“The corona crisis must be taken very seriously by everyone, and rightly so it will be. The programs and measures of governments and central banks show that.”
Interview with Frank Witter
The corona epidemic poses major challenges for the entire global economy. In an interview with the German daily financial newspaper, Börsen-Zeitung, CFO Frank Witter explains how the Volkswagen Group is dealing with the situation.
Mr. Witter, it was announced in February that you would be retiring as CFO of Volkswagen in mid-2021. Will this be the case in the wake of the corona crisis, which has intensified since then, and the dimensions of which cannot yet be estimated?
From today’s perspective, there is no reason to reconsider the plan. This corresponds to my personal life plans and the promise to my family. I have agreed to the Supervisory Board’s request to extend my contract by nine months and I am convinced that we will find a good succession arrangement during this time.
How does the coronavirus pandemic impact your work as Chief Financial Officer? Are you working from home?
So far, I’m working from the office. Chief Human Resources Officer Gunnar Kilian and I are in a way the Group’s guardians for the crisis task force set up in January. Of course, many meetings currently run digitally, but in some cases, attendance makes it easier to make quick decisions. There are interruptions in production at numerous plants and an increased proportion of home office-based staff and management. But it’s not as if the corporate headquarters were deserted.
The spread of the coronavirus is presenting the world with the greatest challenges in decades. In many countries, public life has come to a standstill. How do you assess this crisis?
At the age of 60, I have already experienced several crises, but never anything like this pandemic. It presents us in Germany and the world with new challenges. There have already been severe economic and public finance crises. Now, however, there is also the concern and fear for life and limb. That is a new dimension. However, the shutdown of public life, which is imposed on us by the necessary political decisions, also offers us the chance to reflect anew, in addition to the many critical aspects. This crisis enables a grounding which hopefully will have a lasting effect. We can reflect on what is real and not only supposedly important and how we want to live and work together in the future. We are all gaining new and sometimes very painful experiences during this crisis.
In China, signs of recovery from the corona shock are emerging with the ramp-up of production, while in other markets the spread of the virus has not yet peaked. How long do you currently expect the crisis to last?
If I need a psychological and moral energy boost, I call China in the morning and talk to my colleagues. There are clear signs of normalization there, albeit starting from a low level. These signals are currently giving people a lot of courage and hope. We have not yet seen the peak of the spread of the coronavirus in Europe and America. But if the developments are at least close to what is happening in China, that can give us confidence. However, the coming weeks are likely to be difficult and complicated.
All over the world, governments and central banks are making immense efforts to counteract the serious consequences of the crisis and a prolonged recession. What consequences do you expect for the economy in the wake of the corona crisis?
The question of whether we will experience a V-shaped or rather a U-shaped economic cycle cannot be estimated at present – this also applies to China. Setbacks are possible, but even there it is still far too early to give the all-clear. In many countries, there are now government programs of measures with huge sums of money. Dealing with high levels of public debt is therefore likely to become an urgent issue again in the foreseeable future. But it is right to try with great strength and determination to ensure sufficient liquidity and stability now. It is unclear how quickly the virus will disappear. The effects of the coronavirus pandemic will certainly still be felt in 2021.
Vehicle production and sales have come to a standstill at many locations. From today’s perspective, how do you assess the sales prospects of your Group in the current year? Industry observers believe that a decline below the 10 million vehicle mark is possible in 2020.
As we said at our annual press conference on March 17, a serious forecast for the year is simply not possible at present. This also applies to deliveries, which are currently subject to considerable monthly fluctuations. In the world’s largest single market, China, for example, the total market in January was 1.8 million vehicles, in February 250,000, and in March it could be in the region of 1 million. Although a significant recovery is emerging. Nevertheless, the March figures are still about 40% below the level normally expected. Where do we go from here? When will traders be able to reopen in other markets as well? When will global supply chains be able to function reliably again? It is not possible to estimate all that at the moment. We are currently hoping that by mid-April some plants that are currently closed will be able to resume production. At the same time of course, the car dealerships should also reopen.
How many Group plants are currently dormant?
The vast majority outside China. In China, all but two plants are back online, although not yet at full capacity. The dealer network is also largely open again, and the supply of parts is up and running.
The production stoppage is leading to short-time working across all industries. How is the situation across the Volkswagen Group?
We are in close coordination with the employment agencies. Short-time work is not available in every country, there are different regulations. In Germany, we have currently registered short-time working for three weeks until April 9 for around 80,000 employees of the Volkswagen Passenger Cars brand, the Group Components and Volkswagen Commercial Vehicles. The other Group brands are following a similar procedure in Germany.
Companies in the aviation and tourism industry are reaching for state aid. Could Volkswagen also be forced to take such a step in the wake of the coronavirus pandemic, or are you ruling it out?
From today’s perspective, I can rule that out. We have laid a good foundation with the 2019 financial year. We have a strong cash flow in the Automotive Division and a respectable net liquidity. The discussion in the coming weeks and months will focus primarily on securing liquidity. We have a substantial network of confirmed, partly syndicated credit lines. We have access to the money and capital markets. The European Central Bank (ECB) is buying corporate bonds. It is intensively examining whether it should also purchase commercial papers from non-financial institutions. We have Volkswagen Bank, which has access to the entire range of ECB instruments for its purposes. It also has deposits of around 30 billion euros. This means that the Volkswagen Group is in a relatively stable position based on the scenarios currently in use. We should have the strength to get through the corona crisis with these instruments and maintain liquidity at the necessary level.
When the diesel emissions manipulations became known in September 2015, your Supervisory Board Chairman spoke of a crisis that could threaten the existence of the Group. As a result of “Dieselgate”, the cash outflows now amount to more than 26 billion euros. You don’t expect the corona crisis to have such effects?
Many smaller companies in the trade and supply sector are currently worried about their existence. The situation is dramatic and cannot be taken seriously enough. Volkswagen Group is fundamentally in a relatively stable position. But of course, no one can feel completely secure. The all-important factor is how long the corona crisis will last and what its extent will be. Even though we are in a good starting position compared with many other companies, we are naturally also very concerned today about those areas that are part of our value chain – such as suppliers and the dealership. But apart from that, I would also like to emphasize how impressive I find the level of helpfulness on the ground in the current crisis situation. The heroes of everyday life in the healthcare system or in the retail trade, who do their indispensable work for us day in, day out, securing basic care and exposing themselves to health risks, cannot be appreciated enough.
How much does the experience in dealing with the diesel emissions crisis help you in the current situation?
The corona crisis must be taken very seriously by everyone, and rightly so it will be. The programs and measures of governments and central banks show that. Against the background of the current challenges, we welcome the powerful measures. Aid must now get to where it is needed quickly. The corona crisis is, however, fundamentally different from the diesel emissions affair, which, unfortunately, was our own fault. So the experience is not directly transferable. But one thing is the same in every crisis: we must pay more attention to our liquidity.
In order to remain fully operational in 2015, bridge financing of up to 20 billion dollars was agreed with banks – which was ultimately not needed. Are special measures planned to ensure liquidity in the wake of the corona crisis?
To emphasize this once again, we have a sound foundation with our net liquidity, confirmed credit lines and our access to various refinancing options, such as through VW Bank. But of course, in the current phase it is also crucial to set priorities correctly. That’s why, in addition to the health of our employees and their families, securing liquidity is now a top priority for us. This also includes reducing disbursements and subjecting all programs, investments, advisory services and other matters to a very critical review. The cash inflow has narrowed considerably due to the lack of vehicle sales, so we must also limit the cash outflow to what is really important at the moment. The Volkswagen Group has proven in previous crises that it is able to respond quickly to critical requirements. We are also building on this now. There is a high level of understanding for the measures taken within the Group.
How does it fit in with the fact that you want to increase the dividend for the past financial year by 35% and distribute around €3 billion to shareholders after the Annual General Meeting in May? Could it be that the proposal will still be changed? Or will it stay as it is?
We made this proposal against the backdrop of a good fiscal year 2019 and the fact that our payout ratio - which was around 20% in 2018 – remained well below the legitimate expectations of investors. The payout ratio of a good 24% now envisaged represents a significant improvement. However, it is still below the internationally customary target level of over 30%. I would like to emphasize that the proposal relates to the past fiscal year and the interests of investors. But in order to pay a dividend, the final decision must be made by the Annual General Meeting.
From today’s perspective, how realistic is it that the current dividend proposal will not take effect?
It is important in planning to separate short and long-term issues. But of course, like all other companies, we are also required to consider all payouts in light of current developments. At the moment, I consider the proposal to be appropriate. But it may take even longer until the Annual General Meeting: We are checking whether it can take place on May 7 as planned or whether we have to find another, later date.
Which consequences would arise for financing in the current crisis phase if rating agencies were now to downgrade Volkswagen’s credit ratings?
A lower rating usually has two consequences. The credit spread that has to be paid will tend to widen. Depending on whether you are still in the investment grade range or not, the circle of investors will also narrow. The pool of funds could therefore narrow. We are in close contact with the rating agencies, where there is complete transparency. The agencies know our liquidity, our credit lines, the quality of the assets we have on our books. Of course, they also have to carry out sector and company-specific analyses to assess how likely a rated company is to be able to service its own debt. We are in a comfortable position – with all due caution in view of the challenges that may still arise – so I am cautiously confident.
What role do possible sales of investments currently play in securing liquidity?
We are not currently planning any further measures apart from the topics we have announced in the Power Engineering area. If you look at the money and capital markets at the moment, you quickly realize that the need and appetite for M&A transactions is very low.
Keyword spending discipline: What specific measures do you have in mind at present to secure liquidity?
We scrutinize all projects with regard to their timing, the fixed cost block, capital expenditure on property, plant and equipment, including investments in research and development. All Group brands are involved. Of course, we will continue to work on the new modular electrification system and on ID.3, which is scheduled to be launched on the market this summer. It goes without saying that we will continue to press ahead with the strategically extremely important expansion of our software expertise. But topics that are not relevant in the short term, such as the two mentioned above, we will examine critically. This may also affect the one or other vehicle project before the perspective changes in the markets.
How great is the danger that the residual values of your leasing fleet will come under pressure in the course of the corona crisis and that adjustments will be necessary in the valuation?
We have to make a distinction between the portfolio that is on the books and for which certain residual values are assumed, and the question of at what residual values new leases are entered into. They are two very different animals. It’s no secret that we have traditionally taken a very conservative view of the setting of residual values. It is difficult to predict how residual values will develop during the crisis. However, we see ourselves as fundamentally solidly positioned in this respect. The need for mobility is not fundamentally put into question.
In Europe, in the EU-5 markets, about half of the business is fleet business, especially corporate fleets.
Yes, but even this need will not fall into the bottomless pit. We also have a solid order backlog. But we will also look at where we can provide new financing in the used car business to make sure that the pipeline is free, that dealers are given financing options for used cars. We know how to manage large used car fleets. We build on this with the quality of our portfolio. Nevertheless, the pressure on loan portfolios and on residual values is expected to increase. But I assume that our conservative policy of the past and the financial stability of our Financial Services Division, including the provisions we have made, will once again prove themselves in the books.