Bayerische Motoren Werke AG
XETRA:BMW
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Bayerische Motoren Werke AG
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So, ladies and gentlemen, we are on time. Good afternoon. I would like to welcome you all to our telephone conference for the first quarter results. With us today is Harald Krüger, Chairman of the Board of Management; and Nicolas Peter, our CFO. First, Mr. Krüger will give you an update on the business performance during the first quarter of 2019. Mr. Peter will then take you through our financial results. Afterwards we will have time for a Q&A session. Harald, please go ahead.
Good afternoon, ladies and gentlemen. At the BMW Group, we are always moving forward, with our sights set on the future. Our actions are geared towards the long term. We continue to resolutely chart our own course. Two areas will be crucial for us: strengthening our core business and moving forward with important future projects. I would like to say a few words about each. First, on our core business. We are currently focusing here on 3 key areas: our model and technology offensive 2.0, targeted expansion of our market presence and our internal program Performance > NEXT. In 2019, we aim to lead the global premium segment once again with our 3 brands: BMW, MINI and Rolls-Royce. We also want to increase our market share, and we certainly did that in the first quarter. We delivered more than 605,000 vehicles to customers. This is our ninth consecutive best start into a year. We are also doing well compared with our competitors. In March, we beat the trend, recording sales growth in several key markets, including the U.S. and China. We also posted the most dynamic first quarter growth of any premium car company in China, our largest single market. In Europe, we maintained the same level as last year. And in the U.S., we were #1 in the premium segment in the first quarter. Our core BMW brand, Rolls-Royce and BMW Motorrad all reported their best-ever first quarter. The BMW X models and new 8 Series as well as the Rolls-Royce Cullinan proved especially popular. Our product momentum remains extremely strong. At BMW alone, customers can look forward to 21 new or updated models this year. There will also be new models from MINI and BMW Motorrad. Fresh on the market are the BMW 3 Series, the Z4, the X5, the X7 and the 8 Series Coupé. The new 7 Series, with its new design language and highly innovative entertainment and driver assistance systems, is already a hit with customer, It will be followed later this year by the new 1 Series in the compact class. In the luxury segment, we are gradually realizing our strategic goal of significantly increasing sales and revenues. The 8 Series convertible and Gran Coupe are ready for market launch. Many customers are eagerly ordering the new X7. The incoming orders, both for markets overseas as well as Europe, are exceeding all of our expectations. As part of our model offensive, we will continue to introduce sustainable drive technologies across the fleet as set out in our Strategy NUMBER ONE > NEXT. In the first quarter alone, we sold more than 27,000 electrified vehicles. And by the end of this year, we will have 0.5 million electrified vehicles on the roads. In Europe, our percentage of electrified vehicles delivered is 3x the industry average. In 2018, we were the market leader for electrification in both Europe and Germany, not just in the premium segment but in the market as a whole. We plan to maintain a leading position going forward, both in Europe and worldwide. To do so we will continue to introduce more electrified models across all brands and model series. This also includes Rolls-Royce and BMW M. Plug-in hybrid technology will be a focus for us in 2019. The 3 Series, X3, X5 and the 7 Series all come with a fourth generation of our electric drivetrain technology. This gives these vehicles an increased electric range of up to 80 kilometers. Our fully electric BMW i3 has been on the market for about 6 years now. During this time, its range has doubled. This is one of the reasons it continues to post such strong growth. MINI fans will also be soon able to go fully electric. Production will begin this year for the MINI electric. Preproduction test drives have been very well received by the media. As you know, the MINI Electric will be built in Oxford. This also underlines our continued commitment to the U.K. On the BMW side, we are expanding our fully electric range with the addition of the iX3 from 2020 and the BMW i4 and iNEXT from 2021. By 2025, we will have at least 25 electrified vehicles in our lineup, 12 of them pure electric. As you can see, we are clearly not betting on any single technology. From my perspective, that would be the wrong approach. We are relying on a broad portfolio of technologies with flexible platforms for combustion engines, plug-in hybrids and electric drivetrains. We are also conducting further research into fuel cells with our partner Toyota. Over the long term, drivetrains with hydrogen fuel cells will offer greater local emission-free range with very short refueling times. This will complement our battery-electric vehicles. Every customer has different needs and every market, different business conditions. We can only achieve the flexibility needed for fully sustainable mobility around the world by staying open to different technologies. We are fully committed to this approach. We expect various drive forms to continue to exist alongside one another. Our customers appreciate the wide range of models and drivetrains we offer. This year, we will again be targeting new all-time highs with slight growth on the automotive side and solid growth at BMW Motorrad. More attractive models will be released over the next few months in all segments. We therefore expect to see stronger sales in the second half of the year. The BMW Group is global in every respect. In 2019, we will be targeting growth in all major regions. To achieve this, we are strengthening our presence in the markets and expanding capacity where needed. Our goal remains the same: balance global production between Europe, Asia and the Americas. In the Americas region, we will open our Mexico plant in June. This production facility will set new standards for productivity and sustainability. Most of the plant's power will come from a solar system on the ground and is 100% CO2-free. The vehicle painting process does not produce any wastewater. The water used is processed and recycled. We are creating more than 1,000 skilled jobs in San Luis Potosí. In 2015, we launched our successful dual training model at the plant. Since then, we have trained nearly 250 young Mexicans for their future careers. Ladies and gentlemen, our core business is also about looking inwards. We are constantly optimizing our processes and structures so that we can align ourselves for the diverse tasks of the future. In 2017 we launched our company-wide Performance > NEXT program. We are working hard to become more efficient, more profitable and much faster. Nothing is off-limits. We are also leaving no stone unturned. Our goal is to make structural efficiency improvements throughout the entire value chain. We are already implementing many of our decisions and now stepping up our efforts in all areas. By the end of 2022, these improvements will save us more than EUR 12 billion. Let me give you a few concrete examples. We are leveraging significant synergies in the efficiency and indirect purchasing and material and production costs. We are reducing complexity in our vehicles wherever it makes sense to do so. We are shortening the development process for new models by up to 1/3. We are using digital simulations on a much wider scale. By 2024, as many as 2,500 costly prototype vehicles will no longer be needed. On the product side, up to 50% of our current drivetrain variance will be discontinued as we transition to flexible vehicle architectures from 2021 on. We will focus on what customers want the most. There will be no successor to the BMW 3 Series Gran Turismo. And at our annual accounts press conference, we announced that the size of our workforce will remain about the same as last year. We met this goal in the first quarter. All these measures will have a positive impact extending well into the next decade. That brings me to my second point, future projects. We are a driving force for sustainable, connected and autonomous mobility. Step by step, we are gradually creating the necessary conditions for highly automated and fully autonomous driving. In March, we opened our data center with a high-performance D3Q (sic) [ D3 ] platform. With an initial storage of roundabout 240 petabytes, it eclipses anything we have had in this area in the past. On the product side, the iNEXT is scheduled for launch in 2021. For the first time, we are combining electric and Level 3 highly automated driving with high-end connectivity and a digitalized interior, all in one vehicle. What this means for customers is a completely new experience of mobility in everyday driving qualities with an electric range of more than 600 kilometers. In 2021, we will put a pilot fleet of 500 BMW iNEXT vehicles with Level 4 and Level 5 functionality on the roads. The necessary technical requirements and changes to international regulations and liability laws are currently in progress. One thing will not change: Customer safety remains our absolute priority. We do not use any technology in serious production vehicles until we have completely mastered it. Together with Daimler, we want to develop next-level technology for autonomous driving. This should be available in our models from 2024 on. We are also already working with Daimler to expand our mobility services because future mobility will not be possible without corresponding services. Customers expect a 360-degree approach to all their individual needs. This is the starting point for our new NOW family. Our mobility powerhouse YOUR NOW will provide customer solutions for all their mobility needs, from individually owned cars to ride hailing to car sharing and a wide range of other services. Our joint venture is currently made up of 5 vertical business entities with a solid base of 60 million customers. Ladies and gentlemen, 2019 will be another challenging year. Our environment remains volatile and dominated by uncertainty. Nevertheless, we will continue our positive business development as we systematically prepare for the technology challenges of the future. We clearly see ourselves as one of the driving forces. With our Strategy NUMBER ONE > NEXT, we will continue to set the course for long-term profitable growth as a technology leader in our industry and beyond. Thank you.
Thank you very much, Harald. Nicolas, please go ahead.
Thanks, Max. Ladies and gentlemen, good afternoon. On the operational side, the BMW Group started the year as expected, in a business environment that remains challenging and volatile. Our first quarter financials were heavily impacted by the provision of around EUR 1.4 billion we made in connection with antitrust allegations by the European Commission. The statement of objections leads us to believe that it is probable that the commission will issue a fine. This led us to recognize a provision in the first quarter in line with the International Financial Reporting Standards. Ladies and gentlemen, we are firmly convinced and would like to underline that the allegations made by the EU Commissions are unwarranted. We regard these proceedings as an attempt to equate the permissible coordination of industry positions regarding the regulatory framework with unlawful cartel agreements. The BMW Group will contest the EU Commission's allegations with all the legal means at its disposal, if necessary. The EU Commission also clearly stated that the ongoing investigation is not related to the use of illegal defeat devices. Regarding the diesel discussions, which are completely separate, I would like to emphasize again a deliberate and systematic illegal manipulation of exhaust emissions is, for us, not acceptable. The provisions in connections with the antitrust allegations alone reduced the EBIT margin in the Automotive segment for the period under review by around 7 percentage points to minus 1.6%. As previously announced, we have adjusted our guidance for the year to reflect this effect. Before we look at the quarter in more detail, there is one new development I would like to draw your attention to. Changes in the legal framework allow for a condensed quarterly reporting for the first and third quarters of the financial year. Starting with Q1 of 2019, we will utilize this option. As a result, our future reporting for those periods will be more concise without significantly reducing the information content. But now let's look at the details for the first 3 months. We continue implementing our strategy and investing in the future. Our young product portfolio, which we strengthened again last year, is doing very well both in comparative tests and with our customers. In the first quarter, contrary to the market trend, we gained segment share despite several model changeovers. The key regions developed as follows. The sustained market turbulence in Europe resulting from the transition to WLTP as well as uncertainty over Brexit and how the economy will further develop continue to have a dampening effect. We are seeing robust development in the United States, thanks in part to our new SAV models. We expect the new X5 and the new X7, which have been well received by dealers and customers, to provide further impetus over the course of the year. China continues to develop positively for us. The premium segment and the BMW Group, in particular, outperformed the weaker Chinese car market in the first quarter. The locally built X3 is now fully available and proving especially popular. Ladies and gentlemen, let's take a look at our financial figures for the group. Group revenues for the first quarter totaled EUR 22.46 billion and were therefore on par with the previous year. The financial result decreased to EUR 173 million. This was partly due to changes in interest rates that had a negative effect on market valuation of related derivatives. Pretax earnings amounted to EUR 762 million. The main factor here was the provision I already mentioned. EBT margin for the first quarter stood at 3.4%. Without the provisions, the figure was 9.6% and therefore remains at a high level. As previously announced, due to model changeovers for some of our major model series, we expect the first half year to be slightly weaker overall. Ladies and gentlemen, long-term profitable business development remains our top priority. The upfront investments we are making today to further develop electromobility and autonomous driving are the foundation for our future business success. By the end of the year, for example, we will have 10 plug-in hybrid models on the roads. As planned, first quarter research and development expenditure was around EUR 100 million higher than the same period of last year. The R&D ratio was at 6.0% and is likely to stay between 6% and 6.5% for the full year. In a volatile environment, flexibility is more important than ever. This principle is reflected in our investment strategy. All our larger plants will soon be able to build all types of vehicles within the same production structure, from combustion engines, plug-in hybrids to battery-electric vehicles. Electrified models are already integrated into production at nearly all our locations. In the first quarter, we invested a total of almost EUR 1 billion. That is over 1/3 more than in the same period of last year mainly from modernization and increased flexibility in our plant structures and for construction of our new facility in Mexico. Upfront investments were also needed for production ramp-up and market launch on the 3 Series and the new 1 Series. The CapEx ratio reached 4.4%. We expect the ratio for the full year to be only slightly higher than in 2018 despite the introduction of IFRS 16. Let's move on to the individual segments. In the Automotive segment, deliveries to customers remained stable in a declining overall market, as expected. Due to the model changeovers I mentioned and the highly competitive environment, particularly in Europe, segment revenues remained on par with last year at EUR 19.21 billion. The segment's operating earnings of minus EUR 310 million were impacted by the provision of nearly EUR 1.4 billion, which I have already mentioned. The EBIT margin was minus 1.6%. Without the provision, the figure was 5.6%, as planned. First quarter sales were largely driven by strong growth in China. But since our business in China is only partly included in our operating income, this positive effect is not fully reflected in the EBIT margin. As previously announced, higher manufacturing costs, mainly for fulfillment of regulatory requirements, impacted earnings. The pricing situation remained challenging, especially in Europe. We faced headwinds from currency and commodity prices as expected. In addition to other factors, the collective agreement pay increase in April 2018 also contributed to higher personnel costs. The financial result decreased to EUR 283 million mainly due to positive valuation effects in the previous year's quarter. I would like to say a few words about the segment's free cash flow. On the one hand, as it is usual at this time of the year, we have built up inventory, in particular for upcoming model launches. On the other hand, both the lower net profit and higher capital expenditure are reflected here. As a result, free cash flow for the first quarter totaled minus EUR 559 million. Based on current assessments, we are aiming for a similar free cash flow for 2019 as last year. A possible future payment related to the antitrust allegations has not been factored into this assessment. Ladies and gentlemen, let's move on to the Financial Services segment, which is off to a good start this year. The total portfolio grew to nearly 5.74 million contracts. In the year to the end of March, almost 470,000 new contracts were concluded with retail customers, an increase of 3.9% over the previous year. Segment earnings increased significantly to EUR 627 million. In addition to portfolio growth, the Financial Services segment also benefited from a generally stable risk situation, which was reflected in lower risk provisioning expenses for residual values in a number of markets. Let's look next at the Motorcycles segment. After a challenging 2018, BMW Motorrad made a good start to 2019. Deliveries to customers increased to around 38,600 motorcycles. This positive business development was also reflected in the operating result, which, at EUR 87 million, climbed 11.5% from the previous year. EBIT margin of 15.2% was also higher than for the same quarter of last year. With attractive new models, we are looking forward to dynamic growth for BMW Motorrad over the next few months. Ladies and gentlemen, the BMW Group is in a very robust position in these challenging times. Our financial strength enabled us to continue investing in the future, even in a difficult external business environment. As long as conditions do not deteriorate significantly, we expect that the full financial year 2019 will develop in line with our guidance. In the Automotive segment, we expect a slight increase in deliveries. Barring the effect of the provision for the antitrust allegations, the target range for our EBIT margin of between 6% and 8% remains unchanged. We are on course to reach this goal. Since the provision, however, has a negative impact of 1.5 percentage points on the EBIT margin, we are expecting a margin in the Automotive segment for 2019 between 4.5% and 6.5%. Our clear strategic target in a stable business environment remains in the range of 8% to 10%. In the Motorcycles segment, we are planning for a solid increase in deliveries. The EBIT margin should remain within our target range of 8% to 10%. In the Financial Services segment, we expect return on equity to be on par with last year and above our target figure of 14%. Group earnings before tax will be significantly lower than the previous year, also as a result of the announced decrease in the financial result. Our guidance assumes that political and economic conditions will not change significantly. We expect the second half year to benefit from the strong product momentum generated by the many new and updated models currently ramping up and ready for launch. However, conditions will remain volatile. For one thing, there is a lingering uncertainty over the future course of trade policies and the U.K.'s withdrawal from the European Union. We will also continue to monitor economic developments worldwide very closely. Weaker development in Southern Europe, in particular, could affect our business in the coming months. Thanks to our high degree of flexibility, we are capable of responding quickly to new developments and can steer production as needed. We will continue to work on all factors we can actively influence. This includes reducing complexity, improving efficiency and continuing to optimize processes and structures. Throughout -- through Performance > NEXT, we are using key levers to systematically realign the company. Ladies and gentlemen, the BMW Group has a solid foundation to build on. Sustainable profitable growth remains our goal. Innovation leadership and profitability are key to maintaining our position at the forefront of our industry. Every single BMW employee is committed to this objective. This commitment is what distinguishes us as a company. I firmly believe that with our clear strategy and a systematic implementation by all of our associates, we can continue to lead the BMW Group into a successful future. Thank you.
Thank you very much, Nicolas. Ladies and gentlemen, the line will shortly be open for questions. Please wait for some technical [ explanations ].
[Operator Instructions] Our first question comes from the line of Arndt Ellinghorst of Evercore.
It's Arndt Ellinghorst from Evercore. My first question is for Nicolas, please. Looking at your cash flow, you basically stick to your EUR 2.7 billion free cash flow guide for the year. And how do you -- what do you embed in terms of working capital effect in that working capital profile? You burned roughly EUR 2.2 billion of working capital in the first quarter, which is quite seasonal. We understand that. But how much working capital relief is included in the EUR 2.7 billion for the year? And also, Nicolas, please, in terms of net efficiency gains for this year, how much are you targeting for the full year? And how much have you realized in the first quarter? And then the second question is for Harald, please. Volkswagen last year moved its battery electric target to a huge number of about 500,000 battery electric vehicles in 2020. BMW i sold about 40,000 units last year. How do you think the competitive landscape will change? Volkswagen is really launching these huge volumes in battery electric vehicles. And compare to that, I think what you can physically sell will be just so much smaller in the coming year.
Thank you very much, Arndt. We start with Nicolas and then Harald. Nicolas?
So Arndt, may be starting with your question related to free cash flow. You're absolutely right. The free cash flow in Q1 was mainly impacted by the ramp-up of the 3 Series, X5 and X7. However, working capital impact was more positive or better than in Q1 2018. For the second quarter, we already expect a much more balanced production and wholesale position with BMW and MINI and are therefore confident that we will see quarter-by-quarter that free cash flow in the direction of last year's level. Second question related to efficiency gains, may be worthwhile to mention which are the key areas where we target for efficiency gains. Harald already mentioned indirect material costs. You have to bear in mind that we have a base of more than EUR 20 billion per year on -- in the area of indirect material costs. So if -- and we target single-digit efficiency gains, so this is over the course -- this will be, over the course of the next 2, 3 years, a significant number. Second element, which is very relevant is, as we've already talked a couple of times about, complexity reduction. This is something which will kick in with every additional new model. On top, selective cooperation agreements are extremely important in the area to become more efficient with -- I think we can mention 1 or 2 of those cooperations. Number one, what we do in the area of autonomous driving with Intel and Mobileye and FCA, or what we will do, what we are aiming for in the future for the next generation with Daimler will not only be a smart way of gaining speed in implementing the technology but also will be more efficient. And final comment to this area is in particular, that in the area of our supplier management, we are in very constructive discussions with all our suppliers. And they will contribute in a smart way to our efficiency gains. As for 2019, we expect something in the mid-3 digit area coming from all those different elements.
Okay. Arndt, concerning your question of the VW target for battery electric vehicles and how does the growth look like in the next years maybe for BMW, first of all, there's a difference. At BMW, we believe in plug-in hybrids and pure electric vehicles. To underline this one, for example, 30% of our 5 Series sales in California are plug-in hybrids. So we are selling already a majority even in the United States, even in other parts. In Europe, we were selling also a lot of plug-in hybrids. So our strategy is clearly built on plug-in hybrids, on pure battery electric vehicles as well as combustion engines as well as, maybe in the future, fuel cells. The growth we've seen with the plug-in hybrids is significant, and we have a great offer on the market. Secondly, the growth will be very heavily depending on the market offer and the infrastructure. If you look by today's figures, Arndt, with 3 out of 4 vehicles sold in Norway from BMW are electrified vehicles. If I look into Romania and Europe, it's less than 1%. The infrastructure and subsidies are driving definitely also the rate of the growth of the electrified vehicles. But we clearly believe and I personally believe in electromobility. That's why we're pushing the i3. The i3 had a 16% volume growth in the first quarter, its best quarter ever in the beginning of the year. Secondly, we will launch the BMW MINI electric this year. So we will offer a small car in an attractive segment with a very attractive combination as a pure electric vehicle by the end of this year. In 2020, we have the iX3, and then in 2021, we have the iNEXT and the i4. So with those products, we will see a steep ramp-up of volume in purely electrified vehicles also at the BMW Group. And I cannot tell you, we have more in the [ rec ] compartment and more in the mindset already decided, but it's too early to communicate. So -- but if you look at this, the infrastructure and the subsidies are still a main driver for that one. Customers are worried, if there's no infrastructure, not to buy an electric vehicle. So we need to push on the infrastructure, and we need to see that mobility around the world is different. If you're living in the countryside in the United States, you will not have a huge infrastructure network for charging. So you need a plug-in hybrid maybe as the best opportunity between both worlds. So we believe in both 3 and 4 pillars of our strategy. The ramp-up has shown, and we are targeting steep and ramp-up curves in the future. But believing only on one technology with high volume is a high-risk option. Thank you very much.
Thank you, Arndt. All the best.
That comes from the line of Tim Rokossa of Deutsche Bank.
Yes. I'd like to follow up on the one from Arndt about the net efficiency savings. The auto industry is always great at announcing gross savings, and then in the end, there's very little sticking to the bottom line typically. This EUR 12 billion that you have announced, are you willing to commit to some sort of net savings number out of that? For example, you're basically saying you want to come back to 8% to 10% margin. That would effectively mean we're talking about EUR 1 billion to EUR 2 billion net savings. Is that the right way to think about this? And then just secondly, Nicolas, you just said that H2 will be slightly better than H1. Q1 was actually probably strongly worse than last year. Is it therefore fair to assume that you already see Q2 improving somewhat? Or is this a very, very H2-loaded story?
Okay. Nicolas, please.
Tim, maybe to start with your second question regarding Q2. We expect already improvement in Q2. Why? Because we have availability of X5 kicking in, of the X7. 8 Series will be launched with some addition -- with an additional model in Q2 and of course the 3 Series. So from the product side, a good strong momentum. We continue with our -- the implementation of our efficiency measures. So we are confident that, quarter-by-quarter, we will see an improvement. And we stick to the corridor of 6% to 8% EBIT margin ahead of -- excluding the cartel provision. So that's the first topic. Second topic, you're absolutely right. The EUR 12 billion is a gross number. And to be honest, it only makes sense to look at a gross number because we have so many influences and impacts, which year-by-year change in our P&L, that it's key to look at some specific area, and I've mentioned some of those specific areas, and to follow with the clear KPIs as we see implementations of improvement measures in those areas. This is exactly what we are doing a bit on the -- in the area of [ HK ], be it in the area of material costs, be it in the area of personnel costs and so on.
Thank you very much, Tim.
And the next question comes from the line of Dorothee Cresswell from Barclays.
Yes. It's Dorothee from Barclays. I have 2 questions that I want to make. The first one is around pricing. You mentioned a very challenging environment there, particularly in Europe. And I'm just wondering whether that's still related to some of your competitors' WLTP struggles or perhaps you could give us a little more color and tell us how big that burden was in Q1 for you. And then perhaps give us some guidance on do you expect that to play out going forward, given that I'm guessing those WLTP-related pressures should now begin to ease off of those competitor brands. And then my second question is regarding Brexit. I wondered how much you think that's cost you year-to-date and what additional charges you expect for the rest of the year under both a soft and a hard Brexit scenario. Going into the year, you obviously planned for the U.K.'s exit at the end of March, and things have shifted there now.
Thank you very much. Dorothee, concerning your question about Brexit, Harald will start. Harald, please.
Dorothee, concerning -- I mean first of all, the U.K. is an important market to us. For us, it's the fourth biggest market in the world and it's still the biggest market for the MINI brand in the world. And we are launching the MINI Electric in the U.K. at the plant in Oxford, quite quickly, in a couple of months' time. So first of all, I hope that there will be compromise out -- coming out of the discussions from the Prime Minister together with the coalition leader from the opposition with -- and Mr. Corbyn, that there might be an outcome on -- maybe a compromise on customs union or things like that one. What I would highly appreciate, if there's a pragmatic solution for the next years. Secondly, if this is not going to happen, we are definitely prepared also for a hard Brexit. So we can work with scenarios. We also extended our logistics processes. We worked on the value change. We have provisions for a hard Brexit as well included in the budget. So we're continuing planning for the worse. But definitely, I highly appreciate if there's a pragmatic solution. But in these times, there's one main method, which is flexibility and volatility, and volatility requires flexibility. And we are very flexible on the production side, on the supply chain side. So if there's going -- something going to happen in the U.K.
Thank you very much, Harald. Concerning your question about pricing challenging environment in Europe, Nicolas?
Dorothee, maybe a couple of more general comments and then we should go region by region. First of all, if we look at the macroeconomic conditions, definitely they do not support the development in most of the market, and in particular, in some European markets. And I will come to it. Nevertheless, I believe the fact that we have a strong product momentum and probably the best model lineup we've ever had, this will definitely help us and create opportunities. I've already mentioned some of the models, in particular, the SAV models; X3 fully available now in China, selling very well in all markets around the world; X5, very successful launch; and strong momentum with regard to incoming orders for the X7. So from this perspective, positive momentum. If we look market -- or region by region, we believe despite the fact that the U.S. is a very competitive and transparent market environment, in particular, the SUV portfolio will help us to further improve our contribution. In China, we have been able to develop against the market trend. We've gained segment share. Total market, slightly down. We are, after 3 months or even after 4 months, double-digit up. So this is underlying our positive development. And in Europe, clearly, profitability is more important than the last unit. And this is something as a general guidance for our business because we believe that the key is in order to be in the position to invest in future technologies, we have to further improve profitability.
Thank you very much, Nicolas. Thank you very much, Dorothee.
And our next question comes from the line of Daniel Schwarz of Crédit Suisse.
My first question is regarding the dividend. How is the negative one-off going to impact the payout range? Is 40% your absolute upper limit? Or could the payout range be above the 40%? And then secondly, regarding the free cash flow guidance. As I understand, IFRS 16 had a positive impact of EUR 100 million in Q1. Should we assume about EUR 400 million for the full year? And is the guidance is that compared of -- let's -- free cash flow, is that compared to the EUR 2.7 billion? Or is that relative to a higher restated basis after IFRS 16? And my last question would be on Financial Services. You say in the outlook for the group that you see growing economic uncertainty and WLTP is impacting pricing in some markets, at the same time your flow at the provisioning for residual value risk in Financial Services. And I wonder how conservative is your accounting for this used car price risk in Financial Services.
Yes, thank you very much, Daniel. This will be answered by Nicolas.
Yes. Maybe I need to start with the dividend. It's a little bit early. We are mid of May. Nevertheless, there is no reason to move away from our 30% to 40% range, and we focus on further improving our operational business in -- on implementing our strategy. There is no reason at this point in time to discuss dividend payout ratio. You're absolutely right regarding free cash flow. I think you can assume something between positive EUR 300 million to EUR 400 million. And Financial Services, we have a very robust and I would even call it conservative way of accounting. So we are confident that the way we steer, in particular, RV provisions is in line with market development. I think what has been extremely helpful is that we have, in particular, seen also in Europe residual values for diesel definitely stabilizing.
If I may follow up the guidance for free cash flow, is that EUR 2.7 billion? Or is that from a higher...
Yes. EUR 2.7 billion, so on -- in line with the previous year. So in this area, the guidance is correct.
So thank you very much, Daniel.
The next question comes from the line of Patrick Hummel of UBS.
Patrick from UBS. Two questions remaining from me. I'd like to come back again to working capital and more specifically to inventory. Will you say that the higher inventory right now is all related to the product cadence? Or is there some need for adjustment of production for some models in the quarters ahead to maybe manage inventory in a more cautious manner? As you just pointed out, you're not after selling the one additional unit if it undermines your profitability. So just interested in your thoughts. And are you running, actually, right now extra inventory in the U.S. for the imported vehicles just in case something happens on the tariffs side? And my second question, to Harald. You have now merged the mobility business with Daimler. You have signed the collaboration agreement for Level 4, Level 5 autonomous driving. It seemed out of media reports that the talks or at least the speculation about talks for sharing platforms did not yield any results. So can we assume that the collaboration with Daimler will be further intensified? Are there additional projects on the agenda for the quarters ahead? Or is that basically it for the time being?
Thank you very much, Patrick. Your question will be answered by Harald and Nicolas together. So we start with Nicolas or Harald? The CEO -- no, let's start with the CEO, yes.
Okay. Maybe we start with the working capital stuff first with a small outlook, and you were discussing also the potential issues with trade conflicts between the U.S. and the U.S. inventories. So we haven't increased U.S. inventories. We are managing working capital very carefully and straight on forward. In the U.S. for example, we don't have big dealer stock so far. You will see more products coming, like the new X7, to the United States, but we are managing it carefully. And we are strategically in a better position than the competition. We have, for example, increased in the first quarter 2019, our production in Spartanburg on X3 for the United States for the U.S. market by 20%. So with 3 locations now, X3 in China, X3 in South Africa and then Spartanburg, South Carolina, we can allocate more U.S. production in plant Spartanburg for the U.S. market. And this is going to continue with the X7 in the next weeks and X5. So our strategic advantage of having a huge plant in the -- South Carolina gives us an opportunity to be less sensitive compared to other companies if the trade conflicts will appear because we can allocate more production in the United States for the U.S. market, as we did. And overall working capital, we are managing carefully worldwide inventory. Maybe, Nicolas?
Yes. And maybe more related to, I think, what you've asked for Q -- in particular, Q2, so we have -- as I said already, we have a very balanced position between production and wholesale in Q2. So that is from today's perspective. And we are already -- beginning of May, no need to adjust production in Q2. We are in the ramp up of very important volume models, and this should definitely help to further -- as I said, improve quarter-by-quarter free cash flow over 2019 and to end up in the area of last year.
And on the collaboration with Daimler, we have 2 -- currently 2 big projects going on, the mobility service and the ADAS, and that's what we clearly focus on. These are big projects, we believe, and the collaboration and the relationship is good. And we need to get these, both projects, done. And they are getting into a more intensive phase now on the ADAS for generation 2, which is a huge project, important for both companies and mobility services. And that's the clear focus of both companies, to work on these 2 projects and nothing more.
Okay. Thank you very much, Patrick.
The next question comes from Horst Schneider of HSBC.
Yes. First of all, again, on this cartel side of the provision, I have missed a statement when you expect the payout to happen. Is that still this year? Or just when also your objection is rejected and it's final that you have to pay something? Then you mentioned in one of your comments in the Q&A that you have reserved some provision also regarding Brexit in your budget. I would be interested to know how high this budget is basically that you reserved. And last, but not least, regarding the other cost changes. When you talk about all these efficiency improvements that you are doing now and figuring out, are we going to see a net impact of that already in H2? Or is that more an impact we should expect as of 2020? Because it seems to me at the moment -- I mean you guide for high 3 single-digit EBIT impact here from other cost changes. You had roughly EUR 200 million probably in Q1. So it's more evenly split, this other cost change development, over the next 3 quarters as well. So that the main impact is going to happen just 2020. Just want to know if the conclusion is right.
Okay. Thank you very much, Horst. This will be answered by Nicolas.
Horst, as I already said in my speech, too early to say at what point in time we might have a payout related to a cartel fine. We are at the beginning of the process. And this is definitely a process, which will take some time, but we cannot comment on any specific date. Provisions for Brexit, in the low to mid-3-digit million area. How likely is it today that we meet all those provisions? Difficult to judge, will definitely depend on the further development of Brexit. And then...
So is that included in the other cost change guidance, this Brexit budget? Or is it a separate part?
Yes, yes, yes, Horst. Yes.
Yes means what, sorry?
Yes. It's included.
It's included.
It's included in other cost changes, all right. Okay.
Yes, yes, yes. And third topic were the other cost changes. We expect, on one hand side, as I already mentioned, efficiencies in the mid-3-digit million area. We have the Brexit issue. We see an increase of personnel costs related to the topics I've referred to and definitely on R&D will also be in headwind but in particular due to the effect that we have lower capitalization ratio.
Okay. Thank you very much. Thank you very much, Horst. I think it is 4 minutes to 3. We have time for one more question, please.
And then our final question comes from the line of Stephen Reitman of Societe Generale.
Yes. I have a couple of questions, please. On China, it looks like the JV result was broadly similar to last year, although there was a very substantial increase in production, I think about 29% in the quarter year-on-year. So if you could comment on what's been happening there. And also are you making any -- taking any steps as well regarding uncertainty of the U.S.-China trade relationship as well? And second, electrification. Maybe you don't want to talk about iX3 yet. But on the MINI, can you give us some idea on the electrified MINI, what kind of pricing you could be looking at in terms of -- compared to the current models? I noticed on your hybrids, on the -- on your plug-in hybrids, you've been offering them at broadly similar prices to the petrol equivalent, which I think has obviously helped with the market success so far.
Thank you very much, Stephen. We start with Harald.
The question was on the MINI Electric pricing, we haven't fixed it so far. And it will be always a balance between an attractive pricing for the customer and our profitability targets. So -- but it's too early to fix it. It's not fixed so far. It would come by the end of the year. But I'm sure this product will be attractive as it is available then on the market. And MINI, in the past, was always successful in finding a good balance for attractive prices for customers and the company.
And, Stephen, the 2 other questions, maybe starting with the JV result. Absolutely right, what you've mentioned. On one hand side, very positive development in China in the first -- in 4 months of the year. We are optimistic for the remaining part of the year to see a growth between 5% and 10% for the full year in China. Financial results was a little bit impacted in Q1 in order to prepare the plan for the launch of the 3 Series, which is a very important model in -- for the Chinese market. Second topic, U.S.-China trade relationship. Well, we've -- you've seen last year in the second half of 2018 that the increase in tariffs impacted us in the lower 3-digit million area for the second half of the year. And if something similar would be implemented again, most likely, the result would be pretty much the same. We have, in the meantime, localized the X3, on one hand. But on the other hand, the first feedback we are getting from the Chinese market, the X7 is proving to be a very attractive model for China as well. So in this area, we would be impacted so lower 3-digit million area impact. Having said this, this would not impact our guidance for the full year.
Okay. Stephen, thank you very much for your final questions. Ladies and gentlemen, thank you for joining us today. We wish you a pleasant day and look forward to seeing you next time. Thank you very much and bye-bye.
Thanks.
Thanks. Bye-bye.