Bayerische Motoren Werke AG

XETRA:BMW

Earnings Call Transcript 2021-Q1

[Maximilian Schöberl]

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 Nicolas Peter, our CFO. First, Oliver Zipse will give you an update on the business performance during the quarter, Nicolas Peter will then take you through our financial results. Afterwards, we will have time for our Q&A session. Now Oliver, please go ahead.

[Harald Christiaan Hendrikse, Managing Director]

Good afternoon, also from my side, ladies and gentlemen. The BMW Group is a global company. We leveraged 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 3 main points. First, we are on course for growth, and we are growing profitably. Second, we are growing sustainably and have a clear road map 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 at-equity result from our BBA joint venture in China. Another indicator of our operating strength is our free cash flow of EUR 2.5 billion in the Automotive segment, our best figure ever for a first quarter. Our first quarter deliveries also reached a new all-time high. Compared to 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 BMW iX3, the BMW iX and the BMW i4, we intend 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 3 months of 2021, we are on track to have a total of 1 million fully electric vehicles and plug-in hybrids on the road 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 drivetrain 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 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 3 major world markets, Europe, the U.S. 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 B&W Group and [ remind ] yourself, this is only 8.5 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 1/3 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 the 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 overfulfilled 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 offensive will play a big part in this. Second example, with support from the strategic EU programs, IPCEI, which stands for Important Projects of Common European Interest, we are involved in another project that is advancing battery technology. We are 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 materials. 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 multiyear supply contracts with sustainable lithium from South America with the American company, Livent. Livent uses a special method that minimize 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 Emirates Global Aluminium. The aluminum is produced using electricity from one of the world's largest solar parks. Another example is our investment in Boston Metal. We're 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 tonnes by 2030. And additionally, we have launched an initiative to protect the deep seas with the WWF, Google, Samsung SDI and the Volvo Group. 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 our 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 our key segments from the compact segment 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 the 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 Operating System 8 with the BMW iX, a new generation of performance, user experience and intelligent driver assistance. And in combination with high-performance hardware, we are 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 portfolio. We will be introducing a new digital architecture and a new generation of electrical system. 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 a battery specialist Solid Power by the end of the decade. We will present an initial demonstrator 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're 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 style. 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.

[Maximilian Schöberl]

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

[Nicolas Peter, CFO & Member of Management Board]

Thanks, Max. Ladies and gentlemen, good afternoon. The BMW Group made a good start to the financial year 2021. Our operating results 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 1 in 10 vehicles we sell is already electrified. This underlines the high and steadily growing importance of electromobility to our company. We took advantage over 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, a focus on controlling our inventory levels and cost-efficient personnel 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 EUR 26.8 billion. Group earnings before tax reached EUR 3.76 billion and were, therefore, significantly higher than the previous year. The EBT margin stood at 14%. The development in preowned car markets also contributed to the margin increase through 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. This 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, 2 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 EUR 1.3 billion. 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 EUR 732 million for the first quarter climbed more than EUR 1.3 billion from the same period of last year. On the one hand, this was mainly due to significantly higher earnings of EUR 503 million from BMW Brilliance 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 EUR 334 million. This was due, in particular, to positive valuation effects compared to the previous year. Group liquidity increased to EUR 20.1 billion 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 EUR 17 million to EUR 18 million. 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 underlines the company's excellent performance. The key drivers here were the improved pricing, the significant increase in sales and higher aftersales revenues. Significant growth was posted by all 3 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 vehicle, 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 EUR 2.52 billion. 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 EUR 21.3 billion 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 EUR 787 million. The improved result was mostly due to the positive development of the preowned vehicle markets 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 Motorcycles 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. EBIT 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 pretax 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 ROCE 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 Motorcycles segment, we anticipate a solid increase in deliveries. EBIT margin should be within our target range of 8% to 10% and ROCE for the segment should also be significantly higher year-on-year. Now let's take a look at the nonfinancial 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 week 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 growth. 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 EUR 4 billion. We have the right strategy to successfully continue our transformation process based on our high profitability. Also, we expect the second half of the year to be more volatile, we are optimistic about the future. Thank you for your attention.

[Maximilian Schöberl]

Thank you very much, Nicolas. So let's move to our Q&A session. The line will shortly be open for questions.

[Operator]

[Operator Instructions] And the first question is from Stephen Reitman, Societe Generale.

[Stephen Reitman, Equity Analyst]

I have 2 questions. First question is about semiconductors. I can fully understand that BMW has shown in the past that is very forward thinking. It's very aware of market conditions. And so probably it was one of the first companies to see that the markets are recovering faster than maybe others had anticipated. And so you made sure you had your orders for semiconductors in early. So you're 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 Renesas, which clearly just meant that some of the suppliers were not physically able to supply. My second question is about China and the iX3 and globally as well. Looking at the sales of the iX3 so far in China, it looks like it's at about 8,000 units in the [indiscernible]. Could you comment on the ramp-up of that vehicle, what your plans are? And where do you think it might do one of 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?

[Maximilian Schöberl]

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

[Oliver Zipse, Chairman of the Board of Management & CEO]

Yes, Stephen, very important questions. The semiconductor, as you rightfully noted, is only one incidence where our supply chains are challenged, yes. You mentioned the Renesas 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 terms of crisis you can play out the strength 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 2 plants, Oxford and Nedcar 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 2, we will have here and there some challenges on the production scheduling side. But everything we lose in quarter 2, 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 on -- in May. And it's -- there is still 2/3 of the year ahead of us. So we will have to see. Until now, we are -- 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 iX3. Specifically, as I mentioned in my short speech, wherever we go into automotive testing and comparable -- comparing the vehicles, the iX3 is turning out to be an extremely good vehicle in many aspects. And therefore, market demand is high. And -- 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.

[Operator]

The next question is from Kai Mueller from Barclays.

[Kai Alexander Mueller, Research Analyst]

The first one is really around your guidance. You indicated that you're 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 EUR 4 billion. Can you give us a bit of color, is there more room to be really above the EUR 4 billion maybe towards the EUR 5 billion mark, given 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 EUR 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 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?

[Maximilian Schöberl]

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

[Oliver Zipse, Chairman of the Board of Management & CEO]

Yes. 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 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 [ M ] models. We are a supplier of all segments. We have in the lower segments and many, we have in the upper segment Rolls-Royce. We have high-performance cars like the M models. And relatively, to today's world, they are also -- 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 [ improving ] by the day and day. And also M models, they are here to stay.

[Maximilian Schöberl]

Nicolas?

[Nicolas Peter, CFO & Member of Management Board]

Kai, first of all, you're absolutely right. Our Q1 free cash flow was very strong with at EUR 2.5 billion. Now if we look at the positive and the negative elements we expect in the coming months, on the positive side, clearly, the development of our business [ ex BBA, ] of course, we will have 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 will 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 EUR 4 billion.

[Operator]

The next question is from Patrick Hummel, UBS.

[Patrick Hummel]

Patrick from UBS here. 2 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 EUR 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're 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, 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 and as a consequence, with H2 demand looking very strong as well and volumes may be even better because the chip shortage industry-wide should be easing, why wouldn't H2 margins be even better?

[Maximilian Schöberl]

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

[Oliver Zipse, Chairman of the Board of Management & CEO]

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 of Germany in the first 3 months of the year, we had 40% on the petrol side, 35%, 1/3 on the diesel side and with a big growing proportion, 25% on the electromobility side. So very -- almost 1/3, 1/3, 1/3 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 5 years to have this technological flexibility to serve all markets. And maybe in 2 or 3 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 sum, 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, yes?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.

[Maximilian Schöberl]

Nicolas?

[Nicolas Peter, CFO & Member of Management Board]

Patrick, 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.. In the U.S., very much supported by the development of the used car market as the U.S. leasing market. And during the [ first ] quarter 2020 and in particular, in the first quarter '21, an improvement in Europe as well. On the other hand side, if you look at commodities, I don't think we are -- 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 the -- at our risk scenario, it would indicate that we have a [ mid- to high 3-digit million euro ] risk on the commodity side, while we have a positive impact on the currency side. So altogether, both together sum up to a risk of a negative deviation of EUR 0.5 billion. 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 [ win number ] level in every market, I'm confident that we will continue to further improve the quality of our business.

[Operator]

The next question is from the José Asumendi, JPMorgan.

[José Maria Asumendi, Head of the European Automotive Team]

It's Jose from JPMorgan. 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 3 maybe topics. The first one, how do you think about in-sourcing of this 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 sales or products for sales. And the third topic, the investment you [ did in ] Solid Power. I mean you're making, I think, a very bold statement to be able to bring some proven technology in the coming years. So I would be very interested to hear 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 remarks you could give us there, that would be great. Second maybe for Nicolas, a little bit more -- if you could comment a little bit more around the earnings momentum on your Chinese joint venture for the coming quarters. It does sound like the momentum continues to accelerate. Can you just give us a little bit of the tailwinds and headwinds you see on the Chinese JV for the coming quarters.

[Maximilian Schöberl]

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

[Oliver Zipse, Chairman of the Board of Management & CEO]

Yes. José, 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 drivetrain and so on. The only thing we are purchasing for a 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 this [ 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 whatsoever to do that by yourself. We have 4 large delivery contracts with CATL 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 4 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, we -- on May 4, we made a statement then that we make an investment -- strategic investment in Solid Power, together with other investors to prepare ourselves for the next step. We're thinking more decades and not only in today's world. We are working with Solid Power for quite some time. So it's not a new partner for us. And we think that the ASSP, 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 plate to develop that 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.

[Maximilian Schöberl]

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

[Nicolas Peter, CFO & Member of Management Board]

José, 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 3 major sales regions, China, U.S. and Europe. In fact, we've seen that month after months, Europe has developed in a positive way, and we believe it will develop -- 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 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 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, and 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.

[Operator]

The next question is from Henning Cosman, HSBC.

[Henning Cosman, Analyst]

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 profit. 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 to have 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 than the remainder of the year than it was in Q1, I'm really wondering also sort of considering what Patrick said in your response about the pricing offsetting raw materials and so on and 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 would be great.

[Maximilian Schöberl]

Oliver? You want to start? Yes?

[Oliver Zipse, Chairman of the Board of Management & CEO]

Yes. 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 western and on the east side, this is rapidly developing. United States is starting a booming phase. You have all the after-COVID state subsidies, enormous amounts of some, [ I hope ] that will create wealth at the end of the day. And of course, you see the Asian side [ development, ] 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 approach. This is not what we do here. We are transparent about our plans. And we will see at the end of this year, maybe we are not -- that plan is not even so far away anymore.

[Maximilian Schöberl]

Nicolas?

[Nicolas Peter, CFO & Member of Management Board]

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 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 the second half year in the history of our company, and we have seen margins improving significantly. What did we learn out of this that our today's environment is extremely volatile. It's 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 xEVs in our portfolio. And as we both know, xEV -- and we are really working hard to change this in the next couple of years, but still have 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 [indiscernible] such high demand.

[Maximilian Schöberl]

Thank you very much, Nicolas. Ladies and gentlemen, it's 3:00, but I think we take 2, 3 more additional questions.

[Operator]

The next question is from Daniel [indiscernible].

[Unknown Analyst]

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 my second question is, as you mentioned, you're market leader in plug-in hybrids. And of course, that helps a lot of to cut emissions. Do you think there's a risk that the EU will change the regulation for these vehicles in June?

[Maximilian Schöberl]

Oliver, you would like to start with the plug-in hybrid question, I think?

[Oliver Zipse, Chairman of the Board of Management & CEO]

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 product 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 because of the [ recuperation ] capabilities. The discussion we have, we -- there will be some adoptions. In terms of what -- 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. We can change drivetrains. 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, yes. It's not such a big problem.

[Maximilian Schöberl]

Thank you, Oliver. Nicolas? About residual values.

[Nicolas Peter, CFO & Member of Management Board]

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 bit be it in the Automotive segment and in the, of course, in the Financial Services segment. If we look now at the impact in Q1, it's between a [ low and mid-3-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 U.S., markets like U.K. and Germany, hardly any impact in China because China is not a leasing market. This is a really significant improvement on a per vehicle level in those markets. If we reflect what is -- what we can see right now, the situation is on this strong level, relatively stable in those 3 markets. And this is why we are motivated with the right strategy regarding supply and demand to keep it on this level.

[Operator]

Next question is from Dorothee Cresswell, Exane.

[Hanna Dorothee Hellmuth Cresswell, Research Analyst]

It's a slightly longer-term one. There's obviously a lot of new BEVs in the pipeline for 2022 and '23. And I know you've officially only unveiled 4 of the 8 new launches during those 2 years. But could you confirm that some of those products will be allocated to the [indiscernible] plant and you say that there will be more pure electric products being localized in China. And then I wondered if you have an order intake number on the new iX that you could share with us.

[Maximilian Schöberl]

Thank you, Dorothee. Oliver?

[Oliver Zipse, Chairman of the Board of Management & CEO]

We communicated that there will be -- at the end of 2023, we will have 12 electric [indiscernible] products, in all 3 brands, BMW, Rolls-Royce and also MINI. So we are only at a starting point where we try to cover all segments. Now our strategy is not to have individual cars, we cover all segments. Meaning if there is 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 we will -- next year, we will have the 7 Series, a high-profile product with all kinds of drivetrains. We will have the X1, we will have the 5 Series and so on. So we're only at the very starting point there. There will be best cars, of course, like the iX3 is produced in China, an 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 [indiscernible].

[Nicolas Peter, CFO & Member of Management Board]

Dorothee, may I add to the incoming on a level of the iX to put it very simple production 2021 is sold out. So we are really in -- not only in a good position, but we are optimistic for this kind. We are specifically optimistic because this car plays a key role in our strategy moving forward. This is a segment which we dominated. This -- and it's plus/minus the size of the 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.

[Operator]

The last question is from Philippe Houchois, Jefferies.

[Philippe Jean Houchois, MD & Senior Automotive Analyst]

Have 2 questions, please. One for Nicolas, maybe. Lot of discussion this earnings season about a 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 for the -- 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, by 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 derisk the supply chain and [indiscernible] 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. Zipse ] and more an industry question and you're [indiscernible] 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 what -- is it too late to see a scenario where we basically -- we 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 ACEA has come up with what it would cause the industry in Europe in terms of billions of euros to actually comply with Euro 7 as it is being structured right now?

[Maximilian Schöberl]

Thank you, Philippe. We start with Nicolas and last words from Oliver.

[Nicolas Peter, CFO & Member of Management Board]

Philippe, 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 look -- if you compare end of Q1 inventory level to the previous years, we operate our business with approximately 80,000 cars less 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 partner, which is able to forecast as early as possible deviations from an initial plan [ be it ] on the positive or on the negative side.

[Maximilian Schöberl]

Oliver?

[Oliver Zipse, Chairman of the Board of Management & CEO]

Yes, Philippe, 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 our CO2 targets and emission targets on the air pollutant side, which is Euro 7, they are 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 EU 7 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 EU 7 than we are already in the very good EU 6d 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 to -- and I'm often asked a question, why don't you skip EU 7 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 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 away, and I'm only talking about climate and air pollution effects. The worst-case is 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 EU 7. We are not offering to postpone that. We want to do EU 7, 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 EU 7, maybe in 2025, 2026, whatever. But I would not play -- the CO2 reduction targets, I would not play them off with EU 7. They're quite different things.

[Maximilian Schöberl]

Thank you very much, Oliver, Nicolas. And ladies and gentlemen, thank you for joining us today and also for your questions. Please stay healthy. Bye bye and [Foreign Language] from Munich. Bye-bye.

[Oliver Zipse, Chairman of the Board of Management & CEO]

Bye-bye.