Ladies and gentlemen, and welcome to the Volkswagen AG Live Audio Webcast and Conference Call on the half year financial results 2019. 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 for 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 June 2019
based on
the Hart Healey 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 I'm also pleased to welcome Head of Group Sales Steering, Doctor. Jens Effenburger, to his first call as he fills in for Christian Dahlheim currently on vacation. Most of you will have followed the webcast from this morning's press conference.
Our focus now is to add a little more color relating to your specific needs as investors and analysts. Following the presentations, we look forward to taking your questions. So Frank, it's over to you.
Thank you very much, Oliver, and a warm welcome and a very warm day to all participants of this call. The Volkswagen Group has performed well in the 1st 6 months in a challenging global environment and a pretty tough sector. At €10,000,000,000 the underlying operating result before special items was a touch ahead of the already strong result in H1 2018. This lead to an operating margin of a solid 8%. After the €1,000,000,000 special items already booked in the Q1 of this year, the operating result came in at €9,000,000,000 Deliveries for the first half at €5,400,000 were 3% below the prior year.
It is important to note that there are that there is a base effect from H1 2018 as sales were boosted by the pre buy push ahead of the WLTP switchover. And of course, China has been weaker this year too as have Argentina and Turkey in particular. Jens will give you more color in a few moments. Despite the lower number of units sold, sales revenue rose 4.9% to around €125,000,000,000 reflecting mainly the strong model mix. At €600,000,000 the financial result is down about 1 third versus last year.
The decline is mainly related to higher interest costs. The equity income, mainly driven by our Chinese joint ventures, came in just a notch below last year. Profit before tax at €9,600,000,000 was up €600,000,000 compared to the prior year. Profit after tax for the 1st 6 months was €7,200,000,000 Automotive net cash flow before diesel outflows and M and A came in at €6,900,000,000 We all realize fully how important this position is, and we will go into the details following the sales update from Jens. Automotive net liquidity at €15,900,000 remained more or less at the same level as the end of Q1, and we will dive deeper into the drivers in a few moments.
As you probably heard me confirm this morning, we stick to our full year guidance of a return on sales for the group, certainly before special items, of between 6.5% and 7.5%. Let me now hand over to Jens.
Ladies and gentlemen, I would also like to extend a warm welcome to this conference call and present the sales results of the first half of this year. Since the beginning of the year, the Volkswagen Group delivered a total of 5,400,000 vehicles to customers worldwide. After the last year's strong first half year for many of our brands, this represents a solid result being only 2.5 2.8, sorry, percent below 2018 on a year to date basis and gaining market share as the overall market declined stronger. The brand Volkswagen experienced a decline of 3.9% compared to last year, resulting in 3,000,000 vehicles delivered to customers. Since the new models such as TROC and T Cross in Europe, Atlas in the U.
S. As well as Taru and Taiwan in China performed well, the brand could further expand its market shares despite predominantly shrinking of all markets. Skoda delivered around 621,000 vehicles to customers since the beginning of the year, representing a decline of 4.9%. This decline is mainly caused by difficult market conditions in the Chinese market, but partly offset by a favorable performance in Europe and Russia. The brand held its worldwide market share stable.
The new models Carrok and Scala were especially well received among our customers. Zayed concluded the first half year with over 314,000 cars deliveries, achieving a new record. Year to date, this equates to an increase of 8.4% compared to last year. The performance was particularly favorable in the stagnating or even decreasing markets in Western Europe, led by the performance in Germany, France and Italy. On the model side, the game was mainly driven by 3 SUV models, Arteca, Arona and Tarraco.
With 260,000 deliveries to customers for Volkswagen Commercial Vehicles remains on the level of last year. A strong performance in Poland and Spain was dampened by market related downturns in Turkey and Argentina. Model wise, particularly the Crafter showed a very satisfying performance. Year to date, Audi delivered 906,000 vehicles to customers, a minus of 4.5% compared to last year. The first half year of this year was still dominated by numerous challenges such as model changeovers with volume models and the delayed effects of the WLTP switchover.
On the model side, the recently launched SUV models such as Q2, Q8 and as well in Q3 in Europe show a strong performance. Additionally, 10,000 vehicles of the group's first purely electric SUV, the Audi A Tron, have already been delivered to customers around the world. Porsche delivered 133,000 vehicles to customers from January until June, 2.2% more than in the prior year period. Again, the repercussions of WLTP could be observed in Europe. After a difficult Q1, the brand performed exceptionally well in China in the Q2, benefiting from a reduced VAT rate since April and a change in registration requirements.
Worldwide, the Cayenne registered the highest model growth with a rise of 45%. The model has been available in all markets since this year, while the coupe version arrived at dealerships only in May. Bentley delivered 4,800 vehicles, an increase of 8%, mainly due to the new Continental GT. The Truck and Bus division continued its positive development with both brands Scania and MAN posting further growth. While MAN deliveries increased by 9.9% to a total of 72,000 year to date, Scania recorded an even higher growth of 10.1%, resulting in 52,000 deliveries this year so far.
Both brands recorded their highest growth in Western Europe. Let us now take a look at the performance of our deliveries to customers versus the car market development on a regional basis. The North American market decreased as the U. S. Remained slightly behind its high levels of last year and economic difficulties in Mexico continued.
Additional economic conditions in Canada are worsening. Year to date, our deliveries declined by 0.9%. However, we increased deliveries in the U. S. By 2%, especially driven by a strong performance of Volkswagen brand and increased market share as well.
Total demand in Western Europe shrank in the first half year. Among others, due to the repercussion of the WLTP changeover, the continued uncertainties around Brexit as well as declines in Sweden due to a currency devaluation. Despite unfavorable circumstances, deliveries of the Volkswagen Group declined only slightly as some of the losses in Sweden and the UK were compensated by positive developments in France, driven by both Fiat and Volkswagen brand. The total market in Central and Eastern Europe remained on the level of last year. Our deliveries decreased moderately as the group's positive performance in Russia was dampened by a market related downturn in Czech Republic, which affects us given our high market share there.
While drastic market slump in Argentina further dampened the South American market. As the increase of our deliveries in Brazil could not fully compensate the strong market related decline in Argentina, deliveries in the region decreased slightly by 1.1%. Demand in the Asia Pacific region decreased by 6.2%. Again, this was impacted mainly by China. The ongoing trade conflict with U.
S. Was a driver of the reluctance to buy. The positive development of the Chinese market in the month of June was driven by an artificial effect of a change in registrations requirements. For the remainder of the year, we do not expect a further positive impact on the market. Deliveries of the Volkswagen Group were affected by this environment, recording a decrease of 4.8% in Asia Pacific and 3.9% in China in the first half year of this year.
However, we again increased our market share in China. To sum up, the group's performance in the first half year of the year. In a challenging environment, our brands were able to deliver a total volume of 5,400,000 vehicles to customers, which is just 2.8% below the prior year period. Main drivers of this volume reduction were the market downturns in China, Argentina and Turkey. On the positive side, our performance in France, Algeria and Brazil was significantly better than the respective market and could partly compensate these losses.
In light of the macroeconomic conditions, we expect a slight increase in our deliveries to customers for the full year 2019. The following products will help us in reaching this target. The A 4 from Audi represents the core of Audi's product portfolio. Its exterior is embedded in the brand's new design language. Additionally, the launch of facelifts of the popular models Skoda Superb and Volkswagen Passat, we fully renew our product offering in this important high volume segment.
The Kamiq, Skoda's 3rd SUV model for the European market, convinces with modern assistant and infotainment systems, emotional design and numerous simply clever solutions. Thanks to efficient engines and state of the art connectivity solutions, it is perfectly tailored to the requirements of a younger urban target group. The all new Jetta VS5 will be launched in 1 of the most attractive and fastest growing segments in China, the A Economy segment, accounting for about 1 third of the Chinese market. The car is equipped with a large modern touchscreen and offered at an attractive entry price to appear particular to young first time buyers in China. Taking the first step towards electrification, Bentley creates the group's 1st luxury hybrid.
The new plug in hybrid model combines an advanced electric engine with a powerful and new generation V6 petrol engine and will be most efficient will be the group's will be Bentley's most efficient model ever. Now I would like to hand back to Frank.
Thank you very much, Jens. Moving on with the group operating result performance for the first half in more detail. Let me start by apologizing to Arnd since he cares about cash flow only and has to wait a very little bit longer. The position volumemix prices in the passenger car segment reported a plus of €800,000,000 Strong product mix, reflecting the ongoing growth in our higher margin SUV portfolio and strong pricing, we're able to more than compensate for the decline in volume. Exchange rate was negative with around €300,000,000 This effect is mainly driven by negative hedging effects and the negative development in fair value valuation of commodities.
This position is highly volatile as we already saw in Q1. This volatility shows us again that it doesn't make much sense to speculate now on where this position might end up at year end. Product cost savings continued to improve with a plus of €300,000,000 year to date. Fixed costs have risen by €900,000,000 over the first 6 months. Within fixed costs, ramp up costs increased as product momentum gathers.
This combined with higher depreciation on CapEx dragged on fixed costs by €600,000,000 Furthermore, R and D costs with the P and L impact were about €400,000,000 higher. We know that the continued high level of investments are necessary for the further electrification of our product range, getting up to speed on digital transformation and the expansion and overhaul of certain factories. To compensate for this, it is a must that the focus on cost is to be sharpened even more. The brand's efficiency programs will have to measure up to at least secure the respective margin targets, and you can rest assured that each brand is being closely monitored. I will comment in a few moments on both our commercial vehicles and our financial services results when I take you through all brands in details.
To wrap up on this chart, we booked special items of almost €1,000,000,000 already in Q1 with nothing further added in Q2. This compares to €1,600,000,000 booked in the Q2 of 2018. Turning now as promised to our brands. It should be noted that 3 of our core brands once again contributed over €2,000,000,000 to our operating results in the 1st 6 months. The €2,300,000,000 for example, passenger cars achieved an operating result before special items of more than 7% above the result of the first half twenty eighteen.
This was achieved despite slightly lower sales. It corresponds to an ROAS of 5.2% compared to 5% last year. Product mix, pricing and cost reductions were the key drivers, which more than overcompensated the lower volume and negative exchange rate impacts. Audi reported an operating profit of €2,300,000,000 compared to €2,800,000,000 in the prior year. Lower volume, higher ramp up and run out costs and negative currency impact dampened the result.
On the other hand, mix improvements and effects from the efficiency program contributed positively. As we saw earlier this year with the Q1 results, the lack of availability of certain models caused by WLTP homologation issues remained a burden. Audi is predicting stronger sales in the second half and is working hard to close the gap close in on the gap to last year. Skoda came in with operating earnings of around €800,000,000 Negative FX effects and costs for new products and technologies were key headwinds. On the other hand, the volume and pricing measures were positive.
At €200,000 earnings at SEAT were also flat. Growing SUV volume and mix effects more than offset the costs relating to new products. Bentley showing an operating result of €57,000,000 increased volume due to the availability of additional models, mix improvements and the success of the turnaround program have been key here. Porsche delivered an excellent operating profit before special items of €2,100,000,000 The positive drivers were mainly volume combined with lower product costs, while currency was negative. At just over €500,000,000 the margin of Volkswagen Commercial Vehicles was 7.8%.
Higher volume and improved product costs couldn't compensate for higher fixed and development costs. Supported by the new truck family, Scania increased volumes and had also positive FX impacts that more than compensated for cost increases. This resulted in an operating profit of €800,000,000 with a benchmark margin of 11.6%. MAN Commercial Vehicles delivered a positive result of €200,000,000 as higher volume was offset by costs relating to the new truck changeover. To round up our comments on our industrial brands.
Power engineering came in at €42,000,000 Moving on, Volkswagen Financial Services has continued to perform well with an operating result of €1,300,000,000 for the 1st 6 months of the year, up slightly on the prior year. This was very much in line with the increase in earnings for the full Volkswagen Financial Services division, which reported higher earnings
at €1,400,000,000
At around minus €700,000,000 the other line normalized to a more typical year to date result. As you know, this position consists of the elimination of intercompany profits as well as the earnings from non brand companies such as Porsche Holdingsalzburg and PPA cost allocation. Please be aware, the swing related to commodity hedging is also reflected in this line. There's no change in the principle. Volatility in this line is and will be very difficult to forecast and reflects the global nature of our business as well as the cross supply of components and vehicles between our brands.
Let's now take a closer look automotive net cash flow. As a start, our strong operating result in H1 gave us a good base for further cash flow generation. Cash outflows for diesel amounted to €700,000,000 in the quarter, bringing the year to date diesel cash outflows to €900,000,000 H1 prior year was €2,600,000,000 just to remind us. The cash paid out for M and A activities of €500,000,000 relates mainly to our stake in WirelessCar that we already acquired in Q1 as well as the announced acquisition of shares in Northold as part of our long term battery cell strategy. Focusing on the underlying net cash generation, this came to €6,900,000,000 around €900,000,000 ahead of where we were this time last year.
All in all, this is a decent result and puts us well on course to meet our target of at least €9,000,000,000 of underlying automotive net cash flow for the full calendar year. On the face of it, our working capital management shows signs of improvements. However, this is not enough, and we have to talk about the elephant in the room. The core message here is that our inventories are still too high relative to ideal stock levels. By that, I refer to those stocks held in our factories and our fully consolidated national sales companies.
The key lever to correct this issue clearly is our production. For that reason, we have already taken more than 400,000 cars out of our production planning compared to where our planning was at the start of the year. The fact that most core markets are trending downwards also warrants reducing production even more if needed. Just this week, I had a call with all CFOs of the individual brands and companies who have been clearly targeted to adjust production where needed, and we also addressed the subject again in our Board of Management meeting. In relation to receivables, the declaration of dividends for FAW VW for calendar year 2018 is still outstanding.
Therefore, the corresponding receivable has not been booked. We expect the declaration of receipt of dividends towards the end of the year. Moving on to CapEx and R and D. CapEx is at €5,200,000,000 corresponding to a CapEx ratio for the first half of 4.9%. Despite this increase, we strive to stay within our 6.5% to 7% full year guidance.
Total research and development costs or call it cash spend came in at EUR 7,000,000,000 more or less in line with prior year. Capitalized development costs came in at €2,300,000,000 versus €2,500,000,000 last year. The capitalization rate in H1 was around 33% versus around 37% in the prior year. As we have consistently commented this year, strict discipline in our investment and development processes is vital. We are not there yet, and 2019 is a crucial year to bring improved engines and new BEVs to market to meet our CO2 goals.
Automotive net liquidity ended at €15,900,000,000 more or less on the level of end of Q1. As mentioned, diesel related cash outflows were €900,000,000 so far this year. Within the position M and A, the acquisition of our stakes in wireless and Northwok were the key elements. In the first half, we received Chinese dividends of €1,100,000,000 And as mentioned, the outstanding amount is expected in Q4. For the full year, we expect more or less the same level of dividend compared to prior year.
As already communicated in Q1, the change in accounting for leasing with an effect of EUR 5,100,000,000 negatively impacted our net liquidity. In relation to MAN minorities, the end of the domination agreement led to further payments of close to €1,100,000,000 shown in the Q1. And moving on to one of the most relevant positions for you guys, we paid out dividends of €2,400,000,000 to our shareholders in Q2. In case you were expecting to see the cash inflow from the partial IPO of TRATON, this will be included in the Q3 as the proceeds only arrived earlier this month. We guided for net automotive liquidity of at least €15,000,000,000 by year end 2019 and remain firmly on course.
Going forward, our minimum target of 10% of group turnover remains a clear focus. Now let's get to our final chart. Q2 was also an important strategic quarter for the Volkswagen Group. We took important steps with our long term battery strategy and the TRATON IPO. Furthermore, the announcement together with Ford 2 weeks ago advanced our position in autonomous vehicles and light commercial vehicles.
The MAB platform supply agreement is a further step in tapping into scale potential. There will also be a lot happening for us in the second half, too. We are, of course, ramping up for e mobility and gearing up to face the CO2 challenge. We will shortly introduce the Porsche Taycan, the new Golf and of course, the first way of our MEB vehicles, the ID3 at the Frankfurt show in September. Production of these cars is or will shortly get underway.
These are challenging but exciting results at H1 give us a solid foundation as we go into the second half. However, of course, there are also risks, and we need to ensure that they are considered. We learned some hard lessons from the first wave of WLTP in H2 of calendar year 2018. Although we are much better prepared for the WLTP second act EVAP and RDE, it is it will still be a challenge as we go through the next two quarters. The unsettling global economic framework conditions have certainly not gone away.
Global markets cooling down, Brexit uncertainty, risks of U. S. Tariffs with China and Europe as well as significant foreign currency swings and volatility of raw material prices are some of the key issues to look out for. From where we are now, we continue to expect a solid, robust full year in terms of volume, operating results and cash, even if we were seeing a somewhat downward trend in markets. I trust you know us by now.
For us, delivering consistently is a clear priority. This involves mitigating risk by using realistic assumptions. That is why we are sticking to our guidance for deliveries to slightly exceed the prior year, for revenues to grow as much as 5% and for the operating margin to be in the range of 6.5% to 7.5% before special items. And for our automotive net cash flow, we are striving to come in above our €9,000,000,000 target. To wrap up, our overall path remains the same, and we continue to push as hard as we can.
Thank you. And now back to Oliver.
Thank you, Frank. Thank you, Gens as well. We will now take questions from investors and analysts. So operator, it's over to you.
Thank
I'd like to also try
to get my hand around this elephant in the room that you mentioned about inventories. Obviously, we saw a substantial increase in inventories and in the cash flow, although plan was quite similar to last year where you were building up, I guess, before the WLTP. How big do you think the issue is? Or what is the potential you feel that you can actually reduce inventories by an impact that would then have on cash flow? Thank you very much.
Yes. Hi, Stephen. I think you are absolutely right to the city the elephant. If I go through our reports, I think if I look at the overall numbers, I think in stock until year end, we have to bring it down by number north of 200,000 units. If I go through the Volkswagen universe, we obviously have differences in the current stock levels by brands and by regions.
If I look at the SEAT or Benqi or Lamborghini, they are definitely at ideal. We know Skoda is doing very well except China. So that's the only complaint. We knew that Porsche going into the year would be higher. That was totally planned, but we have a lot of sales momentum going on.
So we have detailed plans for each and every brand. Obviously, if I go through the market, there's almost in all markets something to be done, but we have a clear vision of what we need to do. We have high degrees of details. And I think we can be assured that all our folks will and have are paying a lot of attention. This is certainly important to make the progress, which I indicated, in order to exceed our minimum target of €9,000,000,000 From where we are today, if you manage inventories as described, I think the floor can be exceeded.
But we also all know and we shouldn't forget Q4, given the normal trends, is most often cash negative. We know that obviously WLTP second act EVAP RDE. You know that we will have higher levels of CapEx and R and D. A lot of that goes it's obviously all cash relevant. So on the positive, I think from you heard me saying about China, more dividends, that's certainly helping.
So if you add all of that together, we will push as hard as we can to exceed the €9,000,000,000 euros
Okay. Thank you. Thank you, Steven. You got a second question, Steven?
If I'm just going to ask just about the active changes you're taking, be better positioned for the second stage WLTP?
Yes. I mean, I referred to the hard lessons. Learnings are we obviously took a hard look at our processes. We obviously had we tested them the hardest way possible last year. So we improved our processes and the collaboration amongst the people responsible.
We increased our capacity. We added significant number of dedicated people, but we also secured a higher level of testing capacity. So we furthermore reduced significantly the engine gearbox combinations, in some cases, by around 30%. So I think that's altogether giving us a comfort that we should do significantly better. But as you know, EVAP, RB, E and W, LTP second act also means a lot of work, but I think we are definitely better prepared and these are the measures.
Thanks very much.
Okay. Thank you. We'll take the next question please, operator.
We will now take our next question from Patrick Hummel from UBS. Please go ahead.
Yes, thanks. Good afternoon, Patrick from UBS. My two questions. First one relates to the mix effect, which has been a strong positive driver also in the second quarter. I think your SUV share is now up to 35% from 25% last year.
So my question is simply for how long do you think that positive mix effect will continue? Is that something that we can expect to continue also into 2020? And I'm not asking to give an explicit 2020 guidance. I'm just wondering how much of a tailwind that can be in spite of already having reached 35% SEV share in the mix. And my second question, can you just give us an update on where we are from a VW perspective in China as far as the China 6 changeover is concerned?
Are you still having some inventory that's not China VI in the provinces that haven't switched over yet? What do you expect in terms of sales expectations? What's the pricing and inventory management that, yes, you need to do over the next few months in China? Thank you.
Yes. Patrick, let me start with the overall mix effect and Jens is then adding up to it and also particularly on the China situation. The 35% is the number which I gave this morning also geared towards to the end of the year. So roughly by the end of the year, 35% will be the mix. So we are building up towards to that number and might add another 5% in the overall share in 2020.
So we have the strongest momentum of tapping new segments certainly this year, but I can't personally imagine that it will abruptly end. So volumemixprice in our EBIT bridge will also next year to be an important part of the overall occasion. I hope that answers your question. China overall, China development, Jens will take up. I'm personally not aware of any major issues on the changeover to China 6, but Jens is more closely aligned with the overall situation in China and the sales trend.
Okay. Just let me add some comments to the SUV segment development. I think we will see a strong or we will see a stronger further development of the SUV segment in total. And of course, our share will increase there as well as we are launching a lot of new products now this year and also next year. And don't forget that a lot of electric SUVs will come in the future as well, which accounts, of course, in the SUV segment.
And then, of course, we'll bring the share again further again, I think. So I think this is more or less the explanation about how do we see the development of the SUV segment. If we look into China, we have had these China 6 emission regulations now, and it starts it has started this year and from June or from July onwards and approximately 70% of all cities in China, you are not allowed to register cars with old emission standards. I think we did a great stock clearance. That was exactly the effect I've mentioned in my speech that we had an artificial effect in June due to this and we cleared the stock with old emission standards and have produced new ones now so that we can continue.
But of course, customers were waiting for these kind of actions, which we were undertaking and also the competition was undertaking in China at that stage. So and that is also my comment about the Chinese market in July August. So this was a one off effect in June and we will not see an increase now in the Chinese total market for the second half of this year.
Can I just follow-up on that? Obviously, there was a bit of prebuying in June as well because of very high discounts of Weibo in the market. So how do you specifically think about the next few months? Do you think we'll fall back substantially into negative territory so that Q3 will be very weak for you again?
No, I think to be very honest, I think I don't believe that it has not been weak first half year in China for us or the Q1. I think we've gained market share or we added where we increased our market share in China. And our plan is to increase further market share in China, whereas we have new products coming along. And also the second half year in China is always a stronger half year than the first half year. So I think we will see still see good sales in 3rd Q4, but of course, some pre buying effects we have seen there in June.
Okay. Thank you very much.
Okay. Thank you. Let's move on to the next question, please.
We will now take our next question from Tim Okocha from Deutsche Bank. Please go ahead.
Yes. Good afternoon, everyone. It's Tim Okocha from Deutsche Bank. I'd like to do 2 follow ups, please. The first one is on free cash flow and the second one then again on the mix effect.
Frank, we already got you much further by saying that you are trying to over exceed the €9,000,000,000 target, and I actually thought we would sketch you. I thought you would just say you want to be conservative, and we know you that you want to be cautious. But let's maybe not miss any of the details and you left the target unchanged, so you will have some thinking behind this. If we do look at the close to €7,000,000,000 in the first half underlying free cash flow, you do get the China dividend that already makes you see the €9,000,000,000 Is there a chance that you generate 0 or negative free cash flow in the second half on an underlying basis? Or is that really just being overly cautious because you do not know what's going on, specifically keeping in mind that you also said you're quite optimistic on sales and that you still have the inventory situation.
And then secondly, just on the mix effect, can you maybe help us quantifying this a little bit? It's always kind of difficult to see with all your Chinese numbers also consolidated. What's the average selling price increase for the group? Are we talking about a few €100? Are we talking about €1000?
Or is the magnitude smaller than that? Thank you.
Hi, Tim. No, I mean, I try to be clear that we consider the €9,000,000,000 as the minimum, we'll call it, floor. And certainly, the objective is to exceed. But the points I made earlier are certainly valid. We shouldn't forget that we will have in absolute numbers, higher CapEx and R and D, particularly on the CapEx side.
A lot of that is coming soon in the second half. You know that very often leads to a cash negative Q4. And we have the described home litigation subject. So I don't want to be too conservative, we are forecasting in a market, in an environment, which is clearly difficult. We've seen a lot of other companies, not only in our industry, taking full year forecast down.
And you know from the discussions we had at the end of 2018 and also at Q1, I took in all honesty, I took the miss in for 2018 on our net cash flow target personal, the SEK 3,400,000,000 And if there's an opportunity to catch up, at least on some of that amount, That is certainly what we are striving for. But for the very moment, I think also in the context of what you see left and right, committing to a floor of €9,000,000,000 is okay. And you know us with the explanation I gave that we certainly will strive to come in better, but we also need to deliver on the inventory development, which I described related to Steven's questions.
So really just very clearly reflecting the uncertainties and what happened last year also rather than any planned major cash outflow for anything that you foresee right now?
I think that's a fair description. I think you know the subjects, also the strategic ones we are working on. But you know all the €9,000,000,000 are calculated and what is being taken out based on that calculation, your assessment is right.
Shall we take the question on pricing? Yes.
I think generally speaking, of course, we do consistent pricing in all regions. It's depending a little bit on the region. I mean, if you take, for example, Argentina, of course, the pricing is due to inflation much higher than in Europe. Nevertheless, I think we do consistent pricing, and we do that also even in the market you have mentioned in China. So we have done that, but further pricing steps for this year are not scheduled yet.
My question was then probably a bit mistraced, but I'm much more talking about quantifying the mix impact that we're seeing. So don't really necessarily assume price increases, but just the fact that you are SUV ing your portfolio primarily. What is the mix impact of that on the average selling price? Are we talking about a few €100 on average? Are we talking about €1000?
I think if you think, obviously, it could be the less. But I think it's just a number which you should think of is in the range of €1,000,000,000
Great. Thank you very much.
Okay. Let's take the next question then, please.
We will now take our next question from Arnaud Arlinghorst from Evercore. Please go ahead.
Hi and good afternoon everyone. It's Arnaud from Evercore. Well, Frank, thanks for the shout out on the cash flow. It's obviously what we all appreciate most from the companies. Nowadays, stock seems to go up and companies burn cash.
But ultimately, that's what matters. Let me try to get a bit closer to cash flow for the full year by a different way. Just asking you, you still had this €2,400,000,000 working capital outflow in the first half. 2nd quarter was better. Would you dare to say that you can finish the year with a balanced working capital when you look at all the different parts of it?
That's the first question. And then the second, a huge elephant in the room, is really CO2 next year. You're selling about 3,600,000 cars in Europe. Your footprint is about 120 gram CO2 per kilometer and your target is about 95 gram. So all companies tell us we won't pay fines, we're going to get there, we're going to close the target, which I guess is probably true, probably not for all of them.
But when you look at your high level really planning for next year, and I know you haven't done your budget yet, is there a really significant fundamental earnings risk that you see for the VW Group coming from CO2 compliance and not from paying fines, but from having to force technology into the market, whether it's EVs or PHEVs or mild hybrids that consumers would simply either not want or will not be willing to pay for? Is that really the big earnings risk that you see realistically when you look into the next 2 years?
It's a very interesting and loaded question. I mean, first of all, you know that from the different venues we have been on together, we work under the mandate and the clear target that we want to be CO2 compliant in the respective jurisdictions. This is our plan. That's why we invest a lot of money. But there's one very big unknown, and that is a customer.
What we are definitely 110% fully convinced of is the product. And I mean many of you already got into the Taiken or the CBEV, And some of you also got a snapshot view on the ID3 and other vehicles of the ID family. We are fully convinced, and I'm not a car guy, so to speak. But more and more over the last couple of years, the comfort has grown on me that these products have a distinctive design. Interior is different.
It's new. It's modern. It's fresh. Connectivity is state of the art. And it reminds me of the splash the Prius made in the United States at the time being something people want to get to.
They wanted to get their hands on it. And I think we are entering a new era. We still will be dominated by ICEs, but this new segment has, based on the strong product momentum, the potential to make inroads with a lot of customers, certainly not a black and white discussion. We are talking making inroads into a stronger share of the total fleet being fully electrified over a decade. But the product momentum is what gives us the comfort.
At the end of the day, certainly avoiding fines is amended, but selling those electric vehicles orderly is certainly key. We all together in the industry needs to be disciplined. And if I look at the volumes we have to get to in 2021, just to talk about the next 2 years, I think those volumes can be done in an orderly manner. So certainly, legitimate concerns that volume will be pushed, but I think it can be done. What we also shouldn't forget, particularly related to Europe, more than 50% of the market in the top EU5 countries is corporate fleet business.
This is good business, and a lot of those customers have their own CO2 fleet targets, which naturally supports our ambition to sell more electric vehicles. So it will be a combination of all those facts, but the very big unknown remains to be the customer. But to say it with my own words, we have a lot to offer. And that's the way I would look at it. In terms of working capital, I mean, the key question, Arnd, is that we will be much more efficient as it comes to inventories and stock.
So totally balanced. I think it's probably a bit too much, but definitely a huge step towards to year end and maybe at the level of 2018.
Okay. Which would imply a positive working capital in the second half?
Yes.
Thank you, Frank.
Okay. Okay, Arnd. Thank you. We'll take the next question, please.
We will now take our next question from Jose Asamendi from JPMorgan. Please go ahead.
Thank you. Jose, JPMorgan. Two questions, please. Hi, Frank. The first one on CapEx.
I mean, you're keeping a strong control over this CapEx to sales ratio. Can you talk a bit about the absolute increase you saw in the first half? And then also, can you comment a bit on the is this a press rumor that you could be potentially opening a plant in Turkey or in Eastern Europe as a multi brand plant? What's your thinking behind this? Do you need another plant?
Tackle in the next 6 months and year to improve the profitability of Audi? And would you agree that, that Audi is probably the largest contributor in terms of improving the working capital in the second half? Thank you.
Okay, Jose. Thank you. I counted that as 3 questions, but we'll take that anyway. And we'll start off with your questions on CapEx.
Yes. Hi, Jose. Yes, I mean, we guided you folks that this is an important year and R and D in order to be CO2 compliant. So we still strive for both ratios to be within the corridor of 6.5% to 7% as indicated. But we obviously expected H1 twenty nineteen to be higher than H1 twenty eighteen.
But for the full year, we will push and work hard. And just after this call, I'm having a video conference with one of my CFO colleagues from a brand located in the south of Germany who is probably bitterly complaining that our top down targets are too ambitious. So we are working on it jointly, and we will push to be where we need to be. New plant, let's be very clear and precise. There is no final decision yet.
There is a potential decision to be made. The rationale is obviously not only looking at today's markets, but looking from a longer term perspective, the idea behind a possible decision is a multi brand location. And the one of the ideas is to for a new generation of product to have an optimized production setup for multi brained cars being on the same technical platform potentially. But this is a decision which has not been made. But it needs to be seen in the greater scheme of obviously, a low cost location would help us with the averaging out our production cost and factory cost, but nevertheless, can only be done if the respective volume forecast do support it in the medium and long term.
You mentioned Audi. I think we knew from the get go, and I think we guided you guys that Audi, on the back of difficult H2 in 2018, would have a slower first half of 2019. That's exactly the way Audi started. There was a lack of availability of engine gearbox combinations. In terms of sales, Audi is more comfortable for the second half given the better availability.
But obviously, in a difficult market environment, we are confirming the operating margin target of 7% to 8.5 percent, which clearly is has to be backed by the effective efficiency program the Audi team is working on. And I have no reason to assume that the program will not deliver as desired. It is a combination of cost measures, but also not forgetting the revenue side because just with cost measures, you can't work against headwinds, the ones we are talking about in general terms. And if I look at friendly direct competitors of Audi, I think there's a clear indication that even for those fine luxury brands, the markets are quite difficult. And Audi is right on track on pushing hard for their program.
Alex. And we'll move on to the next one, please.
We will now take our next question from Angus Tweedie from Citigroup. Please go ahead.
Brilliant. Thank you. Just a couple of questions. Firstly, could you discuss capital allocation a bit? You've obviously invested in Northvolts, Algo Mall recently.
And I was wondering how you sort of measure the hurdle rates for those sort of investments and the returns that you need to generate for them. And sort of connected with that, I just wondered if you could give us an update on your investment in GET you made a couple of years ago on the mobility side of things. Then secondly, on the EBIT bridge for this year, could you help us think about the FX drag for the remainder of the year as you see it? And given the movements we've seen in product costs and fixed costs in the first half, Can you sort of scale the impact of efficiency that you've seen within those numbers? Thank you.
Okay, Angus. I guess you were talking about our investments that we reported in Northvolts. I think Argo is still to come, but as you know, we obviously made progress there with Ford. Gatt will touch on, and I think there was FX for the second half.
Yes, a bunch of subjects. Yes, last walk, I think the key issue is that needs to be seen in the context of our overall strategic setting for battery, battery supply, battery cell technology. That is a strategic investment in North Fork AB, but clearly aligned, euros 900,000,000, clearly with the idea of potentially making a decision on a joint venture with a potential facility here in Germany if the conditions are being met necessary to make such an investment instead. You know how the current footprint of battery cell suppliers is. And I think a greater level of diversification, but also potentially European alternative is certainly something in the general interest, and that's the way we look at it.
But at the end of the day, you can rest assured it needs to pencil, and this is certainly behind the capital allocation we were referring to. 2nd point was related to the EBIT bridge. Yes, exchange rate with the volatility, you know that there's a derivative evaluation and purely FX included. The difficult to forecast, but I think we indicated all year long that in the EBIT bridge for the full calendar year, we expect it to be a negative number even though we've seen a great level of volatility in those in that line item from the first to the second quarter. But for the full year, we continue to expect a negative number.
On the fixed cost side, obviously, we invested over the last couple of years significant amounts, particularly in product and related technologies. So growing depreciation is clearly main driver and higher R and D costs together with HR cost increases, are probably the main drivers. If our efficiency programs wouldn't work, the fixed cost increases would be even greater. That's the way I would describe it. But certainly, the investments over the last couple of years, the heavy investments need to be amortized.
So fixed cost increases for the next years and also quarters are a given. I think then the other one, Argo, I think you mentioned also GET, if I'm not mistaken. Autonomous vehicles, it's for sure a costly endeavor, and nobody can be absolutely certain when technology will be ready. I think the very first optimist revised forecast that it will probably not as early as some folks assumed. Some of them already thought next year or at latest 2021.
So might be a little later, but for sure, it will be costly. But the idea is and the logic is to share the cost with Ford to develop that important strategic technology and then independently use it down the road in the respective regions. That is the logic. And for us, we deem it to be strategically important. We believe that we can't afford not to invest.
And we felt similar to Ford, obviously, that to share those costs is makes good business sense. That is obviously a multibillion investment decision over time, but definitely a lower bill to be paid compared to doing it all on our own grounds. Get yes, new mobility services are clearly something we are all excited about. Our investment in GET is a strategic one. We wanted to participate in ride hailing.
You know from all the other folks being in that business, too, it's difficult to make money, and it needs to be seen in the strategic context. But at the end of the day, all those companies may be get Uber. They all have to prove that it's a business which cancels, and we all know what are the key drivers of their respective P and Ls. So we are supporting GET to the extent the financial investor does.
Okay. Thank you very much. Let's move on to the next question, please.
We will now take our next question from Juergen Piepern from Metzler. Please go ahead.
Yes. Hi, it's Juergen from Metzler. I'm just I'm asking for some more details on the pricing, if possible. So if I calculate it rightly, from what you said, could it be that the pricing the positive pricing effect is a little smaller than the mix effect for the first half? Secondly, is pricing positive for all your brands?
Or is maybe for books on commercial vehicles not benefiting from higher pricing? It sounded a bit like that. And certainly, so to understand your pricing strategies, I guess it's principally one price step somewhere in springtime and it's not some kind of steady process. Is that correct?
I can start with I think I can start with the pricing with the last pricing question, whether it's a steady process or not. Yes, it's a steady process. We normally price once a year. In regions where we have stable inflation, but in regions where we do not have stable inflation, we are going to have several price steps in some countries even. We have steps month per month.
For example, in Argentina, we had that for a long while. And even in Brazil, we did a couple of price steps. And also, we look into our competitors, of course, what kind of price steps they do and want to be, of course, want to be ahead of them and do the pricing first. So I think I hope this answers the first part of the question.
Yes. That's good. Thanks.
Okay. I
pick up on the other part. No, I think your assessment, generally speaking, is right. The net mix effect is higher than the pricing because, obviously, you also, in some areas, on some models, have higher incentives. So if I net that, the net mix effect versus the net pricing effect is higher. You asked about more specifics by brands.
We have to come back to you directly because I don't have my hands on the specific details of all brands. This is obviously a consolidated statement for all our passenger car brands.
Okay. Thanks.
Okay, Jurgen. Thank you. We'll take the next question now, please.
We will now take our next question from Kai Mueller from Bank of America Merrill Lynch. Please go ahead.
Thank you very much for taking my question. Just to come back a little bit on the point that Arndt made earlier. When you think of your model ramp up in the second half, you obviously have your Golf as well as your ID models and the EV models. How do you see that mix over time changing? Do you have more people switching possibly to a T Roc from the Golf version and ID going either into the SUV space or full electric?
And how are Golf orders shaping up? And also, can you give us an update possibly if you have already numbers for the ID orders so far and if any color on the taken order intake so far?
If we look at the segment development, of course, especially in Europe now for growth in ID, I think the A segment is a little bit shrinking, of course, due to the SUV segment. And of course, we also see some customers going from a Golf into an ID. So this is the way we see it. But nevertheless, we believe there is place for 2 cars for the Golf and the ID, 3 in the A segment. And of course, we will see some customers going from a Golf into an ID.
But nevertheless, I think there's place for both cars in the same segment even if it is a little bit shrinking segment. We then ask the question on we have preorders for Volkswagen ID, and I think we are there on track. Mr. Stagmann has announced that 30,000 pre orders should be up to the launch of the car in the system, and we are on good way to the 30,000 there.
And on the taken?
Sorry, on the taken, it's more or less the same story as on the ID. We are there on track as well. I think we have approximately 27,000 preorders in the system so far.
Okay, Cai. Thank you very much.
Thanks, Cai. Let's take the next question please.
We will now take our next question from Tom Narayan from RBC Capital Markets. Please go ahead.
Yes, thanks for taking the question. Tom Narayan, RBC. Real quick housekeeping question. What's the new target for special items for year end? It appears that you've increased that amount in your new guidance today.
I get the sense that it's probably not that big. And then a little bigger question, you're already selling MEB kits to Ford, potentially could sell to other OEMs given the CO2 targets, everyone in Europe has to electrify at varying degrees. Do you envision a scenario where the European OEMs maybe not as aggressive on BEVs could wind up buying MEB kits from you? I'm trying to ask basically, could this be a new business windfall for you guys as the kind of loan large electrifying OEM in Europe that's really going about it in this route? Thanks.
Yes. Let me start with the NEB. We always said that we are open for discussions with others. And obviously, thought took us up on that statement. But there's not anything else to be announced other than to confirm that we continue to be open.
And I think, for example, it was indicated that with Ford, we might come to grips on a second model, but this is still to be defined. So I wouldn't rule it out, but at this very moment, this is what we have agreed upon and what is publicly already known. Yes, special items. We are these are related at €30,000,000,000 in total, and we obviously had to book another €1,000,000,000 The clear point is, you know that from the past, we present only material extraordinary and not projectable topics as special items. So we don't have a target.
The key fact is and has been since diesel started, it is due to the multitude and complexity of the risks, which have been the result of the diesel issue, which we unfortunately created. And there are certainly uncertainties with the ongoing and expected legal cases. It can't be excluded that future risk assessments could be different. And this is the statement I made at many occasions. And unfortunately, if you look the way we had to step up to the €30,000,000,000 in total now, that has been the case, and we can't exclude that things are going to happen in the future.
You know from the descriptions in the annual reports where we present all those different particular legal risks, not only related to diesel but many of them. And we closed a lot of those potential risks, but we still have critical subjects being open. So no target, but obviously, to be assessed regularly whether the current level of provisions is satisfactory or not.
Okay. Thank you. We'll take our last question now, please.
We'll take our next question from Christian Lodewig from Malta. Please go ahead.
Yes, good afternoon. Thank you very much for taking my question. Just a quick housekeeping question. In your guidance, you have kept your target of increasing the volume of unit sales slightly for the full year, which means a significant pickup in H2 despite all the weakening global markets. What is it built on the confidence that
you actually will actually outsell last year's second half? Yes. Let me try to answer this question to you.
I think, first of
all, yes, are seeing a decrease slightly decreasing markets all over the world. Nevertheless, I think we have gained market share in all regions. So I think this is a very positive signal, which we have had in the first half year, and we are, of course, going to continue with that. And I've shown also some new models which are coming in the 4th quarter and another new models will come to the market places and significant volume significant models will come to market. And I think that is one of the reasons that we say we can be slightly above previous year with our total sales in 2019.
Okay. Looks like I jumped ahead of the gun. We have one more call on the phone, please.
We will now take our last question from Daniel Schwarz from Credit Suisse. Please go ahead.
Thank you
for taking my question. I have a follow-up question on the Ford partnership. From a ROCE perspective, could you give an indication what the incremental investment is needed for Volkswagen to produce 100,000 MEB platforms for Ford? And then secondly, in that context, as you also supply the battery to Ford within that contract, if there would be a shortage in battery cells at some point in the future, would you need to prioritize Ford over Volkswagen? Or is that completely different sales suppliers that go into the Ford contract than compared to your contracts?
I think it's fair to assume that we only made offers for toolkits where we have supply secured. So I think in that respect, we assume to be able to deliver whatever finally will be delivered. And with respect to the current deal size is 600,000 BEVs, obviously, including the battery packs. And we need to ask for your understanding that, particularly for competitive reasons, we can't disclose any more details of the transaction and behind the subject.
Okay.
Thank you. Okay, Frank. Thank you very much. Before we close the call today, just a couple of saves of dates I'd like to mention for your diary. On Monday, September 9, ahead of the EIR in Frankfurt, we're planning to host an event to give you some more information.
At the moment, the focus is expected to be around our EVs, I will come back to you with a few more details. But if you could save the date for Monday, September 9, ahead of our group night, that would be very good. Following that as well, on Friday, September 20, we will be hosting our 2nd sustainability forum in Berlin with Hiltrud Werner, a member of the Board of Management for Integrity and Legal Affairs. She will be joined by Ralph Fitzner, our Head of Sustainability, and we're also expected to confirm a member of the ID team to join. You'll remember that the forum we held last year and the second event will give you an update as to where we are going.
And this time, we will also provide a webcast if you cannot attend in person. And then finally, from my side, perhaps a more personal note. Some of you know already that after 15 years in the Investor Relations team, this is my last conference call as I moved to a new position at Volkswagen Group UK in August as the Head of Group Corporate and Public Relations. I'm pleased to let you know that Henne Beckerman will take over as interim head of the IR team to provide continuity. Although it was initially planned for me to be here for 4 years, somehow this moved into 15 years.
And during this time, of course, a lot of award has flowed under the bridge. In those early days, our share price was in the low 30s and we focused on the ordinary and not the preferred share. Today, we sit at around 160, although the movement today has been a bit surprising, I have to say. And we are a very different truly global company, albeit with deep German roots. We have exposure to trucks, additional brands have joined such as Porsche and not gently.
And who can forget our capital increase back in February 2010 at the Royal Opera House where we had our Capital Markets Day. So for me personally, please allow me to thank you, our investors and analysts for your engagement. It's not always been easy. We've had some difficult issues to communicate along the way. I trust you found us open and informative, but most importantly available during these times.
To Frank and the team here in Wolfsburg, from my side, thank you for your support and willingness to put up with my limited German, even if you didn't always get my jokes in English. And to the Investor Relations team, of course, my deep thanks, not least for these last three and a half years. It's not always been easy, but we made it. So having worked for 4 CEOs and 2 CFOs, it's now time for me to pass on the baton. This is Larkin Ald.
This concludes today's call. Thank you for your participation, ladies and gentlemen. You may now disconnect.