit. You know, you had a change in management in the U.S., there is going to be clearly I think a new strategy probably been laid out for the U.S. that maybe – I mean, I'm not mistaken by, a love to hear any thoughts there. And also how do you think about the breakevens breakthrough in North America, we've discussed in various calls the product cycle, the improvement you have in product mix, but is there anything you can do to accelerate a little bit more of a journey to cut the losses in the U.S. And if possible if you could maybe just give us a feel of the losses you have in the U.S. I think that will also set in contrast there - I mean, the quality of the results that you have underlying ex-U.S. losses, similar comments please for Brazil. Second question please, timing of the IPO if you could share any comments on that please? Thank you.

Hi, Jose. As usual a nice set of different questions. And obviously, we came in for Volkswagen Passenger Cars at 3.7% which is not surprisingly down from 4.3% four. As we always said, our minimum target was – is for both regions of Volkswagen’s passenger cars to be breakeven at the very latest in 2020. You are probably not surprised if I you say the recovery in South America is faster than in North America because the market is recovering double-digit obviously from lower levels. But as I confirmed at earlier calls, we did all our homework in South America in terms of cost optimization. We had to let go thousands of people and we are very hard on ourselves in terms of cost optimization. This is certainly what we are benefiting from, still certainly way below capacity full utilization and therefore things are going straight into the right direction, but we are still incurring losses, at a lesser rate than in the United States. In the United States, we are improving. We have a much better [indiscernible] even Volkswagen is now at I think around about 50% SUVs, which is pretty much now in line with Audi and Porsche. This is the place where you have to be because it's painfully competitive in the sedan segments. The market is still at a high level overall in the United States, but we shouldn't forget that this also means that everybody is fighting for sales it remains to be a competitive market place. So we are improving, but we have to be realistic, how fast we are progressing in 2020, especially for the United States probably still the target to meet. In terms of new management, and I think, I know the new team very well. Scott Keogh is one of the top notch executives in the industry. He's very highly regarded in the dealer community and the supporting team will also be focusing and basically executing the plan which we laid out and his reputant [ph] clearly led the team into region to improve. But we certainly want acceleration and I think somebody like Scott Keogh who is also extremely well known in the market is certainly an asset which will expedite our measures. Nevertheless, I think 2020 particularly for the U.S. is realistic because every little gain in market share, even with great products which we have and obviously you know that we would bring the five seater derivative later in 2019. This is great ammunition, but it is also a tough play. Triton IPO, we always said that we have a project running which we call the IPO - which would lead to IPO readiness, which means the board of management certainly has the option to decide on something. So that that project I can confirm is progressing and exact is the speed, as we expect guys are doing a great job and at a later point of time we will be in the position to make educated decisions based on the market circumstances and our expectations regarding the availability of the respective market. But no decisions being taken, but we confirm that we are making progress as expected, but decisions to be taken at a later point of time. You might see the restructuring announcement made just the other day to separate truck and bus activities from power engineering to be a step in that direction it would logical in the way we described the pure play to be envisioned.

Okay. Frank, let's take the next question please.

And our next question is from Stephen Reitman from Societe Generale. Please go ahead.

Yes. Good afternoon. Thanks for taking my call – my questions. On the premium side. First of all on Bentley, obviously you mentioned currency is being one of the big impacts behind the losses there, but also you mentioned about issues with Continental GT, what's gone wrong with that relative to – it seems to be the relatively smooth launch of the Bentayga before that? And secondly on Lamborghini, obviously you don't publish the results specifically of that business, but could you maybe make some comment about how you feel it's developing with the launch of the Urus and is it getting close to benchmark performers in the sector? Thank you.

Yeah, its Christian, allow me quick comment on Bentley. The question was what been wrong with the Continental GT launch, look, I don't think that's a time to go into the technical details. I think the general statement would be given the importance of this car and the level of luxury it's playing in. And of course, we did everything to ensure a flawless launch and rather sacrifice some – or excepted some delays instead of sacrificing anything on quality. I think we now have a product ready to go that will fulfill the demanding customer needs. Obviously going forward, we always love a smooth launch, but these things happen. And secondly in terms of Lamborghini, we do not publish a specific result. That's correct, maybe Frank can comment on it on a market performance, the Lamborghini is performing great and it always has been extremely well received by the customers. So we're very happy on that side.

Maybe let's just add to it. Certainly the Urus is an important milestone for the company. Stephen you might refer to the benchmark in the spot luxury sport car arena. Now the company is profitable and I think Audi is discussing whether they provide more details on the two main subsidiaries, Lamborghini and Ducati, I'll leave that to my Audi colleagues. So they're profitable but they are not in the league of the companies you might want to compare them with.

Understood. Thank you.

Okay. Thank you. Operator, we’ll take the next one please.

Our next question is from Dorothy Criswell [ph] from Barclays. Please go ahead.

Hi, there. Its Dorothy Criswell from Barclays. Thank you for taking my question. My first question is about China. I wondered whether you could confirm your guidance for flat earnings consolidated in equity from your Chinese joint ventures. I think that's what you were guiding to for the full year. I always wondered whether we've seen this speculation around a cut to purchase taxes in China and I know it's not yet confirmed, but could you give us some idea of the proportion of your cut that would be affected by that. I think it's meant to be for vehicles with engine sizes 1.6 liters and lower? And then my last question is just around the sort of underlying demand in Europe leaving WLTP aside, what's your view there, and how weak or strong is demand across Europe at the moment? Thank you.

Hi, Dorothy. Maybe I’ll start with the two earnings related questions and Christian will comment on the demand in Europe. No I definitely continue to confirm our earnings guidance for the full year. Sales tax for the very moment, I think it's still a speculation. We know from the past that such a measure can have a very strong impact on demand. The last time we saw the sales tax reduction on engines equal or smaller than 1.6 liter. Whether the government will decide such a program and to what engine gearbox combinations and products it might apply is from my perspective open. But I expect a response soon because obviously there are speculation in the market place, but this is obviously not on us. And if we look at the old program and apply it to our offering in the range of 60% of the costs would be affected if the program would have the same cut-off in terms of engine size, just to give you a ballpark number. But this is obviously to be seen in light of what the government will decide and I think demand in Europe is something for Christian.

Thank you, Frank. Just to add, we see currently roughly stable market in Western Europe despite the fact that the WLTP is already included. If you look year-to-date September Eastern Europe is up 14%. So going forward 2019 we would expect a stable demand. The big unknown of course is Brexit and any uncertainty that might bring. But generally speaking from outlook, we would expect a stable market in ‘19 versus this year.

That’s helpful. Thank you.

Thank you. Let's take the next question please.

And our next question is from Daniel Schwarz from Credit Suisse. Please go ahead.

Yes. Thank you for taking my questions. My first question would be on the dividend with more one-offs being booked in the third quarter and a strong underlying free cash flow. Do you expect to pay out ratio based on reported EPS that this would make a meaningful step towards the 30% target for 2018? Secondly, a follow up on China WITH the flat operating earnings in the first nine months, how did the free cash flow develop relative to that? And my third question would be on the shareholder lawsuits, based on the first hearings the judge seems to be of some opinion that Plaintiffs will receive much less than the claimed €9 billion. But you also seems to believe that there is a basis to sue Volkswagen, on that basis do you expect to built up some provisions for that in the fourth quarter?

Hi, Daniel, I mean, you know from the annual report and our statements in the past, we continuously assess those legal claims and our position targets, the likelihood of a negative decision occurring has not changed. So we – our position regarding the legal grounds and the potential outcome hasn't changed. With respect to dividend on calendar year 2018, it's obviously a bit early to talk about the distribution and pay out. We confirmed our 30% percent target for the five year planning cycle, which we have in place. So obviously since there are still risks – of relevant risks which we have to mention - which we have to manage successfully, we have an eye and I think we've proven to be to be very concerned about the legitimate shareholder interest. And so we will make those decisions in light of the final result. The full year forecast number would certainly indicate that we still have room for a decent dividend to our shareholders. But at this very early time, I couldn't and don't want to go any further. I think the other question, I understood regarding dividend paid from China, we also expect that pretty much to be in line with previous year.

The question was more of the free cash flow development within the joint ventures in the first nine months, whether that was operating income was flat, whether that was pretty much in line with that or above or below?

Cash in the JVs. I think we need to go - get back to you because this is nothing – I just crossed related, obviously we have all the details on the profit at the moment, but we come back to you and with what we can share with you possibly given obviously the agreements in place with our JV partners. So we come back to you directly Daniel.

Okay. Thank you.

Thank you, Daniel. We'll take the next question please.

Our next question is from Adam Hull from MainFirst. Please go ahead.

Yes. Good afternoon. Adam Hull from MainFirst. Thank you for taking my questions. Firstly, to dig a bit deeper on the free cash flow, you say the €9 billion is quite tight. I'm assuming here that you are - you were factoring in a pretty large working capital outflow and that may be the biggest risk. I mean, is that how to see things, is it particularly risk there. Audi inventories being high, that’s also greatest worry and therefore potential we might see that coming back in Q1 with working capital inflows, maybe just a bit on that. Secondly, I think you're pointing out the R&D headwind in your P&L. Clearly as you say the capitalizing rate coming down is a big issue, running at 36% percent now, how should we be thinking about it next year? Does that fall further or is this a kind of a rate that we could sort of stabilize at? And then finally on the financial service EBIT, what's the key driver for Q3 being strong and how comfortable are you now with all your residual values on diesel et cetera? Thank you.

Daniel, sorry Adam that's four questions, I if I add to that together, you're asking really about how we get to the €9 billion for the year. And then the R&D, I think you are asking for a peek into 2019, drivers for the financial services EBIT and I think you sneaked in question around residual values as well. So we'll take those I guess one by one.

Yeah, this is Christian, maybe I can take the question on the first residual values and diesel, I mean, obviously we all know that the diesel share in the market has decreased. I mean, in terms of sales in all markets, but there still is strong demand, this is still a key element, especially on the fleet side that customers are demanding. The diesel if you look across Europe a down year-on-year by about 2 percentage points. So that is an impact, but it is not huge. And it's relatively stable. And again you have to compare your figures in that end of the year and then because you always have seasonal effects. So 2% and this is data that doesn't come from us you can also look it up, if you look at all external agencies DAT for example for the German market.

With respect to capitalization ratio, I think for the remainder of the year you should expect us to be pretty much in line with what you've seen so far this calendar year. On ‘19 we will comment once we are through with the final approval of our planning around. So that is the right point of time to be more precise from my perspective on 2019. And could you maybe specify exactly what you were looking for on the free cash flow question, I understood the related an aspect was working capital changes and working capital.

Just when you - obviously there were different risks to that €9 billion, but I'm assuming quite a big risk is that you don't get enough of the working capital inflow in Q4 that you might hope for or you might end the year with excessive working capital, excessive inventories. If that is the case, I'm wondering whether you know, what your assumptions are and whether that thing comes back in as a positive into Q1, i.e., kind of supports your 2019 free cash flow even if it's a tight one to get your €9 billion this year. And I'm wondering whether it's particular Audi, where you’re suggesting that WLTP issues might drift into next year? Thanks.

No, I think you're right. I mean, at the end of the day we have task force in each and every brand. We have secured transportation capacity, but it's obviously important that at the end of the day we move the metal into dealer level. And there is the volatility, we still have obviously some homologation outstanding which obviously what we don't accomplish in Q4 ‘18 would positively contribute for ’19, but we still have for some brand in particular a low inventory situation ‘19 which is obviously part of the scenario which I described, that is still also at least in the first quarter some more volatility obviously expected to be at a lower rate. But this is this is from my perspective the way I would look at it. I think we have a pretty good shot to end up in the corridor which we described. I think we are very pleased that we pretty much ended up in the corridor on those top line KPIs in Q3.and I have reasonable hope that we will also manage through Q4 in the way we did in Q3, even though there are a lot of open links, but I think we've proven that there isn't - it is not without hope.

Great. Thank you.

So Christian again, Frank handed over the financial service question to me, I guess out of or given that have been in the boards four weeks ago. So the main driver for the good performance of financial services is actually volume mix in margin. So favorable mix in the country mix. But the main driver out of all the threes is clearly volume, so we see a continued rise in penetration, again for remind of course, financial services will be affected by lower volumes due to WLTP, but up to September extremely successful, fields of the brands, including a higher penetration are driving that results.

Thanks very much.

Maybe just to add on it, the P&L just looks a little different than on the old compared to the automotive side. You have a portfolio which is basically leading to your P&L outcome, while the automotive business is more digital so to speak, either you build and sell a car or you don't, you don't have a portfolio, you are drawing from. Therefore I think that were some overly critical expectations regarding our full year financial services performance. Rightly so everybody asks how about residual values. But I think from today's perspective and particularly given the fact that we have the majority of our diesel cars in our portfolio are based on EU6 registrations and we have a very dedicated organization. We have full access to the dealer network and we are remarketing costs throughout entire - the entire European community. And this is the basis which gives us the comfort to deal with this situation. But nevertheless this is an ongoing challenge to be managed but for the time being the guys have still - have been doing a great job.

Thank you, Adam. I think you got two the experts on FX here today, so anybody else got the FX questions lined up feel free. Next question please, operator.

Yes, our next question is from Georges Dieng from ODDO BHF. Your line is open.

Okay. Good afternoon. Its Georges Dieng, ODDO BHF. Two questions. The first question, a follow-up on WLTP. If I understand it well, Frank, you mentioned or that's what I understood WLTP impact was somewhere around, let's say €4.5 billion in Q3. That would suggest that the WLTP impact will actually be higher in Q4 than it has been in Q3. And what has been the share of the VW brand out of this impact? And the second question is more on 2019. I know that you're not commenting the guidance as yet, but you mentioned one factor that could affect '19, either the cost of the [indiscernible] trading schemes in Germany. Could you shed some light on this and what kind of costs are you, let's say, referring to when you mentioned this issue for '19? Thank you.

I think Christian can - if you're interested shed some also some more light on the programs we have out there. But I said it in my speech it will cost money. And also in light of what I said earlier, we will certainly comment on ’19, but it will cost money in ‘19 but the task ahead of us all together is to obviously find offsets and find ways in other areas to deal with those incremental cost. So we certainly have expectations that we still will have 2019 targets, which we also would share with us to be to be ambitious enough. So yes, it is an incremental expense but we will deal with it and hopefully we'll find at least for a reasonable amount decent offsets. I obviously didn't give you a specific number on the WLTP impact, but as I said earlier it's north of a billion, how much we will learn on December 31 given the volatility, there are a couple hundred million which I made the reference to in the end the respective bridge and without going into too many details, but to Volkswagen passenger cars got their fair share of that overall number being obviously a volume player and our best selling brand in Europe where obviously WLTP was the issue. So from my perspective that way I would describe it. We obviously didn't give a breakdown and obviously some of the items are certainly commingled. So a 100% separation of WLTP effects would probably not be possible, but it's obvious that we deteriorated in those brands being affected except for SEAT. But even SKODA brand which is still doing very well is scratches from WLTP, but still striving for a pretty good year. So this is a combination and Christian might comment on the program we have out there, which I think is also an important pillar in the way to rebuild trust into diesel.

Yeah. Thank you, Frank. Maybe just to add and Frank I think as comment on the financial effect of course from the purpose of this program to exchange as many older diesel cars as possible because we strongly believe that exchanging the fleet is the quickest and most efficient and most effective way for cleaner air in the 14 most affected cities, which of course mean we have an interest in our high take rates, which in consequence also will cost us money, because you of course see the premiums we're paying out there. But again this is our commitment to help bring down the NOX emissions, especially in these 14 or including Frankfurt 15 affected cities. For reminder, we have already exchanged 210,000 cars in our older EURO 1 to Euro 4 diesel scrapped scheme which we have now renewed Germany wide in addition to the special program for the 15 cities and we're striving for high take rate and we believes that this will be an effective means for cleaner air in these 15 cities and in Germany as a whole.

Thank you.

Okay. We'll take the last question now please.

Our next question is from Mike Dean from Bloomberg. Please go ahead.

Good afternoon. Frank, Oliver, Christian. It's Mike from Bloomberg Intelligence. Just had a follow up on Jose's question. I'm just wondering is there any further hurdles to overcome before a trait on IPO is possible. And could you just comment on the potential use of cash if you go ahead with the IPO? Thank you.

The biggest hurdle I would predict to is the market and the market conditions. I think it's obvious that we are not in a position that we have to sell shares at any price and therefore I think we deem it to be our responsibility to obviously strive for a decent outcome of such a potential decision. That's from my perspective the biggest - the biggest issue, the way the market is available or both potentially not for such a transaction and in case we would execute an IPO having cash on hand is not the worst thing from a CFOs perspective, there are no other decisions being taken what to do in case. So that is at this point off time open.

Okay. Thank you.

I think that closes the session for today. Thank you, Christian and thank you for those that called in and listened for today. Goodbye from Wolfsburg and… Operator This concludes today's conference call. Thank you for your participation. You may now disconnect.