Bayerische Motorenwrk Ord

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

Good afternoon, also from my side, ladies and gentlemen. The BMW Group is a global company. We leverage this strategic strength both during the financial year 2020 and, of course, in the first quarter of 2021. When the market situation is difficult in individual regions of the world, the other markets carry us through. Since the start of the pandemic, we have done everything possible to create a safe working environment for our employees. And we also offer safe and contact-free delivery of vehicles to customers. In more than 60 markets, we have set up mobile sales offices. And our new customer brands and sales system is taking advantage of the momentum and growing acceptance of digital services that has been building over the past year. Our very strong results underline the viability of our business model, even during one of the worst crises the global economy has faced. It is robust, in demand all over the world and full of innovations. In many areas, we have picked up the pace once again. I would like to give you a brief overview focusing on three main points. First, we are on course for growth and we are growing profitably. Second, we are growing sustainably and have a clear roadmap into the future. Third, we are shaping the technology for tomorrow's mobility. Let's now start with the first point. The BMW Group delivered excellent results in the first quarter of 2021. Markets worldwide are recovering, our diverse product portfolio is reaching large groups of customers, and our ongoing efficiency measures are paying off. This shows clearly our strategy is having a real impact. The automotive segment delivered an EBIT margin of 9.8% in the first quarter. back within our strategic medium target range for the first time in 10 quarters. As in the past, the EBIT margin does not include the ad equity result from our BBH on venture in China. Another indicator of our operating strength is our free cash flow of 2.5 billion euros in the automotive segment, our best figure ever for a first quarter. Our first quarter deliveries also reached a new all-time high compared with the first quarter of 2019. In other words, the comparable period before the crisis, group sales increased by 6%. Our total market share worldwide has climbed up to 3.3% from 2.9% in the same period 2019. Our performance in the Chinese market stands out in particular. Compared to the first quarter of 2019, again pre-crisis, our China sales increased by more than 36%. We recently presented our model lineup for our largest market at the Auto Show in Shanghai 2021. With highly innovative digitalized electric and above all exceptionally high quality products like the BMW iX3, the BMW iX and the BMW i4, we intend to to sustain our growth in China. Our electrified models are also in high demand globally. In the first quarter, we were the biggest manufacturer of plug-in hybrids worldwide. With more than 70,000 electrified vehicles sold in the first three months of 2021, we are on track to have a total of 1 million fully electric vehicles and plug-in hybrids on the roads by the end of the year. This also illustrates the success of our flexible architecture strategy. The BMW iX3 is receiving constantly outstanding ratings from the automotive press. Not only because of its many impressive characteristics, such as its quality, comfort, connectivity, operating ease and dynamic performance, no, but also its range. Its efficient drive train puts it on par with electric models with the highest ranges among all brands within its segment. Just yesterday, I met with journalists testing pre-production models of the BMW i4. This car will put e-mobility right at the heart of the BMW brand. And therefore, I'm extremely confident we will be able to build on our e-mobility successes with the BMW i4 and BMW iX. Growth remains our industry's strongest currency. Before the end of the decade, we want to reach the milestone of 3 million delivered vehicles annually. As far as the BMW Group is concerned, we are also growing profitably and sustainably, and we will make sure this continues. That brings me to my second point. we are growing sustainably. Sustainably, sustainability is the new language that connects the world. The three major world markets, Europe, the US and China, as well as other industry nations, have set themselves ambitious goals on the road to climate neutrality. They have recently confirmed and even stepped up these targets. The next big binding step will be the year 2030. Also for the BMW Group and Remind yourself, this is only eight and a half years away. We have geared our company entirely towards sustainability. By 2030, we aim to reduce our actual carbon footprint per vehicle by at least a third from 2019 levels in a verifiable and transparent manner everywhere around the world. During our annual conference, we published an integrated BMW Group report for the first time, which documents our progress and, most importantly, gives equal weighting to our sustainable development and financial indicators. A company does not become sustainable simply by flipping a switch or buying certificates. What counts is not alleged sustainability, but verifiable measures that deliver a real impact. That is why we joined the Science-Based Targets Initiative. We think about sustainability in a way that goes far beyond emissions. Energy and resource consumption will be the next much, much bigger issue. Raw materials are becoming more expensive. Water and many mineral resources are scarce and valuable commodities. And we are seeing that especially right now. This is why it is so important to think in terms of a circular model and reduce our use of materials from the outset. To achieve this, we are relying on partnerships and collaboration across our industry with NGOs as well as political institutions. This requires hard work, investment, and an ongoing commitment. We firmly believe we will add value for society in this way and also become a stronger company in the long term at the same time. Let me give you now a few examples from the last few months alone. We significantly over-fulfilled our CO2 fleet targets in Europe last year, and we are strategically on course to meet the goals for 2021 and far beyond. Both further development of our conventional drivetrains and our electromobility offensives will play a big part in this. Second example, with support from the Strategic EU Programme's IPCE, which stands for Important Projects of Common European Interest, We are involved in another project that is advancing battery technology. We're conducting research into a new generation of sustainable batteries optimized for use in a circular model for vehicle use, then for stationary energy storage, and finally for efficient dismantling and reuse of materials. Our suppliers rely on 100% green power to produce battery cells. And at the same time, we are increasing our use of secondary material. To give you a concrete example, in the BMW iX, we are reducing carbon emissions in the supply chain by 17% compared to the same vehicle produced without these measures. Another example, we have signed multi-year supply contracts with sustainable lithium from South America with the American company Livent. Livent uses a special method that minimizes the impact of lithium extraction on the surrounding ecosystem. And also, with immediate effect, we will be sourcing half the aluminum needed by our light metal foundry in Landshut from Everest Global Aluminum. The aluminum is produced using electricity from one of the world's largest solar parks. Another example is our investment in Boston Metal. We are also promoting green innovations in steel production. Boston Metal is working on the industrialization of electrolysis processes in production of liquid iron. We aim to reduce our CO2 emissions from steel by about 2 million tons by 2030. And additionally, we have launched an initiative to protect the deep seas with the WWF, Google, Samsung STI, and the Volvo crew. We will not source minerals from deep-sea mining until there has been a full scientific investigation into the impact. All these examples show that sustainability cannot be taken for granted. It takes a lot of different measures to achieve a large-scale effect as well as a conscious openness towards choosing the most effective technology in each case. Our ambition is clear. The greenest electric car will be a BMW. However, we also know that we always have to, and we will, combine sustainability with technology innovation and very inspiring products for all customers. That is our BMW way. And we will continue full speed ahead. That brings me to my third and final point. We are shaping the technology for tomorrow's mobility. we are once again upping the pace of our electromobility offensive and plan to deliver more than 100,000 fully electric vehicles to customers this year. By 2023, we will have at least one fully electric model on the roads in all key segments, from the compact segments to the ultra luxury class. By 2030, at least half of our global sales will come from fully electric vehicles, In Europe, maybe a little bit more. We are electrifying all our brands to achieve this. MINI will release its final model with a combustion engine variant in 2025. At Rolls-Royce, electric driving will soon define a new form of luxury. And at BMW, we are ready for a strong market ramp-up for the i4, the iX, the 7 Series, the X1, the 5 Series and other models. We will also be introducing our new and self-developed BMW Operator System 8 with the BMW iX, a new generation of performance, user experience, and intelligent driver systems. And in combination with high-performance hardware, we're capable of processing more data live than ever before. The data transfer is 10 to 20 times faster than in previous systems. We've also enhanced our award-winning and safe display and operating concept. BMW's Operating System 8 is designed for 5G connectivity with complete functionality for applications like our powerful cloud-based navigation system, BMW Maps. Third-party services can be fully integrated into the operating system. This applies, for instance, to services from Apple, Google, Tencent, or Spotify, which can transform the vehicle into the perfect digital companion. And we already introduced over-the-air updates for our vehicles with the BMW Operating System 7 in 2018 already. More than 1 million vehicles have already received over-the-air upgrades. This was a huge success that we will continue to build on. In many cases, our vehicles can be configured with functions on demand at a later date. By the end of this year, we will have the largest connected fleet in the world with around 2.5 million vehicles with remote software upgrade capabilities. And we are already planning the next big step. At the annual conference, we unveiled the broad strokes of our vehicle strategy from the middle of this decade. The Neue Klasse, electric, digital, and circular. It will be key to the future success of the BMW Group. We're putting all our know-how and our considerable investment into this development. The Neue Klasse will establish a new generation of technology modules, targeting maximum synergies and scalability for our entire vehicle portfolios. We will be introducing a new digital architecture and a new generation of electrical systems. We will also be taking the next leap with our electric powertrain and leveraging the opportunities of the new architecture to redesign our batteries. At our battery cell competence center, we are currently testing different cell chemistries, formats, and modules. We aim to realize an automotive compatible solid-state battery in collaboration with the battery specialist Solid Power by the end of the decade. We will present an initial demonstrative vehicle with these batteries well before 2025. Ladies and gentlemen, the BMW Group is on course for success. We are growing and reaching more customers than ever. We are focused on our goal of reaching 3 million units sold in a single financial year within this decade. And in recent years, we have been working hard to get back on a profitable track. Today, we are seeing the benefits of this strategy. We are setting the standard with our sustainable global business model. We will eliminate mobility as a climate factor in the long term. by implementing impactful and transparent measures in the BMW side. And we are paving the way for the next leaps in technology that will inspire our customers even 10 years from now. Thank you very much for your attention.

Thank you very much. Oliver, Nikola, please go ahead.

Thanks, Max. Ladies and gentlemen, good afternoon. The BMW Group made a good start to the financial year 2021. Our operating result in the first quarter was at a very high level and we exceeded market expectations. We achieved all of this despite growing headwinds from rising raw material prices and in a market environment that remains volatile due to the coronavirus pandemic. we were also able to maintain the supply of semiconductors in the first quarter. As a result, there were no interruptions in production during the reporting period. However, the situation remains difficult. Significantly improved pricing was a key driver for our strong group earnings. Additionally, the positive trend of the second half year in 2020 continued during the first quarter in all major regions of the world with over 636,000 vehicles delivered. In particular, our electrified vehicle fleet once again proved to be an engine for growth. Our sales of electrified vehicles more than doubled from the same period of last year to over 70,000 units. This means more than one in ten vehicles we sell is already electrified. This underlines the high and steadily growing importance of electromobility to our company. We took advantage of the past year to make ourselves more efficient and more profitable for the long term. In addition to the better pricing I mentioned before, this includes strict management of fixed costs, focus on controlling our inventory levels and cost-efficient personal structures. The company-wide performance program continues to deliver important contributions to sustainable earnings growth. Ladies and gentlemen, all these factors are having a positive impact on our financial figures. Let's now take a closer look at our financial performance. Group revenues for the first quarter of 2021 totaled around 26.8 billion euros. Group earnings before tax reached 3.76 billion euros and were therefore significantly higher than the previous year. DBT margin stood at 14%. The development in pre-owned car markets also contributed to the margin increase to higher prices for the sale of end-of-lease vehicles. Manufacturing costs rose compared to the previous year, mainly driven by the overall increase in sales volume and the growing share of electrified vehicles. But also rising raw material prices contributed to the increase. These increases, however, were partially offset by lower risk provisioning. These results show that we are on track with our transformation process. Today's profitability will secure our future competitiveness. We continue to make systematic investments in important future areas of activity, such as digitalization and electrification. This year alone, two all-electric vehicles will be released onto the market. The BMW i4 and the BMW iX. Important milestones in our electromobility offensive. Research and development expenditure was almost on a par with last year at around 1.3 billion euros. Our R&D ratio of 4.8% was lower than in 2020 due to the company's high revenues. the ratio of capitalized development costs of 22.6% was also lower year on year. The financial result of 732 million euros for the first quarter climbed more than 1.3 billion euros from the same period of last year. On the one hand, this was mainly due to significantly higher earnings of 503 million euros from BMW Brilliant Automotive, which had been heavily impacted in the previous year by China's lockdown in response to the pandemic. On the other hand, the other financial result improved significantly year on year to reach a total of 334 million euros. This was due in particular to positive valuation effects compared to the previous year. Group liquidity increased to 20.1 billion euros in the first quarter, reflecting the strong operating result and positive free cash flow. Over the coming months, we will bring liquidity back within our target range of 17 to 18 billion euros. Ladies and gentlemen, let's move on to the segments beginning with the automotive segment. The segment's EBIT margin for the first quarter was 9.8% and underlined the company's excellent performance. The key drivers here were the improved pricing, the significant increase in sales, and higher after-sales revenues. Significant growth was posted by all three BMW Group brands, BMW Mini and Rolls-Royce. Rolls-Royce had its best quarter ever, selling a total of 1,380 automobiles. At BMW, in addition to the electrified vehicles, the BMW X models were especially in demand, as well as the BMW 3 Series and BMW 5 Series. The high earnings quality is also reflected in our strong free cash flow of 2.52 billion euros. A key driver, in addition to the significant increase in earnings before tax, was a strict management of our working capital. The segment's net financial asset rose significantly year-on-year to 21.3 billion euros due to the strong free cash flow. Let's turn now to the financial services segment. This segment also got off to a good start this year. with around 489,000 new financing and leasing contracts concluded with retail customers during the reporting period. This represents a solid increase of 8.8% over the previous year. The recovery in new business with retail customers can be attributed to significant growth in financing business. Segment earnings before tax increased significantly to €787 million. The improved result was mostly due to the positive development of the pre-owned vehicle market and the related improvement in the risk situation for the segment. In the prior year quarter, additional risk provisioning for anticipated credit and residual value risks was needed. due to the uncertainty created by the pandemic. Credit losses remain at a low level. The financial services segment makes comprehensive provisions for its main business risks on an ongoing basis. Current assessments confirm that residual value and credit risks are appropriately covered. The motorcycle segment successfully continued its growth strategy in the first quarter. Over the past year, 13 new models were released onto the market. During the reporting period, more than 42,500 motorcycles were delivered to customers. This is significantly more than in the same period of last year. Limit margin in this segment was 17.9%. Ladies and gentlemen, let's take a look at our guidance for the year. We made a strong start to 2021. Despite this, we expect to see increasing volatility and we will continuously reassess the risk situation. The semiconductor supply situation will remain difficult for instance. Additional headwinds are also expected due to the rising raw material prices, particularly for rhodium, palladium and steel. The volatile corona situation continues to affect the BMW Group's business performance. Based on current information, we are able to confirm our guidance for 2021. The following forecast for the main key figures does not take into account possible effects in connection with the European Commission's ongoing antitrust proceedings. We expect to see a significant increase in group pre-tax earnings this year. The automotive segment should post a solid increase in the number of BMW Mini and Rolls-Royce vehicles delivered to customers compared to the previous year. We expect the EBIT margin in the automotive segment to be at the higher end of our target range of 6% to 8%, with a significant increase in ROC for the automotive business. Our share of electrified vehicles in our deliveries will also continue to increase over the course of the year. In the financial services segment, we expect return on equity to be at the higher end of our target range of 12 to 15%. In the motorcycle segment, we anticipate a solid increase in deliveries. Rebid margins should be within our target range of 8 to 10%, and ROSI for the segment should also be significantly higher year on year. Now let's take a look at the non-financial indicators. Thanks to ongoing personnel restructuring measures, it should be possible to achieve the above-mentioned goals with a slightly smaller workforce size than the previous year. The percentage of female managers at the BMW Group will increase slightly as planned. we will significantly reduce CO2 emissions in our new vehicle fleet once again. According to the planning, CO2 emissions per vehicle produced are likely to fall moderately. Ladies and gentlemen, our thinking and actions are always geared towards the long term. We are setting the right course today to achieve our short, medium and long term goals. This applies in particular to our focus areas of digitalization, electrification and sustainability. Our products are in demand and our operating business is performing well. For the remainder of the year, we expect a free cash flow of over 4 billion euros. We have the right strategy to successfully continue our transformation process based on our high profitability. although we expect the second half of the year to be more volatile, we are optimistic about the future. Thank you for your attention.

Thank you very much, Nicola. So let's move to our Q&A session. The line will shortly be open for questions. Please wait for some technical advice.

Ladies and gentlemen, if you would like to ask a question for the speakers, please dial 0101 on your telephone. Keep it now turned to the queue. Once your name has been announced, you can ask a question. If you find your question is answered before you are turned to speak, you can dial zero and two to answer 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 Steven Reitman, Societe Generale Geleitner Open.

Thank you very much. I have two questions. First question is about semiconductors. I can fully understand that BMW has shown in the past that it's very forward-thinking. It's very aware of market conditions, and so probably was one of the first companies to see that the markets were recovering faster than maybe others had anticipated, and so you made sure you had your orders for semiconductors in early, so you were getting a good supply on that. But how do you cope with the sort of acts of God, like, for example, the Texas freeze and the fire at Nessus, which clearly just meant that some of the suppliers just were not physically able to supply? My second question is about China and the INX-3 and globally as well. Looking at the sales of the INX-3, so far in China, it looks like you've got about 8,000 units of the first at wholesale. Could you comment on the ramp-up of that vehicle, what your plans are, And where do you think it might do on a global scale as well? I understand the car is not going to be sold in the United States. But what are the orders like? What indications for Europe, please?

Thank you very much, Stephen. Your question will be answered by our CEO, Oliver, please.

Yes, Stephen, very important question. The semiconductor, as you rightfully note, is only one incident where our supply chains are challenged here. You mentioned the Renaissance fire in Japan. You mentioned the Texas winter incident. And we are completely aware of that. Why do we comparably well manage these things? BMW is a producer of individual vehicles. And it's kind of normal day-to-day business. to have a very precise supply chain management. Otherwise, you could not build each individual vehicle different than the one before. So we kind of trained this specific muscle of supply chain management. And of course, in times of crisis, you can play out the strengths of this trained muscle. On the other hand, to have disruptions in the supply chain is kind of a normality in our industry. Of course, this is now very publicly commentated and so on. And it is a challenge. That's why we, last week, we already idled two plants, Oxford and Netcar in the Netherlands. And in the second quarter, you will see more of this idling, but not in a magnitude where it will endanger our business overall. And our assumption today is in quarter two, we will have here and there some challenges on the production scheduling side, but everything we lose in quarter two, we will be able to compensate in the second half of the year. So the overall effect will not be, at least from today's point of view, very big. But there is disruption, and therefore we are careful, because this is today's view in May, and it's There is still two-thirds of the year ahead of us. So we will have to see. Until now, I think we have managed it very well. The iX3, that was your second question, Stephen. It's ramping up worldwide right into our plans. And in effect, we just increased our production plans. So we are quite happy with the iX3. Specifically, as I mentioned in my short speech, Wherever we go into automotive testing and comparing the vehicles, the iX3 is turning out to be an extremely good vehicle in many aspects. And therefore, market demand is high. But we didn't bring it to the United States because I think a specific car has to fit to specific markets. And I think the demand in China and Europe is so high that we will concentrate on the IX and the I4 in the United States. Thank you.

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

The next question is from Kai Muller, Barclays. Your line is now open.

Thank you very much for taking my question. The first one is really around your guidance. You indicated that you are at the upper end of your range, now the 6% to 8% on the automotive side, but you're still indicating this free cash flow guide above $4 billion. Can you give us a bit of color? Is there more room? to be really above the $4 billion, maybe towards the $5 billion market near the upper end? Or what are really the moving parts when we think about free cash flow, in particular after we've seen the strong $2.5 billion in Q1? And then the second point is, you mentioned China will continue to stay strong. Is the current sales level that we've seen something we should be able to extrapolate forward for the rest of the year and into next year? And could you give us a bit of color as well? I understand, you know, you have a big ramp up in terms of M models as well. How does that fit in with your China strategy and also with your emission targets here in Europe?

Thank you very much, Kai. We start with your China question and Oliver and then Nikola. Oliver, please.

Yeah, Kai, thank you. Thank you for this China question, which of course was expected because China is, of course, is a booming nation. And by the way, the United States are picking up rapidly with that pace as well. We believe that this positive momentum we see in China will stay. This year, of course, but also next year. Not only because of the cyclical development, but our customer base is increasing. The middle class, which normally buys our vehicles, is is becoming stronger and stronger, and we have a really strong brand position in China, and that is propelling our development there. And of course the regulation towards electrical vehicles plays right into our hands, because these cars are here or will soon be here, and therefore we are quite confident about China. But not only China, we are also optimistic about Asia overall, Korea, Japan, Southeast Asia, developing really well. So we are optimistic also about the whole Pacific region there. And regarding the mix, we have their M models. You know, we are a supplier of all segments. We have in the lower segments the Mini. We have in the upper segment Rolls Royce. We have high-performance cars like the M models. And relatively to today's world, all of them are becoming better and better every day in terms of their emission levels. And it's part of our business model, and we are proving by the day and day. And also our models, they are here to stay.

Nicola?

Kai, thank you. First of all, you're absolutely right. Our Q1 free cash flow was very strong with 2.5 billion euros. Now, if we look at the positive and the negative elements we expect in the coming months on the positive side, side clearly the development of our business ex-BBA of course we will have a China dividend in Q2 or in Q3 in our free cash flow and we will continue to manage in a very very focused manner our working capital so those are the positives on the other hand side we Definitely we'll see some outflow from provisions, some more outflow on the investment side. And taxes are normalizing, so we will have more tax payments due to the development of our result, in particular in the second half of the year. Having said this, I'm very confident that we will be above 4 billion euros.

Thank you very much. Very clear. Thank you. Very clear, yes. And this from our CFO. Good. Thank you very much, Kai. Next question, please.

The next question is from Patrick Hummel, UBS. Your line is now open.

Thank you very much, Patrick, from UBS here. Two questions. The first one, really a big picture one, and I'm not even sure if it's a CEO or CFO question, are you focusing on growth or cash return? What I mean with that is if I look around in the global OEM landscape, there are now companies that are really saying, okay, this is the time to invest. We want to win in the mobility business models of the future, software, autonomous, et cetera, and they're cutting the dividends and stopping share buyback programs, et cetera. On the other hand, you have players that are very much focused on generating cash flow. And it feels to me BMW is a little bit in the middle there. You're talking about profitable growth. You have accumulated $21 billion of net interest-bearing assets, and your dividend policy is, in light of the cash flow you're generating, certainly not the maximum of what you could do. So I'm just wondering, where do you sit? Do you sit in the growth camp or in the cash return camp? And my second question comes back to the guidance as far as the margin is concerned. I hear you loud and clear. You're guiding to the upper end of that EBIT margin target range. But you're warning about commodity headwinds in the second half. I'm just wondering, you know, your pricing power is so strong right now, industry-wide and BMW specifically. Why should these commodities actually be a headwind at all? Can't you just pass that on to the consumers specifically? And as a consequence, with H2 demand looking very strong as well and volumes maybe even better because the chip shortage industry-wide should be easing, why wouldn't H2 margins be even better?

Good. Thank you very much, Patrick. We start with our CEO, Oliver.

Yes. Patrick, there's a very simple answer. We are in both camps. We're in the growth camp and the cash return camp. Why is that? The year 2021 forthcoming are not a surprise for us. We always knew there will be a lot of technologies available in our product portfolio to grow this growth profitably. And as Nicolas said before, we don't grow without being profitable. These times are completely over. But when you look at the world currently, we serve in more than 150 markets, and in every country, the technology with which you grow profitably is a different one. Let me give you a brief example. Germany, in the first three months of the year, we had 40% on the petrol side, 35%, one-third on the diesel side, and with a big growing proportion, 25% on the electromobility side. So very, almost one-third, one-third on the technology side. In contrast, we go to Russia. 33% petrol, 37% diesel, and 0% electric. A completely different landscape. And of course, in time, that will change as well. And we invested in the last five years to have this technological flexibility to serve all markets. And maybe in two or three years, there will be markets which we will supply with 100% electromobility. And we are prepared for that. We are not betting the farm on one technology because the markets are very different. And this is now paying off that we invested huge sums, which is already behind us in flexibility. to follow the markets. And that is why the $3 million is not a target. This is our plan. And by looking at markets, looking on market intelligence, how do our customers develop, where is wealth coming from, and that is a very robust statement and not a target which is not able to be achieved. But to answer your question, we continue to invest heavily in technologies, at the same time growing profitably, and at the end of this day, investing and growing profitably, they belong together. It's part of the same equation. And starting from this year on, as you see, this equation works for us really well.

Coming to your second question, guidance of EBIT in the automotive segment. On one hand side, you are absolutely right. Our pricing power is excellent and is excellent in what is extremely important for us, not just in one market or in one region. We've seen a significant improvement in of course in Asia, In the U.S., very much supported by the development of the used car market and the U.S. leasing market. And during the fourth quarter 2020, and in particular in the fourth quarter 21, an improvement in Europe as well. On the other hand side, If you look at commodities, I don't think we have a disagreement that commodity prices are a headwind for our industry. And I've made earlier today the comment that if we look at our risk scenario, it would indicate that we have – a mid to high three-digit million euro risk on the commodity side, while we have a positive impact on the currency side. So all together, both together, sum up to a risk of negative deviation of 0.5%. billion euros. Are we motivated to further improve our pricing power? Of course. Of course we are and one of the most important projects we are running in our performance program is to use digital tools in an even better way to balance. This is maybe an additional comment to what Oliver just said to balance in the perfect way supply and demand. Because at the end of the day, it's about managing supply and demand. We have probably the most flexible production system in our industry, and with the quality of data we have now available on VIN number level in every market, I'm confident that we will continue to further improve the quality of our business.

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

The next question is from Jose Asimendi, JP Morgan. Your line is now open.

Thank you very much, Max. It's Jose from JP Morgan. A couple of questions, please. The first one for Oliver. Can you talk a little bit about the work you're doing on battery capacity in three maybe topics? The first one, you know, how do you think about, you know, in sourcing all these battery cell manufacturing capabilities in the coming years? Second, if you could just give us also some insights into the work you're doing to develop cells or products for cells. And the third topic, I mean, you're making, I think, a very bold statement to be able to bring some, you know, proven technology in the coming years, so I would be very interested to hear, you know, what kind of work you're doing there. It does seem to me that you could be ahead of other European competitors on the battery front, so any, you know, remarks you could give us there, that would be great. a little bit more, if you could comment a little bit more around the earnings momentum on your Chinese venture for the coming quarters. It does sound like the momentum will continue to accelerate. Can you just give us maybe a little bit of the tailwinds and headwinds you see on the Chinese AVE for the coming quarters? Thank you so much.

Thank you very much, Jose. We start with Oliver about the battery question.

Yeah. Jose, batteries, of course, is a really hot topic. But on the other hand, we are now in the fifth generation of battery technology development, and so it's not completely new to us. We are more or less doing almost everything in-house on the battery side, the full battery pack, the battery modules, the electric drive crane, and so on. The only thing we are purchasing, for good reason, and I'll come to that in a minute, is the battery cell itself, which is only one element of a complete electric drivetrain. Why do we do that? There is a splendid, very competent, rapidly developing market out there. There are no monopoly structures, and a lot of technology development going on. There is no reason, from our point of view whatsoever, do that by yourself. You know, we have four large delivery contracts with CSEL here in Europe and in China with F in China from 2024 and with Northvolt here in Europe and also with Samsung SDI. So we have four big contracts and that will serve us on the capacity side but also on the technology side. So we are extremely happy with that. and we will have enough capacity to propel our growth further. Now, as you rightfully mentioned, on May 4th, we made a statement that we make a strategic investment in Solid Power together with other investors to prepare ourselves for the next step. We're thinking more in decades and not only in today's world. We're working with Solid Power for quite some time, so it's not a new partner for us. And we think that the ASSB, the all-solid-state battery technology, is something promising for the future. Not for next year, but for the future, because the energy density is very promising. And energy density means higher range and so on. So that is on our... on our plate to develop the first. And we are really happy to have, from our point of view, a strong partner there. And I think they think of us as a strategic investor. And we are heavily involved, as we said many times before, into the technology development of battery cells for the future. So we look with high expectation in the future. And as we said before, electromobility is a big part of our strategy.

Thank you very much, Oliver. And now the second part of the question, BBA earnings outlook for coming quarters.

Jose, you've asked about the earnings outlook for the coming quarters, and more specifically, of course, China and BBA. But maybe let me start with a more general comment. We are as we speak, mid of the second quarter. And we are in a strong position in the second quarter. Why? Because we have, and that's not just China, we have a strong order bank in all three major sales regions, China, U.S., and Europe. In fact, we've seen that Month after month, Europe has developed in a positive way, and we believe it will depend very, very much on the development of the pandemic in Europe, how the business will continue to develop in Europe. Now, if we reflect on China, we have seen since April last year, month after month, every single month, an increase an improvement of the business, improvement of the sales, while at the same time keeping the margins very high month after month, and it continued in the first quarter. If I'm more specific about the second quarter, I expect the second quarter to be strong in China in China as well, and we have no indications that it should significantly reverse in the second half of the year. However, what will happen, of course, is you have a different base effect in the second half of the year. In the first half, in particular in the first quarter, we had the shutdown in China in February and early March. We had a very strong second half year in China already in 2020, so the growth potential is a different one compared to Q1 and Q2.

Thank you. Next question, please.

The next question is from Henning Kosman, HSBC. Your line is now open.

Hi. Thank you very much, and good afternoon. I was hoping to speak about your 3 million unit targets. I'm sort of observing that most of your OEM competitors have abandoned their unit targets, some sort of explicitly saying they are not pursuing volume anymore in favor of cash and profits. And, of course, I hear you when you say you want to obviously grow profitably, but I just find it curious that you're almost the last one left who has a specific unit target. So I was hoping you could please comment on that a little bit. And then still on the guidance, I don't want to be too blunt, right? But when I hear you say that you think Q2 will be very strong as well, and I'm sort of reading into that that you're viewing it as similar maybe to Q1 even when I consider the fact that your capitalization ratio will be much higher in the remainder of the year than it was in Q1. I'm really wondering, you know, also sort of considering what Patrick said in your response about the pricing of setting raw materials and so on. It would really leave you with a very, very low implied second half. So if you could just maybe, I don't know if it's possible to quantify some of the specific effects that would really bring you under the ceiling of the guidance range, that'd be great. Thank you very much.

Oliver? You want to start yet?

Yeah, Henning. As I said before, this is not volume versus profit. This is profitable growth. And it's not a target. I think we owe it to our investors to be transparent where we are heading to, technology-wise, market share-wise, but also volume-wise. And this is our plan. Now, this is not a target or a commitment that we have to push If you look at the whole Pacific region, on the west and on the east side, this is rapidly developing. You know, the United States is starting a booming phase. You have all the after-COVID state subsidies in enormous amounts. That will create wealth at the end of the day. And, of course, you see the Asian side developing. And it's not only China. And we are not so far from this 3 million volume target. And I think we owe it to our investors to be transparent. And in the past, maybe there was a target setting. This is not what we do here. We are transparent about our plans.

we will see at the end of this year maybe we are not that plan is not even so far away anymore you know Nicola Henning if we put ourselves in the situation we were exactly 12 months ago when we were discussing the situation in 2020 if I remember well we had a and you were joining our quarters conference, and we had a completely different discussion compared to what happened in the second half of 2020. In the second half of 2020, we had our best sales result of a second half year in the history of our company, and we have seen margins improving significantly. What did we learn out of this? Our today's environment is extremely volatile and therefore we are really focused on managing in the best possible way supply and demand to be able to follow the market in both directions. I think we have proven in Q3, Q4, Q1 that We are performing very well in this regard. You've rightly mentioned the outlook for Q2. And as I said, regarding the second half of the year, it will very much depend on the speed of recovery in Europe. We are confident regarding U.S. and Asia. And it's not just China. Markets like Korea are performing extremely well. And, of course, you have to take into account, and I've mentioned this in my speech, that we have a growing demand for XCVs in our portfolio. And as we both know, and we are really working hard to change this in the next couple of years, but still have a lower margin compared to an ICE engine. On the other hand side, we are really satisfied that our XEV cars, our electrified cars, be it all electric or plug-in hybrid, are in such high demand.

Thank you very much, Nicolas. So, ladies and gentlemen, it's three o'clock, but I think we take two, three more additional questions Yes, next question, please.

The next question is from Daniel Schwarz.

Yes, thank you for taking my question. The question about residual values. So used car prices, obviously, at peak levels, and still you have not reversed the provisions from last year. Could you say what the reason for that is? And can you give an indication what the value is of off-lease vehicles that come back to you every quarter? And a second question is, as you mentioned, your market leader in plug-in hybrids, and of course, it helps a lot to cut emissions. Do you think there's a risk that the EU will change the regulation for these vehicles in June? Thank you.

Oliver, you would like to start with the plug-in hybrids question?

Daniel, we are completely aware that there are a lot of discussions on the hybrid. But looking at the market, it's one of the most fascinating products for customers. And there is one epic truth about plug-in hybrids in terms of emissions. They're always better than a normal combustion engine. Always. You know, because of their recuperation capabilities. The discussion we have, there will be some adaptions, you know, in terms of how is it measured on a test track and what's a real assumption depending on whether you charge the car or not. We see that. But even if that is changed, it will stay a highly attractive customer product independent of the regulation. And so we are quite happy about that progress. And as we said before, we are flexible, you know. We can change drive trains, and if it goes down, it goes down, and currently it's working perfectly for us, really. And if that goes down again, we will do more best. It's not such a big problem.

Thank you, Oliver. Nicola, about the residual values.

Daniel, first of all, you are absolutely right. The fact that... used car markets are very supportive, has a significant impact on our P&L, be it in the automotive segment and, of course, in the financial services segment. If we look now at the impact in Q1, it's between a low and mid three-digit million euro number, the positive impact. And now you can, I guess, relatively easily calculate because in particular relevance is this effect in markets like US, markets like UK and Germany, hardly any impact in China because China is not a leasing company. This is a really significant improvement on a per-vehicle level in those markets. If we reflect what we can see right now, the situation is on this strong level relatively stable in those three markets. and this is why we are motivated with the right strategy regarding supply and demand to keep it on this level.

Thank you very much. Next question, please.

The next question is from Dorothy Kressler. Your line is now open.

Oh, hi there, and thanks for taking my question. It's a slightly longer-term one. There's obviously a lot of new BVs in the pipeline for 2022 and 23. I know you've officially only unveiled four of the eight new launches during those two years, but could you confirm that some of those products will be allocated to the Spartanburg plant, and you say that there will be more pure electric products being localized in China? And then I wondered if you had an order intake number on the new IX that you could share with us. Thank you.

Thank you, Dorothy. Oliver?

Dorothy, hello from Munich. We communicated that there will be, at the end of 2023, we will have 12 electric-only products in all three brands, BMW, Rolls-Royce, and also Mini. So we are only at a starting point where we try to cover all segments. And our strategy is not to have individual cars. We cover all segments. Meaning, if there's a specific marking going quicker to emission-free mobility, we will be able to respond in all segments at the same time. And that's around the corner. So next year, we will have the 7 Series, a high-profile product with all kinds of drivetrains. We will have the The X1, we will have the 5 Series and so on. So we are only at the very starting point there. There will be better cars, of course, like the iX3 is produced in China, you know, and exported from there all over the world. And the pure electric cars in the United States, that will take a little bit more time, but there will be also electric-only cars at a later point in time in Spartanburg.

Okay. Dorothee, may I add to the incoming order level of the iX? To put it very simple, production 2021 is sold out. So we are really not only in a good position, but we are optimistic for this car. And we are specifically optimistic because this car plays a key role in our strategy moving forward. This is a segment which we dominated. It's plus minus the size of an X5. The X5 segment is a segment which BMW has dominated in the last more than 15 years. And the feedback we got on the iX make us very optimistic that we will continue the success story.

Thank you very much, Dorothy. And now the last question, please.

The last question is from Philippe Ochoa. Jeffrey, your line is now open.

Yes, thank you very much. I have two questions, please. One for Nicolas, maybe. A lot of discussion this earnings season about the world of low inventory, better pricing. And I'm just trying to maybe get an answer from you on how we should look at it. You control your environment better than most at this stage. And if we think about, let's say, if you're able to reduce your finished product inventories by, let's say, 10 days of sales, but how much would you think you would have to increase your work in progress or your buffers in terms of days of cost of goods sold to de-risk the supply chain and avoid the repeat all we saw across the industry? So if you have a view on the net impact, that would be very helpful. And the other question I have is more for Dr. Zipzer and more an industry question in your quality of president of the ACEA. We're about to have a decision in the coming months about Euro 7, and everything I read basically about Euro 7 tells me this is the kiss of death for ICE, basically, from a technical standpoint. You may or may not agree. But I'm just wondering, is it too late to see a scenario where, we basically scrap Euro 7. In exchange, the industry moves towards a faster acceleration of electrification, particularly the build-out of charging infrastructure. And if you could, is there an estimate somewhere that the AC has come up with of what it would cost the industry in Europe in terms of billions of euros to actually comply with Euro 7 as it is being structured right now? Thank you very much.

Thank you, Philipp. We start with Nikola and then the last words from Oliver.

Philipp, we spent a lot of resources to improve in a very systematic way the quality of our sales and market forecast for every single individual market and for every single individual segment. And thanks to this, we are, if you compare end of Q1 inventory level to the previous years, we operate our business with approximately 80,000 cars left in inventory, which is, I think, very significant. But we will not stop there. As I said, one of the most important projects from my perspective in our performance program is really to further analyze and understand how we can further improve the inventory level on one hand side while at the same time being also from a supplier perspective and very reliable reliable partner which is able to forecast as early as possible deviations from an initial plan, either on the positive or on the negative side. Oliver?

Yeah, Philipp, that is a very important discussion because it's currently in the regulation phase and in due time there will be a decision on Euro 7. We must be careful not to mix up CO2 targets and emission targets on the air pollutant side, which is Euro 7. They're quite distinct things. We are very strong because there's a direct link between CO2 emissions and the climate, because that is a very strong thing. And that is why we agreed in the European automotive industry to be even more progressive and to offer to be more progressive than a 37.5%. reduction between 2021 and 2030. So I think we are heading somewhere towards 50%. Not to be confused with the 55% in the overall climate gas discussion. The base of that is 1990. We are much, much more progressive because our base starts at the end of this year. And we are offering around about 50%. So we are really progressive about that. The EU7 is not about emissions. It's about the emission effect of air pollutants. So in the term of do no harm. And some of these effects, we even propose to be tougher in EU7 than we are already in the very good EU6D regulation. On the other hand, there are emissions. If you reduce them further, there's almost no effect on air quality. And then it becomes a cost issue with no reason. And what we see currently, and I'm often asked the question, why don't you skip EU7 and go full electric? I think the charging infrastructure worldwide, in Europe, not even in Germany, is in a state where we could make that prognosis. It's far away from being able to to do 100% of electric mobility. We are far away. Currently, the number of electric cars, purely electric cars, is increasing fourfold in comparison to charging infrastructure. And it's increasing by the day. So we are far, far, far away. And I'm only talking about climate and air pollution effects. The worst cases you ban the combustion engines and you do not have the charging infrastructure, you will very quickly see extremely old and, I say, dirty cars driving around here. You will have an Havana effect. You will have the old cars not being replaced. And that's why I warn heavily to emit EU7. We are not offering to postpone that. We want to do EU7, but with the right strategy to increase air quality and to have a right balance, to have a cost ratio benefit. And then I think we can improve the combustion engines further with EU7, maybe in 2025, 2026, whatever. But I would not play the CO2 reduction targets. I would not play them off with EU7. They're quite different things.

Okay. Thank you very much. Thank you very much, Oliver, Nicola, and ladies and gentlemen, thank you for joining us today and also for your questions. Please stay healthy. Bye-bye and servus from Munich. Bye-bye.

Bye-bye.