Robert Streda Cathy Cheng +1 416 597 7397 +1 416 597 538 [email protected] [email protected]

RATING REPORT Volkswagen AG

Ratings

Debt Rating Action Rating Trend Volkswagen AG – Issuer Rating A (low) Upgraded/Trend Change Stable VW Credit Canada Inc. – Senior Unsecured Debt * A (low) Upgraded/Trend Change Stable VW Credit Canada Inc. – Commercial Paper * R-1 (low) Upgraded/Trend Change Stable * Guaranteed by Volkswagen AG.

Rating Update

On October 25, 2019, DBRS Limited (DBRS Morningstar) upgrad- notes that VW’s corporate governance assessment continues to ed the Issuer Rating of Volkswagen AG (VW or the Company) adversely affect the Company’s ratings. to A (low) from BBB (high). Concurrently, DBRS Morningstar upgraded VW Credit Canada, Inc.’s Senior Unsecured Debt rat- DBRS Morningstar notes that VW has proven resilient to the ing and its Commercial Paper rating to A (low) and R-1 (low), Diesel Issue, with the Company’s global sales performance in respectively, from BBB (high) and R-2 (high), respectively. DBRS 2018 and through the first half of 2019 (H1 2019) continuing to Morningstar also changed the trend on all ratings to Stable from moderately outpace that of the overall industry. Financial per- Positive. The ratings incorporate VW’s solid business risk assess- formance over this period has also remained solid, with VW’s ment as an automotive original equipment manufacturer (OEM) Automotive business generating sound operating margins of 7.1% of substantial scale with a highly diversified brand portfolio. and 7.0% (trailing 12-month periods; both figures as calculated Moreover, the ratings upgrades recognize VW’s ongoing solid by DBRS Morningstar) in 2018 and H1 2019, respectively. DBRS operating performance despite sizeable challenges and cash out- Morningstar observes further that Company’s relative perfor- flows stemming from its diesel issue (the Diesel Issue), which, ap- mance in H1 2019 has readily exceeded that of many of its im- proximately four years following its initial onset, appears to have mediate peers that have reported markedly weaker earnings this been largely addressed by the Company, although there remain year in line with declining sales volumes, higher raw material numerous outstanding (primarily civil) actions across various costs and increasing investment requirements. Finally, VW’s per- jurisdictions. Notwithstanding the upgrade, DBRS Morningstar formance in China (accounted for using the equity method and Continued on P.2

Financial Information 12 mos. to 6 mos. to June 30 June 30 For the year ended December 31

(EUR millions) 2019 2018 2019 2018 2017 2016 2015 2014

Revenue 1 106,126 101,715 205,478 201,067 195,817 186,016 183,936 177,538 Net income before non-recurring items 7,485 7,466 13,834 13,812 13,163 9,794 8,896 10,847 Adjusted Interest coverage – EBITDA 1 17.4 16.4 24.5 22.7 18.4 16.5 13.0 13.8 Adjusted DEBT / EBITDA 0.8 0.6 0.9 0.9 0.6 0.6 0.8 0.8 Adjusted % gross debt in capital structure 1 20.7% 16.3% 20.7% 20.8% 16.1% 15.8% 19.5% 18.9% Note: Certain figures in this and in subsequent tables are subject to adjustments made by DBRS Morningstar. 1 Excludes financial services division.

Issuer Description

VW is the largest auto manufacturer in Europe and ranks first globally (according to 2018 data). The Company has a portfolio of 12 brands that, among others, includes Volkswagen, Volkswagen Commercial Vehicles, Porsche, Audi, Skoda, SEAT, Bentley, Lamborghini and Bugatti. VW’s Truck and Bus business, Traton, features the Scania and MAN brands. VW also has a sizable financial services business, and operates VW Credit Canada, Inc., its wholly owned subsidiary.

October 31, 2019 1 Rating Report | Volkswagen AG

Rating Update (CONTINUED) thus not included in the above-cited operating-margin figures) DBRS Morningstar notes further that the Company maintains has also remained robust, notwithstanding the ongoing contrac- several additional options to further bolster its liquidity position, tion of the Chinese market. including the sale of further equity stakes of its Truck and Bus business, Traton SE (Traton), and other potential divestitures of DBRS Morningstar recognizes that VW, like all of its automotive non-core assets. peers, will face meaningful industry headwinds over the next several years amid moderating global sales growth and sizeable Consistent with the Stable trend, the ratings are expected to re- investment requirements, in line with the increasing electrifi- main constant over the near to medium term. DBRS Morningstar cation of its product portfolio (to meet tightening environmen- notes that VW’s financial risk assessment provides some cush- tal regulations, notably in Europe and China). The Company is ion against unexpected challenges at the current ratings levels. also targeting additional investments into new mobility busi- Conversely, additional rating upgrades are not anticipated over nesses. (Regarding the Diesel Issue, while associated cash out- the similar time horizon given the slowing growth prospects and flows will persist, these are anticipated to be of a substantially cost headwinds facing the industry, with the Company’s corpo- lesser magnitude going forward.) However, DBRS Morningstar rate governance issues also serving to constrain further positive estimates that VW’s liquidity position will remain robust amid rating actions. such headwinds given its consistent free cash flow generation.

Rating Considerations

Strengths 4. Financial services earnings smooth profitability VW’s financial services business has provided a stable and mean- 1. Size provides economies of scale ingful source of earnings, with annual operating profit totalling VW is the largest automobile manufacturer in the world and the EUR 2.8 billion in 2018. Financial services earnings help to re- leader in Europe. VW has the size and critical mass to attain the duce the volatility of earnings associated with the Company’s economies of scale necessary to be cost-competitive. Automotive operations.

2. Above-average financial strength Challenges The Company has above-average credit metrics and a strong li- quidity position. The Company’s Automotive operations (exclud- 1. Diesel Issue ing financial services) had a net cash position of EUR 9.4 billion VW faces challenges as the Company attempts to recover from (as calculated by DBRS Morningstar) as at June 30, 2019 (exclud- the Diesel Issue, which initially spanned 482,000 thousand ing the impact of International Financial Reporting Standards vehicles in the United States, only to quickly increase to ap- (IFRS) 16 Leases, which was adopted as of January 1, 2019, and proximately 11 million worldwide. DBRS Morningstar notes negatively affected the Automotive operations’ reported debt by that related provisions incurred by the Company have totalled approximately EUR 5.1 billion). EUR 30 billion as of H1 2019. While this likely represents the ma- jority of such charges, DBRS Morningstar notes that there may 3. Market leader in Western Europe; yet be additional increases pending further developments, litiga- globally diversified tion and regulatory sanctions. Notwithstanding the Diesel Issue and amid ongoing competition across markets worldwide, the Company’s competitive position 2. Corporate governance challenges in terms of market share has held essentially firm. VW’s world- VW’s corporate governance framework is considered to be sub- wide market share in 2018 increased slightly to 12.3% compared optimal as indicated by the following characteristics: with 12.0% in 2017. In North America, the Company’s share de- 1. VW’s Supervisory Board is composed primarily of share- creased slightly and remained low at 4.6% (compared with 4.7% holders and worker representatives, with only a nominal in 2017). In Western Europe, VW’s market share remained con- proportion of independent members; stant (at a level of 22.0% in 2018), with the Company remaining the region’s market leader by a sizable margin. Moreover, VW’s 2. The Diesel Issue highlighted the lack of oversight and ac- market position remained solid in Central and Eastern Europe, countability from VW’s Management Board; and notwithstanding a moderate decline in market share in 2018 to 3. External investors have very little voting rights as the ma- 21.2% (compared with 22.0% in 2017). jority of voting shares are held by a small group of share-

October 31, 2019 2 Rating Report | Volkswagen AG

Rating Considerations (CONTINUED)

holders (as of year-end 2018, Porsche Automobil Hold- source of production for the Company (the country having ac- ing SE, Stuttgart owns 52.2% of voting shares (53.1% as of counted for approximately 20.9% of VW Group production in March 2019), State of Lower Saxony owns 20.0% and Qa- H1 2019). VW is seeking to improve its productivity through tar Holding owns 17.0%). Overall, the challenges in VW’s greater application of modular architectures, which will make it easier to build a wider variety of cars in future factories. Moreover, corporate governance have resulted in a downward adjust- VW’s existing labour agreement cites specific objectives of the ment of the Company’s ratings. Volkswagen brand and the German production facilities, target- ing savings and efficiency improvements and projected declines 3. Earnings volatility from cyclical automotive in headcount (primarily through attrition taking into consider- industry conditions ation the demographic curve of its labour force). VW’s operating performance is largely dependent on automotive business conditions, which fluctuate generally in line with eco- 5. Modest U.S. presence nomic cycles. VW has a modest presence in the United States, which is among the largest automotive markets in the world. Moreover, the 4. Significant production in Germany Diesel Issue (which originated in the United States) continues DBRS Morningstar notes that Germany, a relatively high-cost to represent an ongoing headwind for future sales growth in jurisdiction, continues to represent a material (albeit declining) that country.

October 31, 2019 3 Rating Report | Volkswagen AG

Earnings and Outlook

12 mos. to 6 mos. to June 30 June 30 For the year ended December 31

(EUR millions, where applicable) 2019 2018 2019 2018 2017 2016 2015 2014

Sales 1 106,126 101,715 205,478 201,067 195,817 186,016 183,936 177,538 Operating profit 1 8,570 8,501 14,397 14,327 14,346 12,167 10,595 10,780 Operating profit – Financial Services 1,409 1,294 2,908 2,793 2,673 2,435 2,236 1,917 Equity earnings (i.e. China) 1,599 1,680 3,288 3,369 3,482 3,497 4,387 3,988 Net income before non-recurring items 7,485 7,466 13,834 13,812 13,163 9,794 8,896 10,847 Reported net income 6,875 6,452 12,250 11,827 11,179 5,144 (1,582) 10,847 Return on equity 14.0% 15.5% 14.0% 13.1% 13.8% 11.4% 10.5% 12.7% Return on capital 8.1% 9.2% 7.8% 7.8% 8.3% 6.5% 6.0% 7.6% 1 Excludes financial services division and non-recurring items.

Summary VW’s financial performance in 2018 remained materially affected factors were significantly offset by fixed cost increases and ad- by provisions taken in connection with the Diesel Issue. This not- verse foreign exchange developments. withstanding, results of the Automotive business remained solid. Outlook Revenues increased moderately in 2018 to approximate- VW has incurred substantial provisions in connection with the ly EUR 201.1 billion. The increase reflects higher volumes Diesel Issue; as of June 30, 2019, these provisions have totalled and firmer product mix, partly offset by negative foreign EUR 30.0 billion. While the Company still potentially faces ad- exchange developments. ditional material legal costs (including civil claims or claims by vehicle owners) related to the Diesel Issue, DBRS Morningstar In 2018, special items remained significant and were constant notes that VW appears to have considerably addressed the Diesel year over year (YOY) at EUR -3.2 billion, and all are attributable Issue and has likely incurred the significant majority of associ- to the Diesel Issue. ated charges and cash outflows.

Absent special items, operating profit of the Automotive division For 2019, VW has projected that consolidated revenues may in- in 2018 amounted to EUR 14.3 billion, which was constant YOY crease by approximately 5% YOY, with the consolidated oper- and remained at solid levels. Contributing factors included posi- ating margin likely in the range of 6.5% to 7.5% (absent special tive volume, mix and pricing effects, bolstered by reductions in items). Regarding the financial services division, VW projects product costs; these were effectively offset by higher fixed costs that revenues will likely increase moderately compared 2018, and negative foreign exchange developments. with operating profit anticipated to be roughly constant YOY. For 2020, the Company has forecast its adjusted consolidated VW continued to achieve solid results in China (accounted for operating margin to remain in the similar range of 6.5% to 7.5%. using the equity method), with deliveries in 2018 increasing slightly YOY, notwithstanding a declining regional market, and Over the long-term, VW is seeking to increase its consolidated amounting to 4.2 million units. Proportionate operating profit operating margin to a target range between 7.0% and 8.0% by was slightly lower YOY at EUR 4.6 billion, with dividends paid 2025, despite meaningful industry headwinds in the form of to VW slightly decreasing to EUR 3.5 billion (compared with slowing global growth and cost increases attributable to tight- EUR 3.6 billion in 2017). Despite recent weakening conditions, ening emission requirements and the requisite development of China remains a core market and an important source of future alternative powertrain vehicles. The Company is looking to more growth for the Company. than offset such headwinds through (among other things) firmer product mix and pricing, complexity reduction and attained pur- Revenues through H1 2019 were higher by 4.3% relative to the chasing and productivity efficiencies. Moreover, as with several same prior-year period (despite a slight contraction in volumes), other OEMs, VW is also looking at emerging businesses (no- in line with firmer product mix and positive pricing develop- tably, mobility solutions such as car-sharing and ride-hailing) ments. Profitability of the Automotive division was nominally to ultimately represent a meaningful proportion of revenues stronger, in line with the aforementioned favourable mix and and earnings. pricing effects, bolstered by lower product costs. These positive

October 31, 2019 4 Rating Report | Volkswagen AG

Segmented Data 12 mos. to Key Figures by Brand 6 mos. to June 30 June 30 As at December 31 Unit Vehicle Sales 2019 2018 2019 2018 2017 2016 2015 2014 VW passenger cars 1,886 1,931 3,670 3,715 3,573 4,347 4,424 4,583 Audi 632 812 1,287 1,467 1,530 1,534 1,529 1,444 Skoda 560 511 1,006 957 937 814 800 796 SEAT 370 347 631 608 595 548 544 501 Bentley 5 5 10 10 11 11 11 11 Porsche 136 123 266 253 248 239 219 187 Commercial vehicles 256 248 477 469 498 478 456 442 Scania & Man 124 112 246 234 206 185 180 200 VW China 1,789 1,999 3,891 4,101 4,020 3,873 3,456 3,506 Other Automotive -418 -512 -818 -912 -840 -1,638 -1,608 -1,454 TOTAL 5,339 5,575 10,664 10,900 10,777 10,391 10,010 10,217

Revenue (EUR millions) VW passenger cars 44,146 42,704 86,027 84,585 79,186 105,651 106,240 99,764 Audi 28,761 31,183 56,826 59,248 59,789 59,317 58,420 53,787 Skoda 10,154 9,161 18,286 17,293 16,559 13,705 12,486 11,758 EAT 6,266 5,786 10,682 10,202 9,892 8,894 8,572 7,699 Bentley 835 757 1,626 1,548 1,843 2,031 1,936 1,746 Porsche 12,212 11,231 24,649 23,668 21,674 20,710 21,533 17,205 Commercial vehicles 6,489 6,324 12,040 11,875 11,909 11,120 10,341 9,577 Scania & Man 15,262 13,773 30,561 29,072 27,159 24,901 24,212 24,667 Other Automotive -16,919 -18,206 -33,121 -34,408 -30,288 -56,617 -56,349 -45,885 TOTAL 107,205 102,713 207,577 203,085 197,724 189,713 187,319 180,319

Operating Profit* (EUR millions) VW passenger cars 2,286 2,130 3,395 3,239 3,301 1,869 2,102 2,476 Audi 2,300 2,761 4,244 4,705 5,058 4,846 5,134 5,150 Skoda 824 821 1,380 1,377 1,611 1,197 915 817 SEAT 216 212 258 254 191 153 -10 -127 Bentley 57 -80 -151 -288 55 112 110 170 Porsche 2,117 2,064 4,163 4,110 4,003 3,733 3,404 2,718 Commercial vehicles 506 567 719 780 853 455 382 504 Scania & Man 1,118 944 2,045 1,871 1,844 1,496 1,306 1,339 Other Automotive -727 -856 -1,428 -1,557 -2,335 -1,343 -2,440 -2,052 TOTAL 8,698 8,563 14,627 14,492 14,581 12,518 10,903 10,995 Note: Revenues and operating profit exclude VW China data; as this is accounted for using the equity method. Lamborghini data is included in Audi. 2014 and 2015 Porsche data include financial services * Before special items.

The 2018 sales and delivery performance of the core Volkswagen this was more than offset by gains of the Polo/Virtus, T-Roc, brand remained at strong levels and was essentially constant Tiguan, Touran and Atlas/Teramont models. Revenues of the VW YOY. Reported sales were slightly higher compared with 2017 at brand in 2018 were materially higher YOY, in line with volumes 3.7 million units (this figure excludes sales of VW’s Chinese joint gains and firmer product mix. In 2018, operating profit of the VW ventures (JVs), which are not attributed to the VW passenger cars brand was slightly lower YOY, with higher volumes and improved brand companies). Global deliveries for 2018 increased by 0.2% product costs being more than offset by upfront expenditures for YOY to a record level of 6.2 million units. Regarding major models, new products, unfavourable foreign exchange developments and production volumes of the Golf, Jetta/Sagitar and Passat/Magotan adverse effects of the Worldwide Harmonised Light Vehicles Test were lower YOY (though they remained at solid levels). However, Procedure (WLTP) in Europe. Special items attributable to the

October 31, 2019 5 Rating Report | Volkswagen AG

Segmented Data (CONTINUED)

Diesel Issue decreased considerably in 2018, but remained signifi- in volume, mix and pricing being essentially offset by fixed cost cant at EUR 1.9 billion. Volumes of the premium Audi brand in 2018 increases and adverse foreign exchange developments. Regarding decreased slightly YOY, significantly reflecting challenging condi- the core Volkswagen brand, revenue increased by 3.4% compared tions in its core European market exacerbated by WLTP effects. with H1 2018 to EUR 44.1 billion, reflecting solid sales perfor- However, the declines in Europe were significantly offset by ongo- mance of the T-Roc, Touran, Tiguan and Atlas models, with the ing strong gains in China, with total global deliveries for the brand launch of T-Cross model also being successful. Operating profit amounting to 1.8 million units. Audi’s operating profit in 2018 de- of the Volkswagen brand also improved, in line with favourable creased moderately YOY, in line with lower volumes and higher product costs as well as firmer mix and pricing; these gains were sales costs that were both significantly attributable to WLTP ef- partly offset by lower volumes and negative foreign exchange fects. Audi’s special items attributable to the Diesel Issue were developments. Special items associated with the Diesel Issue de- considerably higher in 2018 at EUR 1.2 billion (compared with clined considerably to EUR 0.4 billion (from EUR 1.6 billion in H1 EUR 0.4 billion the previous year). Porsche enjoyed another year 2018). Audi’s reported sales in H1 2019 decreased compared with of growth in sales volumes and revenue, which in 2018 increased H1 2018, partly reflecting the absence of multi-brand sales compa- by 9.2% YOY to EUR 23.7 billion. Moreover, the brand’s operating nies (separated from Audi and included in Other Automotive ef- margin, while moderately lower YOY, remained very strong level fective 2019) in addition to ongoing WLTP effects. Audi’s operat- of 17.4%. Skoda’s performance was mixed in 2018, with revenues ing profit in H1 2019 also declined compared H1 2018 as a function increasing by 4.4% YOY to EUR 17.3 billion; however, operating of WLTP effects, cost increases, higher product launch costs and profit declined to EUR 1.4 billion (from EUR 1.6 billion the prior negative foreign exchange effects. Porsche continued to perform year), reflecting unfavourable foreign exchange developments, well, in line with ongoing growth in sales volumes and revenue, upfront expenditures for new products and adverse WLTP effects. which increased to EUR 12.2 billion (compared with EUR 11.2 bil- This notwithstanding, Skoda’s operating margin in 2018 remained lion in H1 2018). Operating profit improved slightly to EUR 2.1 bil- solid at 8.0%. With respect to SEAT, the brand remained profitable lion, with volume gains and product efficiencies being effectively last year with earnings improving YOY to EUR 254 million as a offset by negative foreign exchange developments. The Skoda function of higher volumes and firmer product mix, partly offset brand continued to deliver ongoing increases in sales and rev- by cost increases. Bentley’s 2018 operating performance contin- enues, although this is considerably a function of India now being ued to trend lower, with the brand reporting a loss in 2018 as a included. Earnings in H1 2019 were constant compared with H1 function of delays with the launch of the new Continental GT in 2018, with volume gains and positive pricing being effectively off- addition to negative foreign exchange developments. set by cost increases and adverse foreign exchange developments. SEAT’s profitability improved significantly compared with H1 Through H1 2019, operating profit (adjusted) remained at solid 2018, in line with higher volumes and firmer product mix, which levels and was essentially constant relative to H1 2018 with gains was only partly offset by cost increases.

Unit Sales/Revenues by Mar- 12 mos. to ket 6 mos. to June 30 June 30 As at December 31 Unit Vehicle Sales 2019 2018 2019 2018 2017 2016 2015 2014 Europe/Remaining Markets 2,543 2,608 4,674 4,739 4,731 4,635 4,524 4,430 North America 486 433 978 925 992 968 941 879 South America 280 293 583 596 526 421 540 794 Asia Pacific 2,029 2,241 4,428 4,640 4,527 4,367 4,005 4,114 TOTAL 5,339 5,575 10,662 10,900 10,777 10,391 10,010 10,217

Revenue (EUR millions) Europe/Remaining Markets 77,251 76,414 143,926 143,089 142,753 138,079 132,535 122,858 North America 21,762 17,730 41,688 37,656 37,686 35,454 35,384 27,619 South America 5,247 5,236 10,416 10,405 9,988 7,973 10,148 13,868 Asia Pacific 20,797 18,996 44,967 43,166 39,123 35,761 35,225 38,113 TOTAL 125,197 119,377 241,669 235,849 229,550 217,267 213,292 202,458 Note: Revenues by market include financial services division revenues. Revenues and operating profit exclude VW China data; as this is accounted for using the equity method. H1 2019, FY 2018 and H1 2018 total revenue include hedges on sales revenue (not geographically allocated). Revenues from South Africa for the 2008 annual period are inculded in South America.

October 31, 2019 6 Rating Report | Volkswagen AG

Segmented Data (CONTINUED)

With respect to geographic performance, the Company’s global the second consecutive year, with VW having attained a mean- unit sales in 2018 increased slightly YOY, with volume declines ingful increase in sales volumes. in North America being more than offset by gains across all the Company’s other geographic market segments. The global mar- VW’s results in North America declined slightly, with the ket share of the Company improved slightly to 12.3% in 2018 Company’s regional market share in 2018 softening to 4.6% from 12.0% in 2017. (compared with the 2017 level of 4.7%). In the United States and Canada, sales increased YOY, significantly reflecting the ongoing In Asia Pacific, sales volumes including those attributable to JVs popularity of the Volkswagen Jetta, in addition to solid sales per- in China increased slightly to 4.6 million units. formance of VW’s various SUV models. Sales in Mexico declined, however, consistent with the regional industry. VW’s sales in For 2018, sales levels in the Europe/Remaining markets seg- South America were significantly higher YOY, in line with im- ment were essentially constant YOY, with VW’s market share in proving regional market conditions, bolstered by the Company’s Western Europe remaining flat at 22.0%, notwithstanding nega- gain in share to 11.9% (from the 2017 level of 11.4%). tive WLTP effects and ongoing challenges attributable to the Diesel Issue. However, the Company’s market share in Central/ During H1 2019, the Company’s global volumes decreased mod- Eastern Europe decreased slightly in 2018 to 21.2% (compared erately compared with the similar prior-year period with slightly with the 2017 level of 22.0%). In Russia, conditions improved for higher volumes in North America being more than offset by de- clines in all other regional segments.

Financial Profile

12 mos. to Automotive Operations 6 mos. to June 30 June 30 For the year ended December 31 2019 2018 2019 2018 2017 2016 2015 2014 EBITDA 16,470 15,889 30,490 29,908 29,294 26,498 24,111 23,101 Earnings after taxes 7,777 7,627 14,288 14,138 13,447 10,029 9,117 11,069 Depreciation 7,900 7,388 16,093 15,581 14,948 14,331 13,516 12,320 Other items (derivatives, other gains/losses) 2,351 3,712 (2,696) (1,335) 323 (83) 2,718 (3,518) Cash flow from operations 18,028 18,727 27,685 28,384 28,718 24,277 25,351 19,871 Less: capital expenditure 7,540 6,888 19,104 18,452 17,891 18,545 17,759 16,096 Less: dividends 2,419 1,967 2,827 2,375 1,332 364 2,516 1,962 Free cash flow pre-working capital 8,069 9,872 5,754 7,557 9,495 5,368 5,076 1,813 Changes in working capital (3,516) (5,813) (2,047) (4,344) (553) (715) (1,066) 2,100 Free cash flow 4,553 4,059 3,707 3,213 8,942 4,653 4,010 3,913

Net debt (cash) position 1 (9,397) (16,034) (9,397) (15,833) (13,854) (18,709) (13,742) (11,003) % net debt in capital structure -9.4% -18.0% -9.4% -16.9% -15.7% -27.0% -19.7% -14.7% Adjusted % debt in capital structure 20.7% 16.3% 20.7% 20.8% 16.1% 15.8% 19.5% 18.9% Adjusted Gross interest coverage – EBITDA 17.4 16.4 24.5 22.7 18.4 16.5 13.0 13.8 Adjusted Cash flow/total debt 1.3 1.9 1.0 1.0 1.5 1.5 1.3 1.0 Notes: 2015 and subsequent figures adjusted to exclude effects of the Diesel Issue. The Company’s 2019 reported debt obligations have been subject to an increase given the adoption (as of January 1, 2019) of IFRS 16, the primary objective of which being to recognize all leases. DBRS Morningstar notes that this has not impacted VW’s FRA. 1 For 2019 data - excludes the impact of IFRS 16. Net cash, including IFRS 16 impact, was at EUR 4.3 billion as of June 30, 2019.

October 31, 2019 7 Rating Report | Volkswagen AG

Financial Profile (CONTINUED)

Summary Automotive cash flow from operations in 2018 (adjusted to ex- payments continued to progressively increase and totaled ap- clude effects associated with the Diesel Issue) remained at proximately EUR 2.4 billion, in line with VW’s announced ordi- solid levels and was essentially constant YOY, with improved nary and preferred share dividends in the per-share amounts of earnings and firmer depreciation levels offset by a reduction in EUR 4.80 and EUR 4.86, respectively. Significantly reflecting the other items. increasing dividends and capex, gross free cash flow was lower compared with H1 2018 at a level of EUR 8.1 billion. Working Capex was slightly higher YOY, in support of new production fa- capital usage, while somewhat moderate compared with H1 2018, cilities as well as recent/planned product launches. Additional continued to reflect WLTP-associated challenges and remained investments also reflected VW’s increasing environmental focus significant at EUR 3.5 billion. Net free cash flow was nonetheless across its product range and the ongoing development of modu- positive in the amount of EUR 4.6 billion and slightly improved lar toolkits, digitalization and electric powertrains. compared with H1 2018.

Dividend payments continued to progressively increase and at- As of June 30, 2019, the net cash position of the Automotive op- tained a level of EUR 2.4 billion, in line with ongoing solid earn- erations was in the amount of EUR 4.3 billion. While this repre- ings and cash flow generation amid additional visibility related sents a sizeable decrease compared with recent periods, DBRS to the Diesel Issue. Morningstar notes that this is a function of several factors. Firstly, the adoption of IFRS 16 Leases (as of January 1, 2019) had Adjusted gross free cash flow (i.e., before working capital items) the effect of reducing the Company’s reported liquidity position in 2018 was moderately lower YOY (primarily given the high- by approximately EUR 5.1 billion. Secondly, over the 12-month er capex and increased dividends), but remained at solid lev- period ending June 30, 2019, in addition to ongoing outflows of els. Working capital represented a material use of cash in the EUR 3.6 billion caused by the Diesel Issue, liquidity was further amount of EUR 4.3 billion, significantly reflecting increased in- depleted by payments to minority shareholders of MAN in the ventories primarily attributable to WLTP. Accordingly, adjusted amount of approximately EUR 3.2 billion. Additionally, subse- net free cash flow (i.e., after working capital items) for 2018 quent to H1 2019, VW received proceeds of EUR 1.4 billion in was lower, though it remained significantly positive at a level of connection with the initial public offering of 10% of the shares EUR 3.2 billion. of Traton, thereby effectively bolstering its net cash position to EUR 5.7 billion. DBRS Morningstar, notes, however, that the above amount was considerably reduced by cash outflows associated with Outlook the Diesel Issue of roughly EUR 5.3 billion; this amount was DBRS Morningstar estimates that VW’s cash flow from opera- nonetheless of a much lesser magnitude than the similar 2017 tions in 2019 will slightly exceed prior year levels (adjusted to cash outflow of EUR 16.1 billion. Additionally, VW made pay- exclude effects of VW’s Diesel issue), in line with anticipated ments of EUR 2.1 billion to minority shareholders of MAN SE earnings growth. (MAN; substantially to acquire tendered shares). Partly offset- ting the above were net proceeds of EUR 1.5 billion from the 2019 capex levels are estimated to moderately increase YOY, with Company’s June 2018 hybrid notes issuances of EUR 2.75 billion dividends also anticipated to continue their progressive growth (EUR 1.25 billion of which was allotted toward the refinancing of the past few years. the redeemed 2013 hybrid notes). As a function increased capex and dividends, DBRS Morningstar Through the first half of 2019, Automotive cash flow from opera- estimates that the Company’s gross free cash flow in 2019 will tions remained solid although was slightly lower compared with be slightly lower relative to 2018 but will remain at substantially HI 2018, as essentially constant earnings and firmer deprecia- positive levels. While the Company faces additional cash out- tion levels were more than offset by a reduction in other items. flows associated with the Diesel Issue, these are anticipated to Capex was moderately higher compared with H1 2018. Dividend be of a lesser magnitude going forward.

October 31, 2019 8 Rating Report | Volkswagen AG

Debt and Liquidity

Despite substantial outlays in connection with the Diesel Issue However, DBRS Morningstar estimates that VW’s liquidity posi- (in addition to payments to the minority shareholders of MAN), tion will remain robust amid such headwinds given its consistent VW’s current liquidity position remains sizeable. free cash flow generation; DBRS Morningstar notes further that the Company maintains several additional options to further As of June 30, 2019, the Company’s Automotive operations bolster its liquidity position, including the sale of further equity had a gross liquidity position of EUR 30.8 billion, which in- stakes in Traton as well as other potential divestitures of non- cluded EUR 17.5 billion in cash and EUR 13.3 billion in core assets. marketable securities. Industrial debt is a relatively small component of total consoli- Additionally, the Company has a EUR 5.0 billion syndicated cred- dated debt (i.e., approximately 10%). it facility that matures in April 2020; as of December 31, 2018, this facility remained unused. The Company’s consolidated debt maturity schedule (industrial maturity schedule not available) as at December 31, 2018, is out- In 2017 through 2018, VW’s Automotive liquidity was mean- lined in the table immediately below in percentage terms. ingfully depleted by approximately EUR 21.4 billion in cash outflows related to the Diesel Issue. However, this was consid- < 1 year 1-5 years >5 years erably offset by solid net free cash flow generation of roughly 45.9% 42.4% 11.7% EUR 12 billion (absent effects of the Diesel Issue) over this time period, in addition to combined proceeds of EUR 6.3 billion from The debt breakdown (in EUR millions) of the above is as follows: the Company’s hybrid bond issuances in 2017 and 2018.

Bonds 81,549 VW faces meaningful industry headwinds over the next several years amid moderating global sales growth and sizeable invest- Comm. paper & notes 41,356 ment requirements, in line with the increasing electrification of Loans 33,903 its product portfolio (to meet tightening environmental regula- Direct Banking Deposits 30,010 tions, notably in Europe and China). The Company is also tar- geting additional investments into new mobility businesses. Other 4,066

Financial Services Division For the year ended December 31

(EUR millions) 2018 2017 2016 2015 2014 Revenue 34,782 33,733 31,251 29,357 24,920 Operating profit 2,793 2,673 2,435 2,236 1,917 Debt: equity 6.3 5.7 6.3 6.7 7.1 Receivable portfolio 132,909 126,395 118,075 110,073 102,275 Penetration level 33.7% 33.4% 33.3% 31.5% 30.7%

Results of the Financial Services business in 2018 improved As of June 30, 2019, the total number of contracts was at a level moderately YOY as the segment remained a significant contribu- of 23.2 million (as of January 1, 2019, contracts signed by the seg- tor to consolidated earnings, thereby partly offsetting the recent ment’s international JVs are also included). volatility of the industrial operations in connection with the Diesel Issue. Credit risk within the wholesale portfolio and the retail/ fleet portfolio remains at low levels and readily covered by Operating profit was moderately improved as a function incurred provisions. of ongoing business growth, bolstered by ongoing gains in cost efficiencies. Leverage as of December 31, 2018, was moderately higher YOY, though well within historical levels and commensurate with in- dustry standards.

October 31, 2019 9 Rating Report | Volkswagen AG

Financial Services Division (CONTINUED)

Penetration rates continue to trend upward, with the penetration Moreover, the Company has indicated further that it does not (excluding the activities of Scania and Porsche Holding Salzburg) anticipate the Diesel Issue to result in any materially negative as of H1 2019 being at a level of 34.5%. While penetration levels impact with respect to credit and residual value losses. vary considerably across regions, the global rate is affected by the inclusion of China, where penetration levels remain low (i.e., ex- Funding sources are well diversified, with bond issuances cluding China, H1 2019 penetration levels amounted to 48.3%). (33.7% as of June 30, 2019), asset-backed securitization trans- actions (21.5%), and credit lines (11.4%) being among the larg- This segment is continuously looking to increase its penetration est sources of funding for Volkswagen Financial Services AG. rate through further product offerings, such as extended war- For Volkswagen Bank GmbH, major funding sources include ranty programs and short- and long-term vehicle rentals as well customer deposits (45.9% as of June 30, 2019), bond issuances as car sharing (i.e., very short-term vehicle rentals). Integrated (9.4%) and credit lines (9.1%). Intercompany financing and com- products are also being launched (i.e., combination of finance, mercial paper represent additional funding sources available to insurance and service contracts). both companies. Moreover, VW’s financial services companies have access to the EUR 5.0 billion syndicated credit facility. VW’s financial services business has strong global presence and was active in 48 markets as of December 31, 2018. Note: A realignment of the division became effective as of September 1, 2017, with subsidiary Volkswagen Bank GmbH (in- For 2019, revenues of the financial services business are pro- volved in the credit and deposit business within Europe) spun- jected by the Company to increase moderately relative to 2018, off from VW Financial Services AG to VW AG, an objective of the with operating profit anticipated to be roughly constant YOY. realignment being to reduce the regulatory load on the division.

Rating Support

The ratings of VW Credit Canada Inc. are supported by VW reputational and financial factors that are deemed likely to mo- through a Guarantee. Per DBRS Criteria: Guarantees and Other tivate a parent or affiliated company to support its subsidiary Forms of Support (January 2019), the Guarantee, in combina- issuer, result in a flow through of VW’s ratings to VW Credit tion with DBRS Morningstar’s assessment of additional implicit Canada Inc. support considerations, including (but not limited to) business,

October 31, 2019 10 Rating Report | Volkswagen AG

Volkswagen AG 1 (Financial Services business on equity basis) Balance Sheet (EUR millions) June 30 As at December 31 June 30 As at December 31 Assets 2019 2018 2017 Liabilities & Equity 2019 2018 2017 Cash & deposits 30,848 37,545 27,338 Accounts payable 21,873 20,962 20,497 Accounts receivable 21,420 12,523 16,668 Short-term debt (5,816) (1,504) (458) Inventories 45,263 41,302 36,113 Other current liabs. 50,472 48,524 49,672

Other assets - - 90 Total Current Liabs. 66,529 67,982 69,711 Total Current Assets 97,530 91,371 80,210 Long-term debt 26,551 21,712 13,484 Net fixed assets 61,553 54,619 52,503 Pension provision 39,082 32,535 32,189 Intangibles 64,746 64,404 63,211 Other liabilities 33,117 30,970 30,906 Fin. Services equity 29,497 28,492 27,472 Minority interest 1,756 225 229 Other assets 23,065 24,130 25,198 Shareholders' equity 109,356 109,592 102,074

Total Assets 276,391 263,016 248,593 Total Liabilities 276,391 263,016 248,593

12 mos. to Balance Sheet Ratios 6 mos. to June 30 June 30 For the year ended December 31 2019 2018 2019 2018 2017 2016 2015 2014 Current ratio 1.5 1.2 1.5 1.3 1.2 1.0 1.1 1.2 Inventory turnover (days) 93 84 88 88 82 80 72 67 Receivable turnover (days) 35 34 34 26 31 31 30 32 Accounts payable/inventory 0.5 0.5 0.5 0.5 0.6 0.6 0.6 0.6 Total debt-to-capital 19.5% 11.9% 19.5% 16.5% 11.7% 10.7% 14.6% 14.6% Adj. total debt-to-capital 20.7% 16.3% 20.7% 20.8% 16.1% 15.8% 19.5% 18.9% Net debt-to-capital -9.4% -18.0% -9.4% -16.9% -15.7% -27.0% -19.7% -14.7% DEBT/EBITDA 0.81 0.45 0.87 0.73 0.46 0.40 0.59 0.64 Adj. DEBT/EBITDA 0.83 0.60 0.91 0.93 0.65 0.60 0.80 0.84 EBITDA coverage 27.7 23.0 34.6 30.7 22.4 19.9 15.0 16.1 Adj. EBITDA coverage 17.4 16.4 24.5 22.7 18.4 16.5 13.0 13.8 EBIT coverage 14.4 12.3 16.4 14.7 11.0 9.1 6.6 7.5 Cash flow/total debt 1.4 2.6 1.0 1.3 2.1 2.3 1.8 1.4 Adj. cash flow/total debt 1.3 1.9 1.0 1.0 1.5 1.5 1.3 1.0 Cash flow/capital expenditure 2.4 2.7 1.4 1.5 1.6 1.3 1.4 1.2 1 Excludes non-recurring items.

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12 mos. to Income Statement 6 mos. to June 30 June 30 For the year ended December 31 (EUR millions) 2019 2018 2019 2018 2017 2016 2015 2014 Sales – automotive 106,126 101,715 205,478 201,067 195,817 186,016 183,936 177,538 Cost of sales 76,983 72,794 149,906 145,717 143,586 136,529 137,037 133,991 Depreciation 7,900 7,388 16,093 15,581 14,948 14,331 13,516 12,320 Other expenses 12,673 13,032 25,082 25,441 22,938 22,989 22,788 20,446 Operating profit – automotive 1 8,570 8,501 14,397 14,327 14,346 12,167 10,595 10,781 Net interest income (expense) (121) (270) 125 (24) (466) (688) (627) (686) Other income (expense) (918) (597) (1,943) (1,622) (3,162) (2,620) (993) (1,205) Financial Services division income 1,409 1,294 2,908 2,793 2,673 2,435 2,236 1,917 Income before taxes 8,940 8,928 15,487 15,474 13,391 11,294 11,211 10,806 Income taxes 2,762 2,981 4,485 4,705 3,426 4,762 6,481 3,725 Income before non-controlling interest 6,178 5,947 11,002 10,769 9,965 6,532 4,730 7,081 Net income before non-recurring items 7,485 7,466 13,834 13,812 13,163 9,794 8,896 10,847 Net income 6,875 6,452 12,250 11,827 11,179 5,144 (1,582) 10,847

Cash Flow - automotive division Earnings after tax 7,777 7,627 14,288 14,138 13,447 10,029 9,117 11,069 Depreciation 7,900 7,388 16,093 15,581 14,948 14,331 13,516 12,320 Other items 2,351 3,712 (2,696) (1,335) 323 (83) 2,718 (3,518) Cash flow from operations 18,028 18,727 27,685 28,384 28,718 24,277 25,351 19,871 Less: capital expenditures 7,540 6,888 19,104 18,452 17,891 18,545 17,759 16,096 Less: dividend 2,419 1,967 2,827 2,375 1,332 364 2,516 1,962 Free cash flow before working capital 8,069 9,872 5,754 7,557 9,495 5,368 5,076 1,813 Changes in working capital (3,516) (5,813) (2,047) (4,344) (553) (715) (1,066) 2,100 Free cash flow 4,553 4,059 3,707 3,213 8,942 4,653 4,010 3,913

Profitability Ratios EBITDA margin 1, 2 15.5% 15.6% 14.8% 14.9% 15.0% 14.2% 13.1% 13.0% Operating margin 1, 2 8.1% 8.4% 7.0% 7.1% 7.3% 6.5% 5.8% 6.1% Net margin 1 7.1% 7.3% 6.7% 6.9% 6.7% 5.3% 4.8% 6.1% Return on equity 1 14.0% 15.5% 14.0% 13.1% 13.8% 11.4% 10.5% 12.7% Return on capital 1 8.1% 9.2% 7.8% 7.8% 8.3% 6.5% 6.0% 7.6% Note: Certain figures subject to DBRS Morningstar ajustments. 1 Excludes non-recurring items. 2 Financial services net income excluded.

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Rating History

Current 2018 2017 2016 2015 2014 Issuer Rating – Volkswagen AG A (low) BBB (high) BBB (high) BBB (high) A (low) A Senior Unsecured Debt – Volkswagen Canada Inc. ------BBB (high) A (low) A Commercial Paper – Volkswagen Canada Inc. ------R-2 (high) R1(low) R1(low) Senior Unsecured Debt – VW Credit Canada Inc. A (low) BBB (high) BBB (high) BBB (high) A (low) A Commercial Paper – VW Credit Canada Inc. R-1 (low) R-2 (high) R-2 (high) R-2 (high) R1(low) R1(low)

Previous Action • “DBRS Changes Trend on Volkswagen AG to Positive from Stable, Confirms Ratings at BBB (high),” October 25, 2018.

Commercial Paper Limit • CAD 1 billion.

Previous Report • Volkswagen AG: Rating Report, October 31, 2018.

Notes: All figures are in euros unless otherwise noted.

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