Bayerische Motorenwrk Ord

Good afternoon, ladies and gentlemen. I would like to welcome you all to our telephone conference for the first quarter results. I hope you are all doing well in these unusual times. With us today is Oliver Zitze, Chairman of the Board of Management of BMW and Nicola Peter, our CFO. First, Oliver Zitze will give you an update on the business performance, and then Nicola Peter will take you through our financial results. Afterwards, we will have time for a Q&A session. Oliver, please go ahead.

Good afternoon, ladies and gentlemen. The current situation is extremely challenging, which makes it even more important to have a clear course, a firm stance and responsible leadership. This includes balancing business decisions between short-term impact and long-term perspective intelligently and effectively. On the one hand, we have measures to combat the massive impact of the coronavirus pandemic on our business and the way we work. And on the other hand, we have future projects we plan to continue or even accelerate. The BMW Group is in a strong position and well prepared to handle the challenges on both sides. We've intensified. and accelerated our Performance Next program, through which we have tapped considerable potential on both the cost and the performance side since 2017. We continue to electrify our product portfolio and are bringing new models onto the market at the right time. And we are using the time to make our supply chain even more sustainable. All of this helps us to balance business, environmental and societal challenges equally. Responsibility is and will remain the foundation of everything we do. I have three points to underscore this. We are guiding the company through the coronavirus pandemic with flexibility and sound judgment. Second, we remain committed to meeting our climate protection targets And third, we remain focused on investing to enhance our future success. Let's turn to the first topic. No one can reliably predict how the global economy and specifically auto markets worldwide will develop in the next few months. We are prepared for our business to be impacted for a long period. Our decisions and how we steer the company are based on customer demand. The BMW Group is located in over 150 countries and as you know, business conditions are different across the globe and the situation is constantly changing as a result of the coronavirus pandemic. At the beginning of March, the sale of vehicles was only restricted in China and parts of Asia. In all other markets, retail outlets were still able to go about their business as usual. Only five weeks later, by the second week of April, sales had come to a complete halt nearly everywhere in Europe, in Central and South America, in Russia, in South Africa, in India and parts of Asia. Sales were also restricted at the time in the United States, in Canada, the Netherlands, Scandinavia and several other Asian countries. The only retailers open at the time without any restrictions were in Korea, Japan, Australia, and in China once again. Under these circumstances, as you can imagine, our first quarter sales were impacted above all by the economic fallout of the pandemic in China and Asia. There was a pronounced decrease in sales in all our major market regions. In Asia, minus 25%. in Europe minus 18% and in Americas also minus 18%. Or, to put it another way, we reached 75% of our sales volume of the previous year in Asia and about 82% in Europe and the Americas. At group level, sales decreased by 20.6% compared with the first half of 2019. the geographic spread of the pandemic around the globe from east to west became even clearer in our sales figures for the month of April, with a decrease of about 44% year on year. In China, on the other hand, the first signs of recovery started to become visible in March and April, in February with minus 88.1%, and in the month of April with plus 13.6%. compared to the previous year. But I want to make it quite clear. China is only of limited use as a blueprint for development in other markets. In our most important sales region, Europe, the picture is extremely mixed. It is clear that automotive demand in countries that have been hit, hard hit by the pandemic like Spain, Italy and the United Kingdom will remain probably relatively low for the rest of the year. As government containment restrictions are gradually being eased, retail outlets in many markets can now partially reopen. Our dealers have stayed in contact with customers even during the closure. The dealer mobile sales office was rolled out in more than 60 markets in early April. It allows our sales representatives to videoconference with customers so they can advise them and configure vehicles together online. And where legally possible and viable, they've also carried out necessary service and repairs, providing pickup and delivery of vehicles directly to customers. With our investments in the digitalization of our marketing and sales processes, together with our retail partners, we're exactly on the right track. Our advanced capabilities here increasingly enable a contactless sales process, which during the corona pandemic is a big benefit for both of our customers and staff. The global situation remains extremely fragile. On March 18th, We provided an outlook for the financial year 2020. Global sales significantly lower than the previous year. Group earnings before tax significantly lower than the previous year. The EBIT margin in the automotive segment of between 2% and 4%. Possible longer-term economic implications of the coronavirus pandemic were not included in this outlook in March. Over the past few weeks, however, it has become apparent that the measures to contain the corona pandemic have lasted longer in many markets than anticipated. It is therefore clear that delivery volumes in these markets are not going to return to normal within just a few weeks, as was assumed. As a consequence, we now expect the EBIT margin for the automotive segment to be within a target range of 0% and 3%. Deliverance to customers and group profit before tax are still expected to be significantly lower than in 2019. It is important to me that we are neither pessimistic nor euphoric about initial signs of normalization in a number of markets. We need to take a realistic view and must be fully able to respond accordingly at all times. For this reason, we are taking a measured approach and exercising sound judgment. This applies not only to protecting our employees, but also when it comes to ramping up our production facilities. Since March 17th, alongside flexibility instruments such as reducing overtime hours and asking employees to take leave, we've also been implementing short-time working in our German plans. Around 30,000 employees are affected. In line with our agreement with the German Works Council, we are topping up the short-term allowance to up to 93% of the employee's salary. But now, how is short-time working compatible with paying a dividend? The short-time allowance is a benefit paid by the Federal German Employment Agency. It is funded by unemployment insurance contributions split between employers and employees. Therefore, it is not state aid, but rather an insurance benefit to preserve jobs. The dividend in contracts is always geared towards past results, which is distributed to shareholders, retroactively for the prior financial year. The profit-sharing payments received by our employees are also tied to the dividend by the way. And we cannot forget that many investors are pension funds which use the dividend for pension schemes. The economic impact of the pandemic will be apparent in the current financial year. And it will also be reflected in the dividend, the bonuses and the profit sharing payouts for the business for year 2020, paid out in 2021. The most important thing is we have always kept the BMW Group running, even if operations have been reduced. In both production and non-production areas, we have continued to implement measures that were urgently needed. We put an important package of initiatives into effect early on to protect our employees and their families, to maintain our operational capabilities, to support society in its fight against the virus. We are, for instance, obtaining medical protective equipment and providing relief organizations with BMW vehicles. All our activities are coordinated by our Corona Competence Team in consultation with the authorities and the Robert Koch Institute in Germany. In administrative areas, we are gradually increasing the number of employees going into the office. All managers in Germany have received a handbook with clear rules on how to adhere to the measures to protect against infection. A few examples include Face masks must be worn if a minimum distance of 1.5 meters cannot be maintained one-way traffic rules for walkways and or assigned seating on planned buses. We will also produce face masks in our Wackersdorf location to meet our own needs. The machines are currently being set up and will start production over the coming week. We are also using our employee app to communicate quickly and swiftly and directly with nearly 50,000 employees. On the 27th of April we began ramping up our plants in a successive structured process that will be strictly aligned with conditions and demand in the respective markets. That is why we will initially restart production with just one shift. The joint venture plants in China as well as our component plants here in Germany already resumed production several weeks ago. Our engine plants The Rolls-Royce plant in Goodwood in the United Kingdom and plant Spartanburg in the United States have also restarted this Monday. Dingo Fing, as our largest European plant, will start producing again on May 11th. And all other plants, as well as Oxford, Roslin and St. Louis Potosi, will follow on May 18th. Naturally, a transition towards two-shift operations will depend on further developments in the markets, and we will take a cautious approach before a full ramp-up. A key indicator for us in this will be monitoring our inventories. Let's move on to the second topic. We remain committed to meeting our climate protection targets. For us, climate protection is a given. It will remain one of the central tasks for our global society. We will deliver on this while at the same time keeping our promises to policymakers. In the face of the coronavirus, we remain more committed than ever to the climate goals that have been agreed. This applies to both the European unit CO2 targets for 2020 and 2021 and the introduction of the Euro 60 emissions standard. And we are strongly opposed to calls for moratoria. In other words, for deadlines to be postponed. This shows once again, the auto industry is not a monolith. We electrified early and systematically and prepared very diligently for the new targets. And by doing so, the BMW Group possesses a substantially competitive edge. Even in the first quarter of 2020, we delivered more electrified BMW and MINI vehicles to customers than in the same period of last year, with growth of almost 14%. In Germany, new registrations of BMW MINI e-vehicles and plug-in hybrids increased by almost 50% in the first three months. But postponing the targets and deadlines would reward those who didn't make any adequate preparations. In CESP, A restart premium could be used in a targeted manner to connect market efficiency and innovative products. On the other hand, we are open to the idea of moratoria on additional burdens, for example, if registration offices or authorities are closed as a result of the crisis. This could certainly include discussions about deadlines for the introduction of new and pending regulations, such as the emission standard Euro 7 standard for instance. And let me come to my third and final point. We remain focused on our future success and will continue investing accordingly. We will invest more than 30 billion euros in research and development by 2025. This will also include HydroSense fuel cell technology, which we continue to drive forward. As planned, we will be electrifying our model lineup across all brands. And as communicated earlier, by 2023, we will have 25 models with a pure electric or plug-in hybrid drive pin on the roads. This will also include the upcoming generation of the BMW 7 Series, both as an electric model and a plug-in hybrid variant, as well as both combustion engine variants, diesel and auto. We have used the past few weeks for the necessary remodeling at our plants. At plant Munich, we have been preparing for production of the fully electric BMW i4 and plant Dingolfing is gearing up for the launch of the BMW iNext. Both will be released in 2021. There will be no compromise when it comes to the iNext. This vehicle will enable highly automated driving on motorways. In the current situation, we are carefully reviewing all our projects as a matter of principle. We're analyzing structural and construction projects as well as product decisions. And we are asking ourselves, will these projects contribute to the long-term success of the company? Are they still viable? And is the timing still feasible? As an example for this, Since expected demand is always a relevant factor for us, we have decided to postpone the opening of the plant in Hungary by one year. Ladies and gentlemen, around the world, the impact of the corona pandemic is dominating virtually all areas of the economy and our daily lives. Although this disruption may continue for a long period of time, we are also thinking ahead to what comes after. we are reviewing different scenarios and developing measures and initiatives that will make the BMW Group even more adaptable. Thinking in scenarios will enable us to be far more agile and flexible to make decisions to effectively combat these challenges and remain on course for the long-term strategic development the BMW Group is striving for. It is also clear that the impact of the coronavirus comes on top of the complete transformation of mobility. As a result, it will accelerate the consolidation of our industry. I am and I remain confident that the strength of the BMW Group, even in such a challenging time, lies in its ability to act in a responsible manner while maintaining its course to a successful future. This has always set us apart as a company. Thank you very much.

Thank you, Oliver. And now, Nikola Peter, our CFO. Nikola, please go ahead.

Ladies and gentlemen, good afternoon. The spread of the coronavirus and the measures to contain it strongly affected the BMW Group's business development in the first quarter of 2020. sales decreased significantly, especially in China. This impacted our earnings position in the first three months of the year. Local production facilities and retail outlets there have since reopened and the situation is now recovering. In March, due to the decline in demand resulting from the coronavirus, we shut down production at our European plants in the US and South Africa. When plants can ramp up again will depend on how customer demand develops after the gradual opening of more retail outlets. The situation remains extremely volatile. As before, it is unclear how and when public life will be largely back to normal. For this reason, it is currently not foreseeable that demand for cars will move towards the level assumed in mid-March over the next few weeks. As Oliver has already explained, we are currently planning in various scenarios. Accordingly, we are adjusting and expanding our guidance for the financial year and are expecting an EBIT margin in the automotive segment of between 0 and 3%. I'll go into more detail on the guidance shortly. Ladies and gentlemen, Particularly in crisis situations, liquidity is essential. The BMW Group further increased its already strong liquidity position to almost 19 billion euros at the end of the quarter. We still have the best rating of any European car manufacturer and the second best worldwide. Because of our solid credit rating, we continue to enjoy good access to international capital markets. We keep our word, and that is more important than ever during this crisis. For the previous financial year 2019, we will pay a dividend to our shareholders and share our profit with employees as promised. Ladies and gentlemen, let's take a closer look at business development over the first three months. Group revenues for the first quarter totaled 23.25 billion euros. Despite positive pricing and model mix effects, revenues in the automotive and motorcycle segments decreased. This was mainly due to weaker demand in China resulting from the coronavirus and closure of many dealerships worldwide. Group revenues rose slightly overall. This largely stemmed from lower revenue eliminations as well, as from an increase in revenues in the financial services segment. The financial result was significantly lower than the previous year, at minus 577 million euros. Last year's figures had benefited from the one-time appreciation effect of pooling our mobility services with a dime level. The financial result was also impacted by the negative development in the market value of interest rate derivatives driven by lower interest rates in the US. The temporary downturn in demand in China and the negative impact this had on BDA earnings contributed to this decline. Another factor was a negative operating result from the year-now companies. Group pre-tax earnings which were also impacted by the effects I referred to, totaled 798 million euros. This figure was slightly higher year on year, due in part to positive effects from intersegment eliminations. In the first quarter of 2019, earnings had been dampened by the provision of around 1.4 billion euros in connection with ongoing antitrust proceedings. EBT margin for the first quarter of 2020 remained unchanged from the previous year at 3.4%. We expect to face continued earning headwinds, especially in the second quarter, as a result of the decrease in sales, first in China and now in other regions of the world. Ladies and gentlemen, the first quarter was dominated by the global pandemic, which is now having a major impact on the real economy. In this challenging situation, we continue to concentrate on managing the crisis. Nevertheless, we also remain focused on the future. We are also planning now for the time after the coronavirus. This is also reflected in our research and development costs. In the first quarter of 2020, we invested 1.32 billion euros in research and development. This remains at the same high level as last year. As expected, the R&D ratio according to the German Commercial Code was 5.7% and therefore slightly lower than the previous year. We are securing our future competitiveness by making targeted investments in new and attractive products, like the iForm, the iNext, as well as our popular X-Models. The capex ratio for the first quarter was 3.0%, significantly below the previous year. In light of the current situation, we will be delaying a number of projects like the plant in Hungary. Other projects will be carefully reconsidered. Now, more than ever, our investments need to be targeted and based on sound judgment. For the current year, investments, primarily property, plant and equipment, will be below 4 billion euros after nearly 5.7 billion euros in 2019. Ladies and gentlemen, let's move on to the individual segments. Thanks to the major model offensive of recent months, the BMW Group initially made a promising start to the year and was reporting safe growth in the automotive segment. Our young and attractive product portfolio is winning over customers. Our excellent product mix and improved pricing also help the year begin well. We implemented a whole range of high-impact measures three years ago to continuously improve our performance. These efforts are now bearing fruit. Thanks to our corporate program Performance Next, which will now be intensified once more, we are in good shape operationally. However, by February, the pandemic had already significantly impacted sales in China. Overall, sales there dropped by almost a third in the first quarter. The good news is that this trend was reversed in March, with signs of a recovery in this market. However, by March in Europe and the US, the initial effects of the pandemic were also clearly visible. First quarter sales were significantly lower as a result. The BMW Group delivered a total of over 477,000 vehicles to customers in the first quarter of this year. This is a decrease of 20.6% from the previous year. Despite negative sales growth, segment revenues totaled almost 18 billion euros and were therefore only moderately lower than the previous year, thanks to positive price development and the strong modeling. As expected, earnings were dampened too. The EBIT margin for the first quarter was 1.3%. The segment's operating earnings of 229 million euros were significantly higher year on year. The provision recognized in connection with antitrust allegations had strongly impacted last year's earnings. As expected, the financial result was significantly lower than the previous year at minus 149 million euros. This reflects the negative effect of the BBA earnings contribution. Another factor is the one-time appreciation effect I already mentioned from pooling our mobility services last year, which is, of course, no longer included in this year's figures. The global pandemic also impacted free cash flow in the automotive segment. the total for the first quarter was minus 2.2 billion euros. The lower operating result contributed to this negative effect since the previous year's antitrust provision was a non-cash item that had not been included in the cash flow. Trade payables also decreased from mid-March due to production being suspended at several locations. Once plants are up and running again, This effect should be reversed over the coming months. The first quarter also saw a seasonal increase in inventories, which was amplified by the closure of retail outlets. While the plants are ramping up production, we will focus on systematically reducing our inventory levels as soon as phase channels reopen. The development of free cash flow for the full financial year depends significantly on the earnings side. Despite the decrease in investments and the strict management of working capital, we nonetheless no longer expect to achieve a positive free cash flow in the automotive segment for 2020. Ladies and gentlemen, the financial services segment also felt the adverse effects of the containment measures and resulting closure of dealerships. In the first three months of 2020, the financial services segment concluded just under 450,000 new contracts with retail customers. This represents a slight decrease of 4.2% that can largely be attributed to weaker financing business, especially in China. As expected, higher provisions for regional value and credit risk dampen pre-tax earnings. this item decreased significantly year-on-year to 484 million euros. In the area of dealer and customer financing, we have introduced appropriate measures to mitigate the crisis on a case-by-case basis, including moratoriums and temporarily increasing loans to dealers. The pandemic's impact on used car markets in the premium segment cannot be reliably predicted so far. In anticipation of losses in market values, we already made market-specific adjustments to provisions for the portfolio that is subject to residual value risks in the first three months. We made comprehensive provisions for our main business risks on an ongoing basis. Due to the current volatile development in connection with the coronavirus pandemic, Further negative effects on the risk situation in the financial services segment may arise in the subsequent quarters. Based on current assessments, we continue to be appropriately hedged against residual value and credit system. The motorcycle segment was also affected by the coronavirus and its consequences. Since Europe is traditionally the strongest market for this segment, we expect to see more significant headwinds in the second quarter. A total of nearly 35,000 motorcycles were delivered to customers between January and March, down almost 10% from the previous year. The operating result decreased as a result to 72 million euros. EBIT margin of 12.9% remains at a high level. Ladies and gentlemen, Let's now turn to our title. The uncertainty surrounding the global spread and resulting consequences of the coronavirus makes it difficult to provide an accurate forecast of the BMW Group's business performance for the financial year 2020. The continuing restrictions on business operations, as well as the extension of the lockdown measures, particularly in Europe and the U.S., have further depressed the mid-term economic outlook for 2020. A rapid recovery of automotive markets seems unlikely. In our guidance, we assume that the economic environment will begin to stabilize in the third quarter of the year. Possible effects of a second wave of infection and corresponding containment measures are not taken into consideration in this assessment. Likewise, a possible even more severe slowdown of the Chinese economy as a result of the developments in Europe and the US are not included. Market distortions due to an increased competitive environment also present a risk for our guidance. Currently, we expect that the effects of the crisis will impact significantly longer than we assumed in mid-March. That is why we plan in-scenarios and ranges for our guidance and are continually reviewing our outlook. The assumption is that global sales will continue to be significantly lower than last year. Due to the extreme volatile situation we have expanded the range of our EBIT margin in the automotive segment. For the full financial year we now expect an EBIT margin of between 0 and 3%. Deliveries in the motorcycle segment are forecast to decrease significantly during the forecast period. The EBIT margin will be between 3% and 5%. On the financial services side, we now expect the return on equity to be moderately lower, mainly due to a decline in the volume of new business and increased refinancing costs, as well as a more volatile risk environment. As before, food profit before tax for 2020 is expected to be significantly below the previous year. These targets are to be achieved with a workforce size no longer at a similar level to the previous year, but slightly under the previous year's level. Ladies and gentlemen, we expect that the current crisis will impact the automotive industry for the foreseeable future, well beyond 2020. Despite the current crisis, however, the BMW Group is still on a solid financial footing. Our stable credit rating and good access to capital markets mean that our liquidity is secured. At the same time, we are quickly and systematically implementing efficiency and cost reduction measures. We will continue to carefully monitor the situation and are prepared to react on. quickly and flexibly to further development.

Thank you. Thank you very much, Nikola. Ladies and gentlemen, the line will shortly be open for questions. Please wait for some technical advice.

We will now begin our question and answer session. If you have a question for our speakers, please dial 01 on your telephone keypad now to enter the queue. Once your name has been announced, you can ask the questions. If you find your question is answered before it is your turn to speak, you can dial 02 to cancel your question. If you're using speaker equipment today, please lift the handset before making your selection. One moment, please, for the first question. And the first question is from Tim Rokosa, Deutsche Bank. The line is now open.

Thank you very much. Good afternoon, Oliver, Nicola, and Max. Oliver, my first question is to you, I think. You spoke to Merkel yesterday. You are quite vocal about the fact that you would like to have a governmental stimulus program for cars. The public debate about it in Germany is heating up because of Kurzweil, the dividend payment, and so on and so forth. And the industry is not getting the best press about it. Now, I'd be curious to understand why you think it is worth taking on this political debate, considering that you didn't really benefit much from the incentives in 2009. And if you could build your dream incentive structure, how would that look like that you also benefit from it more this time? Secondly, and maybe more for you, Nicola, and that's even more important in my view when we look at the stock price development today, BMW is widely liked for its superior liquidity management. Now, in key one, we have seen that ex-China dividend, you burned almost $3 billion. That is a good amount more than the two other German OEMs. specifically adjusted for the size of the companies. Now, it seems to be largely coming from working capital. I would understand the inventory buildup if you told me that you would recover from this very fast. But judging from your comments, that doesn't seem to be the case. So can you explain me this massive working capital and specifically the inventory buildup? Have you reacted too late to this downturn? Have you underestimated the slowdown in a lot of the markets? Or is there something else behind it? And also, can you help me understand the free cash flow guidance for the full year? Because if this working capital is bouncing back, you are indeed cutting capex, why wouldn't automotive free cash flow be positive?

Thank you. Thank you very much, Tim. We start with Oliver and then Nikola. Oliver, please.

Yes, hello, Tim. It's good to speak to you. Thank you very much for your question. We had, I think, a very good and fair discussion yesterday and also in the days before where we where we approached several political leaders in Germany. What we tried to explain yesterday, and I think we were quite successful, is that we say a government stimulus is not directed towards putting into a salvation scheme of the automotive manufacturers. That is not the point. It's a stimulus which is directly geared towards customers. Why is that important? The automotive industry is, unlike any other industry, a system integration industry. That means it's only 20% of its value added is actually inside our companies. The rest is outside of our companies. And when you drive up the automotive industry, you will have a big economical impact on the whole nation. And I think we convinced that we explained that yesterday and also got a got a lot of support, for example, from Peter Altmaier and so on. On the other hand, we understand that it's very difficult publicly to support only one industry, because that is, I think, a difference to 2829, that almost every part of society is affected. And it's very difficult to explain to the public why do you specifically only support one industry. So the agreement yesterday was, yes, we hear you, and we also support, in effect, a combination of an innovative stimulus and a market stimulus at the same time, but we must wait for early June when we do a bigger package of economical support for the whole society. So I'm still very hopeful that in about four to five weeks' time, and we said we're going to meet again early June, that we will be part in a bigger economic stimulus. But I would like to repeat again, it was a very fair discussion, and they fully accepted our point. And I'm convinced that a customer market stimulus will be a very helpful economical and societal impact for Germany.

Thank you very much, Oliver. The second part was about stock price development today. This will be answered by Nicola.

Tim, thanks a lot for your question. You've raised two topics. Did we react too late in mid-March? Definitely not. Definitely not. Why? Because if you remember, during the weekend mid-March, More or less all markets in Europe were implementing shutdown measures and just four days later we had more or less all plants in Europe and South Africa shut down. We've tried to keep Spartanburg as long as possible running. Why? In particular, from the recovering Asian market, there is a strong demand for X model. So why did inventory build up? Well, because we had a very, very good level of incoming orders in the first couple of weeks. So we were really running full steam on top. If you look at the value of our products, we had... very positive mix effect X7 for the first time with a full year effect so in Q1 2019 no X7 8 series full available so this definitely didn't help however of course clear focus is on reducing inventory level in order to reduce our working capital and we are very optimistic that over the course of the following months we will see the trend reversing. So, of course, this will have on one hand side a positive impact on free cash flow. This is your second question. However, due to the reasons Oliver and myself refer to, we see a slower than expected ramp up and reopening in particular in in Europe and US and this unfortunately will impact in a negative way earnings in particular in the second quarter and of course this is negative for the free cash flow.

Can I just follow up to that please? Is the full year guidance including the possible cash out for the cartel fine or is that excluding that number?

It's excluding. Excluding.

Good. Okay. Thank you very much. Thank you very much, Tim. Next question, please.

The next question is from Tom Narayan, RBC. Your line is now open.

Hi, yes. Tom Narayan, RBC. Thanks for taking the question. My first question is on the 2020 revised outlook. And firstly, I thank you for providing this. You're the only European automaker to provide this. Everyone else is just giving rather nebulous commentary. That's not very helpful. But I'm just trying to understand the difference between The March 18th guidance versus the one today. In the prepared commentary today, you said you're now assuming an improvement in Q3. Just curious what you were assuming, you know, before on the March 18th guidance and maybe what's behind the demand coming back in Q3. Is it, you know, because you're seeing online activity pick up, maybe dealership activity in Germany that they're open, just something on that. And then, you know, other OEMs have said that the working capital use of cash in Q1 has in large part come from paying suppliers for components that were not used yet. You saw a big outperformance in the suppliers in Q1. Just curious if that happened to you as well, if that would obviously suggest that in a recovering demand scenario, there would be a sizable, you know, positive reversal in working capital that would benefit you. Thanks.

Thank you very much. Tom, Nicola, please.

So, Tom, your first question, what is different if we look at the actual situation compared to mid-March? I think what's different is in particular the outlook for the U.S. and Europe. In China, if you remember our press and investors conference mid-March, We forecasted exactly what happened for China, stronger March, and I can tell you in April we are really on a very good level in China and in some other Asian markets, including Korea. However, we've seen that in particular in the U.S., in Germany, South Europe, and U.K., the impact will last longer than in China. And if you think that in particular markets like Italy just reopening now after eight weeks of shutdown, Spain still uncertain, France question mark. And this makes it very, very complicated to forecast what is exactly happening once dealerships are closed. reopening and this is why we believe on one hand the period lasted longer and second it's even more difficult to forecast and this is why we use a wider range in our guidance. Your second point, you're absolutely right. The fact that went down, had a negative impact in Q1, approximately 650 million in working capital. And this will, of course, reverse when we ramp up production again, step by step.

Thank you.

Thank you very much. Thank you very much. Next question, please.

The next question is from Ashley Ramanathan, Redburn. Your line is now open.

Good afternoon, team, and thanks very much for taking my questions. It's Ashley here from Redburn. I have two very quick questions for Dr. Peters and one even quicker one for Mr. Zipser. So, Dr. Peters, first quarter, the decremental margin, so you know your your loss in EBIT relative to your loss in revenue were close to 60% if we exclude some of the provisioning for residual values. That's pretty steep compared to some of your peers. Can you give us a ballpark for how you're thinking about decremental margins in 2Q? Or maybe to ask the question directly, do you think that a $1 billion EBIT loss in the automotive division in 2Q is a reasonable estimate with what you see today? So that's the first question. The second question is just a clarification on the cash flow. I think you said previously that you'd expect BMW to have a positive free cash flow at a 2% auto margin. What I'm trying to understand here is with the new guidance of potentially a negative free cash flow, what is the level of caution included here? I think back to last year when we were coming out of the Frankfurt Auto Show, we had guidance given down or talked down to the market for a close to $2 billion free cash flow, and then you ended up printing $2.6. So I'm just trying to understand the caution included in your free cash flow guidance. And then very quickly for Mr. Zipster, can you confirm if any of your vehicles which are being released or launched in 2021 will have over-the-air functionality and whether that has been affected by the corona pandemic? Thank you very much.

Thank you very much. Ashley, we start with Oliver and then Nikola.

Oliver, please. Yes, Ashley, thank you very much for your questions. In effect, we have over-the-air functionality already since 2019, and that is expanded in terms of functionality. We will increase that also this year in 2020. And in 2021, we will have over-the-air functionality in a more accelerated manner, and yes, I can confirm that.

Thank you very much, Oliver. Nikola?

So, Ashley, your first question is regarding EBIT margin, what happened between Q1 2019 and Q1 2020. Well, if you look at the bridge between those two quarters, volume mix and pricing is more or less flat. On one hand side, we've lost in volume. On the other hand side, we've gained in quality of our business, pricing, good mix. I've already referred to the very successful X7 and X8 series. What happened is, on one hand side, we had effects from FX and commodities. But even more important, we have, in particular in Europe, a very high share of demand in plug-in hybrids and electric-powered cars. And this has two sides of a coin. On one hand side, this is extremely expensive. encouraging from our perspective because this makes us definitely confident that we are achieving the CO2 targets set in Europe for 2020. On the other hand side, as you know, this is not for free. This is not for free and this is why product costs went up in particular in the European environment, just to give you an idea. Approximately 15% of our sales in Europe are in the meantime XEDs.

Good. Thank you very much. Ashley, next question, please.

Sorry, it's definitely too early to exactly guide on Q2. I've mentioned in the press conference this morning Q2 will be negative. Why? Because in particular, in Europe and in the U.S. We have still a shutdown situation in many, many markets. However, as I said, it's too early now. We see one market, one country after the other, in particular in Europe, reopening. So let's see what is happening exactly. But it will be negative.

Good. Okay. Thank you very much, Ashley. Next question, please.

The next question is from Horst Schneider, Bank of America. Your line is now open.

Yeah, good afternoon, and thank you also for taking my questions, Horst, from Bank of America. The first question to Dr. Peter, this dynamic that we have seen in Q1 in reconciliation, Is that something we will see even to a larger extreme in Q2 and then slowly fading out in Q3, Q4? Just some help will be appreciated, but we can expect from this very difficult to focus line for the rest of the year. And then the other question that I had was on other cost changes. It seems that if there was a fairly large burden in Q1 coming from CO2 content costs. If I'm right, I calculate something like 300 million euros. Is that now a number we should expect also in the next few quarters until the end of the year? And then lastly, coming back on those graphic schemes, a question for Mr. Zipser. Isn't it the case that if this scheme would be granted that this just reduces the recovery potential in 2021? So I have got still problems to understand what is really the long-term benefit of this package scheme.

Thank you. Okay. Thank you very much, Rolf. We start with Oliver and then Nicola.

Yes, thank you very much for that question. We never wanted a scrappage scheme. This was not the intention. We wanted a market acceleration scheme and an innovation scheme, unlike the program which was launched in 2009 and 2008. So it's quite a different one because we would like to combine market development and, of course, CO2 and emission-relevant cars. But this is not a scrabble scheme. A scrabble scheme is geared towards cars which are more than 10 years old. In Germany and Europe, you will not find very many 10-year-old BMWs. So the effect on employment would be very low. So that is a big difference, I think. But I still think for the customers, especially in these very, very strange times, we need an impetus that people come back to the dealerships. And an impetus could be something which we already have, geared towards buying more electric cars. We have an environmental bonus in Germany already with a height of 6,000 euros divided between government and the manufacturers. So we already have that. So it is clearly geared toward all segments, not only toward scrapping old cars, but buying the most efficient new cars at the same time. And I think it's still worthwhile to give something to the customers. This is, again, not a salvation program for automotive companies. It's purely geared towards customers. And the only beneficiary is the customer, not the company.

But it puts forward demand, right?

Pardon me?

In the end, it puts forward demand. I mean, however you call it.

Yes, of course. But the beneficiaries of demand is workplaces, tax payments, running of factories. So the effect of society is the target. It's not only geared towards making car companies more profitable. And again, the beneficiary is foremost of all the customer. Because the most... the most strenuous situation we have is that our plants are not running. And you cannot close plants completely. You have depreciation and so on. So the main thing is we have to regain the whole society, and because the automotive industry is an integration industry, it will affect more or less all parts of society. That is the main course of our argument.

Okay, thank you.

Regarding consolidations, you are absolutely right. You will see a significant full year increase, so quarter by quarter. In the other cost changes, we expect for the full year a slightly positive effect in the other cost changes. However, this includes a negative effect in the I would say a mid-three-digit million area, in particular coming from regulatory requirements and here in particular from our XEV offensive. As I'm repeating myself, we are really well on track to achieve the CO2 targets set for 2022.

But other cost changes, positive this year. I got that right, yeah?

Yeah, yeah.

Other cost changes likely positive for the week.

Okay. Thank you.

Good. Thank you very much, Horst. Next question, please. I think we have time for two more questions. Yes. Next question, please.

The next question we received is from Harald Hendricks from Monk Stanley. Your line is now open.

Yeah. Thank you so much, guys. Thanks for taking the questions. I wanted to ask about the operational leverage, but I think you've answered that enough. Can you just talk a little bit more in detail for me? GM has just highlighted that they think that residual values will continue to impact on their financial services results for the rest of the year. Some of the numbers that we've heard, particularly about U.S. residuals, have been pretty shocking for April. Can you just talk a little bit more about what you've done in the first quarter in terms of both loan loss and residual provisions? And obviously, if you can give us any numbers, that would be helpful. and then maybe put that in the context of what else you expect for the rest of the year and how you would expect residuals to develop from here. It sounds like there's quite a lot of used inventory in the system at this stage.

Okay, thank you very much. Harald, Nikola, please.

Harald, of course, this is one of the key KPIs we are following, in particular in our three major leading markets, being U.S., UK and Germany. From our perspective, it's a little bit too early to exactly quantify what will happen in the used car market after the full reopening in those three markets. However, what we did in Q1, in order to cover the development we can foresee We've booked a low three-digit million-euro account for credit and residual value risks in Q1, and we expect some more bookings in this area for the following quarter. But it's really too early to give a precise estimate. estimate what will happen in US, UK and Germany. As you know, we have a very sophisticated way to measure our credit and residual value risk and as I said, from today's perspective, I think we are well covered for those with the measures we took in Q1.

Okay, thank you very much. Thank you very much. Next question, please.

The next question is from George . The line is now open.

Thank you. I just wanted to ask you a few questions on China, if I may. Firstly, to what extent do you think the recovery in Chinese demand and dealership flow is temporary and catch up, and to what extent do you think it will be sustainable through the second half of the year? And secondly, you've mentioned the build-up in inventory and how it was the right thing to do because you had significant demand from Asian customers. Can you just clarify what percentage of the inventory build-up that you had, particularly with respect to the X series, is homologated for the Chinese market and is intended to go to the Chinese market over the course of the coming months? Thank you.

Thank you very much, George. We start with, yes, with Oliver. Yes, Oliver, please.

George, thank you very much for your question. I think what we did in our program planning, we switched from your purely order intake look and short-term market look, which worked very fine during normal instances. We went over to a scenario-based program planning. That is the biggest switch, maybe, and that's currently adapted. But our scenarios for China show that April, May, June is a stable environment in China. But at the same time, China is, of course, one of the biggest exporters, and depending on export markets or the global market overall. And as you know, there are recession elements in more or less any society currently. So what we can expect is that there will be some effect also in China. I would not think that the effect is as strong as in other markets because local Chinese demand remains to be fairly robust, also by big government incentive schemes, lowering interest rates, easier terms and conditions for applying for loans, and so on. So the market in China is fairly stable. But we could not exclude that there would be some form of effect also on recessive elements. On the inventory management, almost any plant currently produces cars for China. I think the biggest impact we have in our Spartanburg plant, building a big portion of our plants for Asia and China, and that is why Spartanburg has started as the first of our plants and has started already – three days ago. And as I said in my speech, we will start the plant according to market demand. So the vehicle plants which produce largely for Chinese market will be started first. But we currently do not see any effect that we cannot supply the Asian markets. And that is why we we precisely plan our supply chain according to that demand.

Nicola? George, in percentage, I can't give you... I could, but I'm not going to give you the exact percentage. However, what I'm giving you is an indication. If we look as of 31st of March, where... In which markets did we have inventory? Number one, U.S. Number two, U.K. Number three, China. And I'm going to explain you why. If you look in particular in the U.S. and the U.K., March is an extremely strong month, extremely strong month. And in those two markets, we were really hit in the last 10 days of the month by the shutdown. So... we had, because the running rate was really on a good level in both markets, we had enough supply in the market and then in UK full stop and in the US plus minus 70% of the dealers closing and this is why we had most of our inventory in those two markets. China luckily was ramping up already in in in March. As you remember, we've said usually we sell plus minus 60,000 cars per month. In March, we already did 45,000 and we are even better in April.

Thank you very much, Nikola. So, last and final question.

The next question is from Helen Cosman, HSBC. Your line is now open.

Yes, good afternoon. Thank you. Just if I may, maybe on the cash flow again, like some of the others, I'm also trying to square up the negative for cash flow guidance. So if you could maybe confirm that as far as working capital is concerned, you're budgeting roughly a billion of working capital outflow for the full year. And as one of the other moving parts on the China dividend, I assume this still stands at roughly positive one billion for the full year. Is that roughly fair?

I'm not going to give details on this level. However, what I can confirm, yes, we are planning a dividend payment. Its exact amount is not finalized. This is a joint venture, so we have to discuss this with our joint venture partner, but there will be a dividend in June. in the course of 2020. And, of course, the negative pre-cash flow guidance has in particular to do with the development in terms of EBIT margin. We in particular forecast for the second quarter of the year in many very important markets.

Thank you very much, Henning, for your last and final question. Ladies and gentlemen, thank you for joining us today. Please stay healthy. All the best from Munich. Bye-bye.

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.