Volkswagen AG

XETRA:VOW

Earnings Call Analysis

Volkswagen Q1 Earnings Highlight Sturdy Paths Amid Challenges

Volkswagen's Q1 results reveal a mixed picture. Sales declined slightly to 2.1 million vehicles, with significant growth in China offset by weaker performance in Europe. Revenues dipped 1% to €75.5 billion, while operating profit stood at €4.6 billion, reflecting a 6.1% margin. Despite supply chain issues and higher R&D spending, the company maintains its full-year outlook, expecting up to 5% revenue growth and a 7-7.5% operating margin. Future prospects include new model launches and efficiency gains to tackle wage and cost pressures.

Introduction and Company Overview

Volkswagen Group's recent earnings call reflected both challenges and opportunities in the company's journey towards electrification and digitalization. The discussion focused on vehicle sales, market dynamics, financial performance, and future expectations.

Vehicle Sales Performance

In Q1 2024, Volkswagen sold 2.1 million vehicles, a slight decrease of 2% year-on-year. Excluding joint ventures in China, sales fell by 5% to 1.4 million units. Declines in Europe and North America were offset by substantial growth in China, where sales rose 8%, and in South America, with double-digit growth, particularly in Brazil.

Battery Electric Vehicles (BEVs)

BEV deliveries reached 136,000 units, representing 7% of total group deliveries. However, BEV sales were down 3% year-over-year due to weaker demand in Europe and North America, despite a significant increase in China. The company remains committed to its target of a 9% to 11% BEV share this year.

Revenue and Financial Performance

Volkswagen Group's total revenue for Q1 2024 was EUR 75.5 billion, down 1% from the previous year. The Financial Services division saw improved sales revenue, nearly compensating for a 4% decline in automotive sales revenue. The operating result stood at EUR 4.6 billion, with a margin of 6.1%, 1.4 percentage points lower than the previous year.

Challenges and Strategic Measures

The company faced challenges with supply shortages, particularly of 6- and 8-cylinder engines at Audi. Additionally, elevated costs from higher R&D expenses, depreciation, and new business ramp-ups, like PowerCo, impacted financials. Volkswagen plans to accelerate efficiency programs to counter these costs.

Research and Development Costs

2024 is anticipated to be the peak year for R&D spending, which was evident in the Q1 expenditures of EUR 6 billion, nearly EUR 1 billion higher than the same period last year. High investment levels in battery and software are driving these costs, which are expected to normalize in subsequent years.

Brand Group Performance

The core brand group experienced a 20% increase in operating results to EUR 2.1 billion, with a 6.4% margin. Smaller brands like ŠKODA and SEAT/CUPRA also performed well, achieving margins of 8% and 6%, respectively. Volkswagen Commercial Vehicles reached a 9.6% margin. However, the Progressive brand group, including Audi, faced a 3.4% margin due to engine supply constraints.

Future Outlook

Volkswagen is confident about its performance in the coming quarters, expecting improvements in vehicle mix, efficiency measures, and product momentum, especially at Porsche and Audi. The company reaffirmed its full-year margin guidance of 7% to 7.5% and an automotive net cash flow target of EUR 4.5 to 6.5 billion.

Conclusion

Despite a challenging start to 2024 with a decrease in sales revenue and operating margin, Volkswagen remains optimistic about meeting its annual targets. The focus will be on ramping up new products, executing performance programs, and maintaining a solid financial position.

Earnings Call Transcript 2024-Q1

[Operator]

Ladies and gentlemen, welcome to the Volkswagen AG Investor, Analyst and Media Call Q1 2024. I am Shari, the Chorus Call operator. [Operator Instructions] The conference is being recorded. The presentation will be followed by a Q&A session. [Operator Instructions] The conference must not be recorded for publication or broadcast.

At this time, it's my pleasure to hand over to Mr. Pietro Zollino, Head of Corporate Communications. Please go ahead.

[Pietro Zollino, executive]

Good morning, everyone, and a warm welcome to the first quarter results call of Volkswagen Group. It's a joint call for both media as well as investors and analysts, which is moderated by Rolf Woller, our Head of Treasury and IR; and myself, Pietro Zollino, I'm heading Corporate Communications. With us today is Arno Antlitz, our CFO and COO.

Let me provide a few remarks before we start. You should have received the press release, the interim financial report and all the other related materials, all of which were published this morning. If you do not have them yet, you can find them, all the documents, you can find all the documents on our group website. In case of any issue, give us a call or drop us an e-mail, and we will send them straight to you.

Before I hand over to Rolf, I would like to inform you about a change in our reporting. Volkswagen Group has decided to change the reporting frequency for deliveries from a monthly to a quarterly rhythm starting from Q2 2024. The main reason is that comparisons of monthly figures are often distorted due to, for example, differing numbers of working days.

With that, let me now hand over to Rolf, who will give you a brief run-through of the next 1.5 hours.

[Rolf Woller, executive]

Thank you, Pietro, and a very good morning to everyone on the call also from my side. Thanks for joining us today at this beautiful morning here in Wolfsburg.

Let us have a look at the agenda. Arno will first present the key highlights of the first quarter. And after that, we will take a closer look at the underlying financials of quarter 1 and thereafter to the full year outlook 2024. Following the presentation, we will first host a Q&A session for the investor and analyst community, moderated by myself. And after this session, we will have a short break before we continue with the media Q&A, which will be hosted by Pietro.

As a reminder, and as always, the safe harbor language and other cautionary statements on Page 2 of our presentation will govern today's presentation. I would like to encourage you to read the disclaimer carefully since all forward-looking statements are qualified by this language. As you know, I won't read it to you.

With that, I hand over to Arno. Arno, please go ahead.

[Arno Antlitz, executive]

Yes. Thank you, Rolf, and good morning to all of you from my side as well.

Let's dive straight into the presentation with the highlights of the first 3 months, starting with an icon that is celebrating its fifth birthday. The eighth generation of the Golf was just launched, and the full lineup from entry level to GTI will hit the markets this year. Tiguan is our global bestseller. 7.5 million customers have opted for the compact SUV since its debut in 2007, and it is currently in the rollout with new model variants to be added over the course of the year.

Same holds true for the all-new Passat, an important model for our fleet customers. All 3 models, Passat, Tiguan and the Golf, will also come with a PHEV option, offering up to 120-kilometer fully electrical range. For all these models, we see an encouraging order intake.

ŠKODA just revealed the Epiq, its first entry-level BEV. The model will be delivered to customers from 2026 onwards at an attractive price point starting at around EUR 25,000. Most important, the first quarter has seen the very successful launch of the first Porsche and Audi models based on the PPE, the Premium Platform Electric, a great progress in our group's transformation towards electric mobility.

Our Capital Markets Day in China last week was another milestone in our building-block strategy of the Volkswagen story. About 170 guests joined the event at the Phoenix Center in Beijing, 1 day before the Beijing Auto Show opened its doors.

Let me highlight my main takeaways of the day. Despite challenges such as fierce competition and evolving market dynamics, we pursue a clear plan to strengthen our position as a market-leading international manufacturer. Our target is to increase the proportionate operating result to around EUR 3 billion by 2030, including the fully consolidated joint venture in Anhui, and to achieve a 15% market share by 2030 in China. We expect the market to grow to 28 million vehicles by then. NEV penetration in our vehicle sales should reach 50% in 2030.

With our goals, we have taken decisive action, together with strong partners, enhance our technological competitiveness with a locally developed zonal electric and electronic architecture, local advanced driving assistance functions or sophisticated infotainment solutions in our smart cockpit. The introduction of LFP battery technology is expected to reduce battery cost by 1/3. In total, we expect to reduce material cost by 40% with our China Main Platform and achieve cost parity with local BEV leaders in the price-sensitive compact and [ minor ] segment by 2026.

Thanks to the new local independent structure with the Volkswagen Group China Technology Company, VCTC, in Hefei, we will shorten time to market for new products by 30%. And over the next 3 years, the group's brands plan to launch 40 new models in China, half of which will be electrified. With these actions and our highly profitable combustion engine car business, we are well prepared to continue to play a leading role in China.

Back to the first quarter results. Global deliveries in the first 3 months of 2024 increased to 2.1 million vehicles, 3% above prior year quarter. Despite the geopolitical tensions, global supply chains continue to be robust. However, our deliveries were held back by temporary supply shortages, in particular, affecting Audi vehicles with V6 and V8 engines.

Incoming orders continue their encouraging positive trend in the past months in both BEV and combustion engine car segments. The brands of the Volkswagen Group collected in total 730,000 new orders in Western Europe in the first quarter. BEV order intake was particularly strong, more than doubling compared to the same period last year. As a result, the order book in Western Europe improved to a solid level of about 1.1 million vehicles by the end of March, including 160,000 battery electric vehicles.

Growth was primarily driven by a strong increase in China, totaling 8%, as well North America where deliveries increased by 5% year-on-year. Our South American operations recorded even double-digit growth with a particularly strong increase in Brazil from a relatively low basis. In our home market, Europe, deliveries were slightly down year-on-year to about 970 -- 907,000 vehicles, largely due to weaker BEV deliveries.

Demand for battery electric vehicles was muted at the beginning of the year in Europe and North America. Substantial growth in China could not fully compensate for this. And as a result, BEV deliveries declined slightly by 3%. BEV deliveries reached 136,000 units, corresponding to about 7% of group deliveries. BEV deliveries were down in Europe and U.S. by 24% and 16%, respectively, while BEV volumes in China almost doubled.

BEV incoming orders, on the other hand, has doubled versus the first quarter 2023. The BEV share target of 9% to 11% is confirmed. Performance in the coming quarters should be supported by the most recent and upcoming launches such as the all-new ID.7 Tourer, the Macan electric and the Q6 e-tron, resulting in an increasingly competitive product offering.

Let me now give you a summary of Q1 financials. All in all, there are no big surprises in the sense that Q1 was never going to be our best quarter. As planned, we are preparing for exciting product launches later in 2024 at Porsche and Audi. During this ramp-up phase, cost and consumer behavior was affected, especially Porsche was held by well-flagged cost increases ahead of their model changeover.

As previously indicated, we have had supply shortages relating to 6- and 8-cylinder engines at Audi. However, we are now in the process of ramping up supply, and the situation should improve already in Q2. And it will take a while for the efficiency program at brand Volkswagen to show its full impact, not least because of the wage increases initiated in 2023, which are unfolding the full impact now in 2024.

And as also previously guided, 2024 will be the peak year for R&D spend, and we can see this effect in the Q1 numbers. This has all been flagged previously and factored into our 2024 forecast, which is why we remain confident about our 2024 outlook.

With that, let's move on to the financials and the operating performance of the Volkswagen Group. Vehicle sales came in at 2.1 million units in the first 3 months, slightly down year-on-year at minus 2%. Excluding our joint venture operations in China, vehicle sales were down by 5% to 1.4 million vehicles year-to-date. These vehicle sales are the driver of our automotive sales revenue.

Group sales revenue was slightly lower year-on-year at EUR 75.5 billion, which is down minus 1% versus last year. Strongly improved sales revenue in the Financial Services business could almost compensate for the decline in Automotive sales revenue of minus 4%. Operating result came in at EUR 4.6 billion, corresponding to a margin of 6.1%, 1.4 percentage points below the prior year period.

Net cash flow in the Automotive Division totaled minus EUR 3 billion in the first 3 months, about EUR 5 billion below the prior year level. This is largely related to a significant buildup of working capital of in total EUR 4.6 billion after we managed down our inventories at the end of last year.

As indicated in our full year results call in March already, we had already anticipated a reversal of the exceptionally strong release of working capital at year-end 2023, which contributed to the strong full year cash flow of EUR 10.7 billion in 2023. In total, we recorded a cash outflow of EUR 5.9 billion from the buildup of inventories in the quarter under review.

This brings me to our Automotive net liquidity, which recorded a corresponding decline of about EUR 3 billion compared to the year-end 2023. Overall, at EUR 37.2 billion, net liquidity continues to stay at a very solid level.

Coming to our divisional performance. Passenger Cars recorded an operating result of EUR 2.6 billion, about 1/3 below the prior year period. The margin amounted to 5.3%, down by 1.7 percentage points.

Commercial Vehicles continued their strong earnings trajectory also in the first quarter. Results advanced further to EUR 1 billion, return on EUR 1 billion. Return on sales stood at a strong 9%, confirming that the group is well on track towards delivering on the full year targets.

Financial Services division recorded an operating result of EUR 0.9 billion, corresponding to a decline of 24% year-over-year, in line with our expectations due to the normalization of the used car business.

Let's have a look at the drivers behind the operating result development in the Passenger Cars segment. Volume/price/mix contributed a negative EUR 0.5 billion. As already mentioned, vehicle sales, including China JVs, were 5% lower. Mix was adversely affected by weaker model mix, in particular, due to the V6 and V8 engines at Audi, a negative regional mix due to the negative -- relatively weaker performance in Europe and, not least, brand mix. However, model and brand mix should clearly improve in the coming months.

Pricing continued to be slightly supportive, benefiting from rollover effect from last year's price increases, but burdened by higher temporary sales promotions for our electric vehicles. Compared the prior year period, operating result in Q1 benefited from a swing of fair value effects outside hedge accounting amounting to about EUR 900 million.

Product costs were a slight headwind year-on-year, mainly due to the one-offs, but we continue to expect product costs to provide tailwind for the remainder of the year. Fixed costs and other costs increased considerably as a result of higher R&D costs, higher depreciation and amortization and the ramp-up of new business like PowerCo, like Scout or our fully consolidated joint venture, Anhui, as well as continued general inflationary trends.

Let's have a more detailed look at overhead cost development. Our group has demonstrated remarkable overhead cost discipline in recent years, which has led to a significant improved overhead cost ratio and a much more robust cost structure. In Q1 2024, we were not able to continue this trend. Higher overhead costs, driven by the carryover effect of wage increases from 2023 and lower sales revenue, resulted in a strong increase of the overhead cost ratio in the first quarter.

This development clearly shows the need for speeding up the implementation of our efficiency programs in the coming months. And it's our clear target to improve our position here throughout the remainder of the year.

Moving on to automotive investments into R&D and CapEx. As already flagged at the full year results conference in March, automotive investments are expected to peak this year. The currently high investment levels, particularly in R&D, are reflecting the accelerated transformation of the Volkswagen Group's brand, total electrification and digitalization. As a result, R&D expenses increased by almost EUR 1 billion to EUR 6 billion in the first quarter.

CapEx is at elevated levels due to currently high upfront investments in battery and software as well as execution of our regional strategies. Relative to automotive sales revenue, the investment ratio stood at 14.4%, up on the prior year level due to higher investment as well as lower automotive sales revenue in the quarter. This is clearly a level that needs to be significantly reduced going forward. Even stronger focus on group synergies, more efficient R&D processes and the reduction of this year's peak of ICE investments will drive the reduction in expenditures.

Moving onto the performance of our Brand Groups, platforms and Financial Services business. Brand Group Core recorded flat sales volume. In Q1, sales revenue declined slightly by 1% year-on-year, supported by continued positive price/mix, but held back by higher temporary tacticals for our BEVs. The operating results grew by 20% to EUR 2.1 billion and a margin of 6.4%, 120 basis points above prior year quarter.

Each brand contributed to this performance, expanding operating margins year-over-year with significant contributions from the smaller brands. ŠKODA and SEAT/CUPRA stood at about 8% and 6% return on sales, respectively, Volkswagen Commercial Vehicles achieved even a 9.6% margin. Also, Volkswagen Brands recorded a step-up in performance to 4%. Nevertheless, there is still some way to go to achieve the target of up to 5% this year.

Brand Group Progressive recorded sales revenue significantly below last year's level, mainly due to the constraints of V6 and V8 engines. Operating result came in at EUR 0.5 billion, corresponding to a margin of 3.4% and 740 basis points below prior year quarter. In addition, operating profit was burdened by valuation effects in the magnitude of about EUR 0.3 billion, in particular, resulting from Audi's residual value model. Adjusted for valuation effects of the underlying margin at Brand Group Progressive came in at about 6%, clearly below the full year target range of 8% to 10%.

Brand Group Sport Luxury achieved a 14.8% operating margin in its Automotive business despite lower sales volume and higher ramp-up costs due to a record number of new model launches this year. In addition, Porsche recorded an increase in development costs and depreciation on capitalized development costs, as already flagged in the full year results call.

Coming to CARIAD, operating result continued to be negative and came in at EUR 552 million loss, slightly up from prior year number, but down versus the fourth quarter 2023. Reported net cash flow stood at a positive EUR 0.5 billion as CARIAD benefited, like last year, from a EUR 1.1 billion intra-group income tax refund. The underlying cash-out totaled to minus EUR 0.6 billion.

Our battery business continues to make fast progress in the ramp-up of the organization as well as the construction of Salzgitter plant, which is developing according to plan. Despite the continuous buildup of the organization and higher CapEx, the operating loss at EUR 79 million was kept largely unchanged compared to Q1 2023. Needless to say that we review the global BEV sales expectations continuously and are prepared to adjust the capacity and CapEx planning in PowerCo unit accordingly, if necessary.

TRATON continued its positive top line and earnings trajectory and delivered another strong performance in the first quarter. Unit sales normalized and decreased by 4% year-to-date. The lower volume was compensated by favorable product mix, better average revenue per unit and a continued higher demand for vehicle services, driving sales revenue up by 5%.

Operating margin came in at a strong 9.0% and, with that, confirming the stronger profitability levels achieved in 2023. The increase in profitability was driven by sales revenue growth and improved cost structure. In the period under review, TRATON delivered a net cash flow of EUR 0.4 billion and was able to reduce net indebtedness in its industrial business further.

Volkswagen Group Mobility kept the overall contract volume stable. A slightly lower number of financing contracts was compensated by an increase in the number of both leasing and insurance contracts. The credit loss ratio continued to be stable. Operating results in the Financial Services division in the first 3 months 2024 fell by about 1/4 to EUR 881 million or a 6% margin.

Operating profits were sequentially up compared to Q3 and Q4 2023. The expected decline reflects the continued normalization of used car prices and provisioning for residual value risk as well as a significantly increased interest rate. And as you know, we take a conservative stance when it comes to residual value risks.

Moving onto our performance in our China joint ventures. From a volume point of view, we saw a strong start to the year with deliveries increasing almost 8% to 694,000 vehicles. This was also driven by growth in BEV sales, which nearly doubled year-on-year. As a result, the BEV share in the [ dealers ] in China advanced from 3% in Q1 2023 to now 6% in the quarter under review.

The proportionate operating result of our China JVs amounted to EUR 0.4 billion after 3 months in 2024, down 31% on the prior year number and in line with our expectations of EUR 1.5 billion to EUR 2 billion proportionate operating result this year. The decrease is reflecting the margin dilutive effects of the ramp-up of our BEV business in a very competitive market environment.

Finally, onto the full year, we confirm our outlook for 2024. We continue to expect sales revenue to advance by up to 5%, the operating margin in the bandwidth of 7% and 7.5%, and automotive net cash flow in the range of EUR 4.5 billion to EUR 6.5 billion.

As already anticipated back in March, the Volkswagen Group recorded a muted start to the year with a slight decrease in sales revenue and operating margin of 6.1%, below the full year corridor, and recorded negative net cash flow. We expect an improvement underlying operating and financial performance already in the second quarter and stronger earnings trajectory during the remainder of 2024.

In order to deliver on our full year outlook, we factor in a significant step-up of sales and earnings momentum at both Porsche and Audi based on the ramp-up of new models; a much stronger product mix at Audi due to a better availability of 6- and 8-cylinder models; a decisive implementation of the performance programs at Brand Group Core to achieve a margin well in the range of the guidance corridor of 6% to 7%; and the rigid cost work and overall disciplined investment spending across the entire Volkswagen Group.

What gives us additional confidence for the quarters to come is that we can count on a solid order book, an improving order intake, the gradual materialization of effects from numerous strong product launches and a very solid truck business. To further support our efforts to reduce personnel costs in the administrative function of Volkswagen AG, the Board of Management in April resolved the offering of selective severance payments.

It is important to know for the severance pay program that we, as an employer, must also accept the severance pay request. This ensures that we do not lose key employees. We expect this to result in expenses of total EUR 900 million and will accordingly book a provision in the second quarter. We aim to compensate for those effects in the full year.

Ladies and gentlemen, in the coming months, we will focus on the ramp-up of our great new products and the decisive execution of the performance programs across the Volkswagen Group. We continue to have a very solid balance sheet and financials. We continue to transform our company towards electrification and digitalization, our great product [ substance ] and flexibility between BEVs and combustion engine vehicles will help to [ master ] the current challenges. That said, we remain fully focused on stringent execution, capturing synergies within the group and delivery on net cash flow.

Thank you very much so far, and let me now hand back to Rolf.

[Rolf Woller, executive]

Thank you, Arno, for that comprehensive and detailed presentation on the Q1 financials. We will now proceed with the question-and-answer session. [Operator Instructions]

[Rolf Woller, executive]

And we start right away with the first question, which comes from José Asumendi from JPMorgan.

[Jose Asumendi, analyst]

Just a couple of questions, please. Can you please comment a little bit more on the dynamics of the result in China, a little bit what you saw in the first quarter in terms of volume, in terms of maybe pricing and any elements around the incremental fixed costs?

And second, can you comment on residual values? How is this impacting some of the brands across the Volkswagen Group? Is this a onetime that you expect to see in the first quarter? Or do you expect any recurring items in the coming quarters?

[Arno Antlitz, executive]

Yes, José, Thanks very much for your questions. I think you have also participated our, from our perspective, our successful Capital Markets Day in China, where we laid out a lot of details already. First and foremost, I must say that the proportionate operating result we achieved in the first quarter is fully in line with our expectations for the full year of EUR 1.2 billion.

If you look at the market dynamics, we clearly have to decide between ICE and BEV business. As always flagged and as said already, we have a very strong ICE business with very solid margins and cash flow delivery. And on the BEV side, you see a, I would say, let's call it, very challenging pricing environment. And we always said also that we will make sound compromises between prices, pricing and volume in order to have a balanced approach in line with our value over volume approach.

So -- and having said that, we will, in the, yes, I would say quarters going forward, benefit continuously from our ICE business, which has -- I think we jumped over 20% market share in China. And in our BEV business, we will make, as said, compromises between ramping up the volume, staying in the market, at the same time, improving the cost position of our BEVs in China.

And with the cost measures and the competitive measures kicking in, in our platform, for example, then bringing the LFP battery, bringing a more advanced driving system functions, improving in-car infotainment, we will then continuously to participate in the growing BEV segment. And we already gave you the indications also for 2027, more than EUR 2 billion proportionate operating result in China.

Residual value. Yes, residual values, I would say, overall, residual values are still stable, also slightly differentiated between BEVs and ICE. If you remember, they were very high in the last 2 to 3 years after COVID. So we always said we see a normalization, that means residual values came down slightly. But over time, but it's more like a normalization with a little bit more pressure on the BEV side. But we must also take into account that due to the subsidy schemes in the markets, the proportionate residual value is also influenced. And if you take out that effect, then we see, I would say, yes, a normalization of the residual value situation. They are still strong, but yes, slightly under pressure in the BEV side.

[Rolf Woller, executive]

Thanks, José. And we move over to the next question, which comes from Tim Rokossa at Deutsche Bank.

[Tim Rokossa, analyst]

It's Tim from Deutsche Bank. I have 2 questions, please. The first one is in Evergreen. Arno, you and I discussed about it many times. There's no doubt, less complexity would do very well for you guys. TRATON had a very good Q1. And [ as said ] at the CMD now, the free float is an issue for investors. When do we finally see you guys making use of the higher stock price? When is something happening on that side?

And then secondly, I thought that your comments on the order intake were actually quite encouraging. Now I've heard over the 16 years that I look at autos, all OEMs always saying that car launches were a great success and that the order intake really does surprise them to the upside. Can you put a bit more flesh to the bone here? We're hearing very good comments about the order intake for BEVs. Is that developing year-to-date? Or did it just happen in March? And for the new models, does the order intake that you record currently suggests double-digit growth? Or is there any other quantification that you can give us?

[Arno Antlitz, executive]

Yes. Tim, first and foremost, to the first question, TRATON, let me add a little bit from more [ grower ] perspective. First and foremost, we are very pleased with TRATON operating performance over the past 18 months and pursuing their strategy. MAN has achieved a turnaround and presented impressive figures for 2023. Scania has regained its former strength, operating at double-digit margin. Volkswagen Truck & Bus continues to deliver solid results. Navistar is now fully integrated. So initially, they are well on track. There's still a lot of self-help potential, and they are looking confidently into the remainder of 2024.

And you're right, we have been frequently told by analysts and investors that the liquidity and free float in the shares are holding them back and to unfold their full potential in the stock. And we have always said we are open for a next step at the right time, and this view has not changed. So this is what I can say at the moment, Tim.

And in terms of order intake, look, it is specifically encouraging for us that the order intake was really up in the BEVs. It was specifically up in February and March. We had still a rather weak January, but February and March was strong. And it was -- it more than doubled to the prior year period.

And so we still have some more chances if you take into account that E-Macan, Q6 e-tron, a very important car is the Tourer, the ID.7 Tourer. For the time being, we have only limousine in the market. So they will specifically continue to drive order intake even further. And with this order intake, we are confident to achieve our 6% to 8% -- it's 8% to 10% market proportionate operative share of BEVs this year.

And more important, that will give us momentum within, yes, for example, in E6, to the 2025 BEV share targets. So let me precisely -- the target for this is 9% to 11% BEV share, and we are well on track on that target there.

[Rolf Woller, executive]

Thank you, Tim. Thank you, Arno. The next question comes from Michael Punzet from DZ Bank.

[Michael Punzet, analyst]

I have 2 questions. The first one is on the negative effect of EUR 400 million related to hedge accounting because as you mentioned also that this effect was related to the residual value provisions at Audi. Maybe you can explain a bit more in detail what is the key driver for that? And what should we expect for the full year?

And the second question is with regard to your guidance for the industrial cash flow. In the presentation, you mentioned EUR 4.5 million to EUR 6.5 million. And in the footnote, you mentioned possible investments of up to EUR 4 billion in battery. But if I remember correctly in the full year conference, you mentioned a figure of EUR 6 billion. So what is the right figure to take into account for the forecast for the full year industrial free cash flow?

[Arno Antlitz, executive]

Yes, I'll start with the second question. So the target for the net cash flow or the outlook for the cash flow is EUR 4.5 billion to EUR 6.5 billion, and that hasn't changed. So -- but what we have into -- what we factored in, in the EUR 4.5 billion to EUR 6.5 billion is we foresee, in terms of cash flow, about EUR 6 billion for the ramp-up of our battery business. And then this is what we indicated in last year's conference call. And EUR 4 billion out of that is R&D and CapEx and about EUR 2 billion is additional M&A. These were like the differentiation between the EUR 4 billion and the EUR 6 billion.

M&A, specifically for -- yes, kept getting more control over the value chain, as we always said, it doesn't make sense to just invest in the battery capacity in terms of factories. We have a threefold approach: it's development of a unified cell; it's ramping up our own battery capacity in Europe with 2 factories and in U.S., in Ontario and Canada; and the third pillar is having more control over the value chain for raw materials, specifically cobalt, nickel and lithium.

And this leads to the difference of the EUR 4 billion and EUR 6 billion. Again, EUR 4 billion in total, I would say, reserved for cash-out for battery this year, and EUR 6 billion and EUR 4 billion of that is CapEx.

Yes, the Audi residual value model, I'm sure my colleague, Mr. Rittersberger, will go into more detail on Friday. I think they have a call on Friday. It's kind of a -- it's a model for the financed vehicle in the German market. And it's basically accounted as valuation effect on that hedge accounting. It's a delivered. And since it's a delivered, we book it like a delivered. And there was, yes, a burden of about EUR 300 million for the change in residual values this year, and this is why we booked that.

If you add that back to the performance of the Audi, which is 3.4% EBIT margin Q1, you end up at 6%, closer to the performance of 8% to 10%. What you could expect from them and the difference between the 6% and 8% to 10%, which they indicated, is basically the impact of constraints of the 6- to 8-cylinder -- at 6- and 8-cylinder models, which hold the impact both in terms of volume and in terms of margins.

[Rolf Woller, executive]

Thank you, Michael. Important to note here, when you look at the year-end presentation from March, there is no change in guidance for the net cash flow. The footnote still stays the same, EUR 4 billion. But I think the clarification from Arno was precise and very good.

So next question comes from Horst Schneider from Bank of America.

[Horst Schneider, analyst]

The first one that I have, it relates more to the outlook basically until the rest of the year. So if I get this right, basically, you say that Q2 is going to be back in the 7% to 7.5% range, and then you need to achieve a higher margin in H2. Just want to understand what makes you confident really that H2 then is better than H1, given that the price pressure in the market is probably rather increasing. So in other words, what is the level of visibility that you have for H2, given that your order book probably just reaches until September now? And then I'll ask the next question thereafter.

[Arno Antlitz, executive]

Okay, Horst, thanks. Yes, first and foremost, let me start with that we fully confirm our outlook for 2024 in total. To be a little bit more precise in -- for Q2, before the booking of the restructuring of the severance package, we expect to be clearly in line. This is our margin guidance for the full year also in Q2. And now on top, we book that EUR 900 million in Q2, which might lead to a burden in that respect. But we promised to catch up on the remainder of the year.

So what makes us confident? If you go through the EBIT bridge, there's basically, in a lot of elements, there's confidence. First and foremost, Audi was really held back by a supply constraint of V6 and V8 engines, both in terms of volume, but much more important in terms of margins, specifically at the 8-cylinder model. So that will improve already in Q2 with a significant improvement then in Q3, Q4 going on with that will both improve by volume, but also by mix.

Then from the material cost topic, we had a slight burden in Q1 due to a one-off effect at product cost, but we still are back to about at least EUR 1 billion positive in that bucket. And then we have the product momentum, both at Porsche and Audi going forward, specifically Porsche with a huge number of model launches in very important model lines, which will drive their profitability.

And last but not least from, I would say, a fixed-cost burden versus efficiency measures effect, we saw the wage increase in mid of 2023 and the full year effect we have now in 2024, specifically first quarter, where we compare with the first quarter of 2023 where the wages were not increased.

And so on the other hand, the efficiency measures, specifically at Brand Group Core and Volkswagen Brand of the efficiency program, they will kick in throughout the remainder of the year. So the net effect of the burden of increases last year and the efficiency measures will also give us confidence for the remainder of the year. So these are some of ingredients, Horst. Hopefully, you can factor them in, in the bridge, which gives us confidence specifically for the second half of the year.

[Horst Schneider, analyst]

But again, to my question regarding the visibility on the order book, so am I right in assuming that the order book currently reaches kind of until September and what we're also going to see in H2 is then a significant increase in the BEV share, but that is all within your planning that does not make you any worried about the H2 outlook at the moment?

[Arno Antlitz, executive]

No, this is in our planning. And we even expect an increase in incoming orders. Look, key models were not available to order in the first quarter: Passat, a very important model for Brand Volkswagen; Tiguan, not all the engine models at Tiguan were open to order; and others at other brands. So we expect the order intake to even increase throughout the year due to availability of the models.

And yes, the BEVs will -- BEV share will increase throughout the year. Yes, they are margin dilutive, but that is all factored in, in our outlook. Yes.

[Horst Schneider, analyst]

Okay. That's great. The last one that I had, just more a housekeeping item in the trade of PowerCo versus CARIAD. Is it fair to assume that from now on, basically, the CARIAD losses will get smaller in terms of quarterly run rate and the PowerCo losses will increase since you ramp up the capacity for 2025?

[Arno Antlitz, executive]

Yes, the PowerCo losses will increase with the ramp-up. This is clear until 2025. And the CARIAD, we don't want to obviously give you a quarterly outlook for the CARIAD business. But what will happen at CARIAD business, I mean, you have the spending on the one hand.

On the other hand, as you know, the sales revenues of CARIAD and the top line of CARIAD depends on the number of models that are sold. Basically, CARIAD is paid in -- by a license model car-by-car by the brands. So with the ramp-up of the MEB, for example, ID.7 Tourer, with the ramp-up of E-Macan, Q6 e-tron and the first 1.2-based cars, so a significant ramp-up of sales is expected at CARIAD, and that should improve the situation further.

[Rolf Woller, executive]

Thank you, Horst. And we are moving on to the next question, which comes from Henning Cosman from Barclays.

[Henning Cosman, analyst]

I just had a very small clarification on how you're going to be reporting the provision in the second quarter. So in the line item that corresponds to your full year guidance, you will fully include it, right? It will not be somehow adjusted out as a one-off. So just to clarify on what you said, the Q2 margin, as you show it, could again be outside the bottom end of the full year range. And then you're saying you have enough tools at your disposal in the second half to offset that, which effectively means that's on top of what you would previously have expected in the second half when you weren't yet anticipating the EUR 900 million provision.

[Arno Antlitz, executive]

Yes, that's exactly right. When we say we aim to compensate for that additional effect is that we really try to -- we aim for compensating that. That means we won't deduct it or won't adjust for that. We confirm our guidance, including the EUR 900 million. But as also said, it might be not -- we might be not able to fully compensate it in the first quarter alone. So the...

[Rolf Woller, executive]

Second quarter.

[Arno Antlitz, executive]

Sorry, in the second quarter alone, we will book it now in the second quarter. So we might not be able to fully compensate in the second quarter, but we aim for compensating it through the remainder of the year.

[Rolf Woller, executive]

Thank you, Henning. And we are moving on to the next question, which comes from Daniel Schwarz from Stifel.

[Daniel Schwarz, analyst]

I had one question regarding the management compensation. The new free cash flow component that you introduced this year, could you say what the target corridor is in '24, so the minimum/maximum target? And are the targets adjusted for M&A, for example, what you're spending on the battery side? Or if you would decide to sell TRATON or Porsche shares, would that be adjusted for?

And the second question, also clarification, the EUR 900 million provision, will that lead to a cash outflow in '24? Or is it stretched over a longer time period?

[Arno Antlitz, executive]

Yes, Daniel, it's an absolute cash flow figure. And of course, we have bandwidth. But I don't think that we disclose the actual mechanism behind it. And it's basically all in. So it's based on the EUR 4.5 billion to EUR 6.5 billion guidance, including the cash-out of, yes, investments, for example, in battery, but also including now the additional cash-out for the severance payments. And it's basically up to the Supervisory Board to decide on that.

And Rolf, can you add?

[Rolf Woller, executive]

Yes. And maybe to add that because you explicitly asked for it, I mean, a potential sale in TRATON shares would obviously not be net cash flow, yes, because this would be accounted as cash flow from financing.

[Arno Antlitz, executive]

No, you're right, that is -- yes. And the EUR 900 million, it will be booked in the second quarter. And the cash-out is obviously then, yes, once like each personnel accepted, we expect then the cash-out, I would say, Q2, mainly Q3. And the -- so this is how you could model it in, in the free cash flow. I would say the majority can be expected in Q3.

[Rolf Woller, executive]

Thank you, Daniel. And we are moving on to the next question, which comes from George Galliers from Goldman.

[George Galliers-Pratt, analyst]

Obviously, the restructuring development expenditure was very high in Q1. I was wondering if you could give us some insight into how you see the absolute expenditure on the R&D trend there in Q2 in the second half relative to the EUR 6 billion in Q1.

Second question I had was just with respect to the overall net liquidity. Obviously, it is below EUR 39 billion to EUR 41 billion that you're targeting for the full year in Q1. But maybe revisiting a broader question, when we think about what is the targeted level of automotive net liquidity in the long term, can you remind us what you are looking for? Obviously, some of your peers are at close to 20% of top line. Is that an appropriate level for Volkswagen? Or do you not need that much?

[Arno Antlitz, executive]

Yes, George, thanks for the 2 questions. In terms of R&D, I mean we gave a guidance in terms of the top line, our sales revenue and the guidance of R&D and CapEx. So -- and this would be like proportionately in the first, second and third quarter ideally. And then in the fourth quarter, we have a higher outflow in the CapEx because this is typically where the big investment projects are, basically, are cleared. And the outlook for investment ratio combined is confirmed between 13.5% and 14.5% for the full year 2024. This is what we can say. But clearly, with the majority of that will be R&D and the smaller proportion of that will be -- or the smaller proportion of that will be CapEx.

We are aware of the number, both in terms of overall number, both in terms of, yes, I would say, benchmark to our peers. We know where volume competitors stand. We know where premium competitors stand also in different regions of the world. We clearly indicated where the benchmark is for us. We always said it's like 8% for volume, 10% for premium. So we long term shoot for 9%. And this we indicated on the Capital Markets Day last year in summer. So we -- that we target for 11% in 2027 and eventually 9% in 2030. And the levels are also clear. We have to work on more synergies. The runout of the combustion engine upfront investments will help us. And this is the way we want to go forward there.

In terms of net liquidity, target is what we indicated is more than 10% of group sales. But we also see that some of the competitors who have much more net liquidity compared to sales, they have also a stronger rating. So this is -- there's also a trade-off between holding more cash and the rating, which in turn leads to a better refinancing cost, less cash-out for interest, which then leads to better cash flow. So this is where we -- what we're looking at, also depending on the cycle of the business. But for the time being, our target has clearly indicated it's more than 10% of sales.

[Rolf Woller, executive]

Thank you, George. So I can see no further questions here on my list. And yes, thank you for the vivid Q&A and the very good questions we had. If anything is left unanswered, yes, please contact the team in Wolfsburg.

The next time to meet with us is at one of our numerous conferences we will attend. Our Annual Shareholder Meeting will take place virtually and is scheduled for May 29. Half year results are to be presented on the 1st of August. And the respective pre-close call will be hosted -- not hosted, sorry, Horst, hosted on July 10 after the market close.

So we will now continue with a short break, yes, about 5 to 10 minutes before we then start with a Q&A session for the journalists. Thank you again for your numerous participation. Take care. All the best, and speak soon. Thank you.