Bayerische Motoren Werke AG
XETRA:BMW
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Bayerische Motoren Werke AG
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Ladies and gentlemen, good afternoon from Munich. 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 of BMW AG; and Dr. Nicolas Peter, our CFO. We will start with Nicolas Peter who will take you through our financial results, followed by Oliver Zipse who will give you a general business update for the BMW Group. And as usual, we'll have afterwards time for a Q&A session.
Nicolas, please go ahead.
Thanks a lot. Good afternoon, ladies and gentlemen. The BMW Group has made a strong start to 2022 in an increasingly volatile geopolitical and global economic environment. Our business is performing in line with our expectations.
The ongoing war in Ukraine is affecting the availability of vehicle components, which led to production disruptions at several European plants during the first quarter. Semiconductors also remain in short supply, and we expect the situation to ease at the earliest in the second half of 2022. In China, restrictions to combat the corona pandemic are affecting our local sales production and logistics. Our associates are working hard to manage our supply chains with the greatest possible flexibility so we can minimize the impact on the BMW.
As expected compared to the strong first quarter of 2021, vehicle sales decreased by 7.8% in Europe and 9.2% in China in the first 3 months of this year. However, our U.S. sales still grew by 3.7%. This shows that the BMW Group has an excellent competitive position and is highly diversified. In the current volatile environment, we are benefiting once again from our balanced footprint across all sales regions.
Our consistent focus on emission-free mobility is also gaining further momentum. With the market launch of the BMW iX and the BMW i4 last year, we released 2 all-electric models onto the roads that are in very high demand. In the first quarter, the BMW Group sold a total of 35,289 all-electric vehicles, an increase of nearly 150% over the previous year.
Two weeks ago, we unveiled the BMW i7, an all-electric luxury sedan that underlines our innovation leadership in electrification, digitalization and autonomous driving. The BMW iX1 would also expand our best product range over the course of the year. In the second quarter, we will launch the BMW i3, the first all-electric C series tailor-made for the Chinese market.
Ladies and gentlemen, as you know, we extended our contract with our Chinese joint venture BBA until 2040 and increased our stake in BBA from 50% to 75%. With the conclusion of this transaction, BBA has now been fully consolidated in the BMW Group's financial statements since 11th February 2022 and therefore fully considered in all items pertaining to the income statement, the balance sheet and the cash flow statement. The development is reflected in higher revenues and operating results in the Automotive segment. The increase in the cost of sales also includes depreciation from the purchase price allocation as well as consolidation effects related to intragroup deliveries.
The previously held equity interest of 50% in BBA was revalued to its current fair market value. This resulted in a positive onetime effect of EUR 7.66 billion in the Automotive segment's first quarter financial results. The net amount from consolidation of BBA's liquid funds less the purchase price amounted to EUR 5 billion and increased free cash flow in the Automotive segment in the first quarter. Ladies and gentlemen, the BMW Group's financial figures for the quarter are therefore greatly impacted by the increased stake in BBA and full consideration of the joint venture in the group financial statements.
Group revenues for the first 3 months of the year climbed 16.3% to EUR 31.14 billion. The financial result includes the onetime effect of EUR 7.66 billion from the fair market valuation of the existing 50% stake held in BBA. This boosted group earnings before tax, which totaled EUR 12.23 billion at the end of March, which resulted in an EBT margin of 39.2%. Without the revaluation of the existing stake and consolidation effects arising from BBA's full consolidation, the group EBT margin reached 18.4%.
Bolstered by a good performance, we continue to invest systematically and from a position of strength in the future competitiveness of our company. As previously announced, we are focusing on the electrification of our model lineup and on digitalization both of our vehicles and our business processes. Our research and development expenses according to IFRS is therefore mainly in connection with new models' electrification and digitalization of the vehicle fleet as well as automated driving. R&D spending for the first quarter stood at EUR 1.57 billion and was therefore 9.4% higher year-on-year. The R&D ratio according to the German Commercial Code for the quarter fell slightly to 4.5%, owing to the strong increase in revenues. We expect the figure for the full year to be within our target range of 5% to 5.5%.
Our capital expenditure is focused on future mobility and was significantly higher year-on-year at EUR 1.1 billion. This represents CapEx ratio of 3.5%. We expect the ratio for the full year to be close to our target figure of 5%.
Ladies and gentlemen, let's move on to the individual segments. In the Automotive segment, the volume-related decrease in revenues was offset by a strong operating performance. Segment revenues rose by 17.4% to over EUR 26.73 billion. A share of this increase is also due to the first time inclusion of BBA revenues as well as currency tailwinds.
In addition, a favorable model mix and sustained good price realization due to our premium positioning are reflected in the revenue growth. Price increases in the markets helped partially to offset the increase in raw material and energy prices. Income from the resell of end-of-lease vehicles in the preowned car market also continued to develop positively.
The cost of sales in the Automotive segment increased by 20.9% to EUR 22.63 billion. This reflects costs for energy and raw materials, increased research and development spending and the higher percentage of electrified vehicles. Effects from the initial consolidation of BBA amounting to around EUR 1.2 billion also contributed to the increase in the cost of sales. In addition to consolidation effects of approximately EUR 500 million in depreciation of the purchase price allocation, eliminations of intercompany profits amounting to approximately EUR 700 million were recorded.
The segment achieved an EBIT of EUR 2.37 billion for the first quarter, an increase of 5.9% over the same period of last year. The EBIT margin came in at 8.9%. Excluding the consolidation effects mentioned above, the operating segment result would be around EUR 3.5 billion and the EBIT margin would be 13.2%. This reflects the strength of our core segment in the first quarter particularly given the difficult business conditions.
The financial result for the segment climbed to around EUR 8 billion in the first quarter of 2022 compared to just over EUR 500 million for the prior year quarter. This includes the onetime effect of EUR 7.66 billion from the revaluation of the existing 50% stake held in BBA I referred to before. At the same time, due to the full consolidation, the equity result decreased by EUR 117 million in the first quarter.
The segment's free cash flow also reflects the full consolidation of BBA. As expected, the acquisition of BBA's liquid funds less the purchase price resulted in a net inflow of EUR 5 billion. This was partially offset by changes in working capital since temporary suspensions of production resulted in a decrease in trade payables. The closure of dealerships in China due to lockdowns also led to a decrease of advanced payments received from the dealer network. Free cash flow for the segment totaled EUR 4.82 billion. On this basis, we confirm our target for the year of at least EUR 12 billion.
In the Financial Services segment, a total of 433,000 financing and leasing contracts were concluded with retail customers in the first 3 months of the year. The number of new contracts was down 11.4% compared to the very strong prior year quarter. In addition to the limited availability of new vehicles due to supply issues, this also reflects more intense competition in the financial services sector, particularly in China and the U.S.
The strong product mix and pricing led to a higher average financing volume compared to the previous year. As a result, new business volume decreased by only 3.1%. Segment earnings before tax reached just over EUR 1 billion, a new all-time high in the first quarter.
The situation in preowned car market around the world remains exceptionally positive and continues to contribute to high income from the resale of end-of-lease vehicles. Thanks to an attractive model lineup, the Motorcycles segment was able to maintain sales growth. With more than 47,000 units sold, we once again reported double-digit growth and posted our best ever first quarter sales. The segment's operating earnings for the quarter totaled EUR 108 million with an EBIT margin of 13.5%.
Ladies and gentlemen, with lower economic expectations, rising inflation and high energy and raw material prices, we face growing uncertainties in our business environment. Despite these challenging conditions, the BMW Group made a strong start to 2022. Based on current information, we are able to confirm our guidance for the full year. Driven by the full consolidation of BBA, we expect to see a significant year-on-year increase in both group pretax earnings and employee numbers.
In the Automotive segment, despite supply bottlenecks and production downtimes in the first quarter, we forecasted vehicle sales for the full year will be on par with last year. The percentage of electrified vehicles should also increase significantly, and the number of fully electric vehicles should more than double. We expect that, that share will be at least 10% of total sales volume. We are targeting a slight reduction in CO2 emissions in the new vehicle fleet and CO2 emissions per vehicle produced. We still expect the EBIT margin in the Automotive segment to be within the range of 7% to 9%.
In the Financial Services segment, we can confirm our target range of 14% to 17% for return on equity. In the Motorcycles segment, we anticipate a slight increase in deliveries with an EBIT margin within our target range of 8% to 10%. Our guidance assumes that the semiconductor supply situation will ease at the earliest in the second half of 2022.
It is impossible to foresee how the geopolitical situation will evolve. That is why the possibility of the conflict expanding beyond Ukraine or stricter sanctions or countermeasures from Russia are not factored into our guidance. Further restrictions related to the corona pandemic in China are also not included.
Ladies and gentlemen, despite geopolitical and global economic uncertainties, the BMW remains on track to meet its goal for the full year. We are managing our supply chains proactively and are able to respond flexibly to changing circumstances. Demand for our products remains strong with especially high new orders for our all-electric vehicles. We are investing in e-mobility and digitalization to secure the future sustainability of our company while maintaining our strong operating performance. That is how we are continuing to navigate the company carefully through turbulent waters and are in an excellent position for 2022. Thank you.
Thank you, Nicolas. And now over to you, Oliver.
Thank you, [ Nikolai ]. Ladies and gentlemen, a strong product and desirable brands are the foundation of the BMW Group's success as a company. With our customer-centric portfolio, we have experienced very robust demand in recent years. Despite these difficult circumstances, we are seeing this trend grow even more this year.
Never before in the history of our company has our preorders been higher than they are today. The market signals that this high demand will continue. Our order books are full several months out, especially for our fully electric vehicles and in particular, our innovation drivers: the BMW i4 and the BMW iX.
A few weeks ago, we unveiled another milestone in the expansion of our fully electric lineup, the BMW i7. I presented it in person to our retailers in the Americas and journalists in the United States. The response from around the world has been tremendous. The new 7 is tech magic at its best. It is the only luxury sedan to offer the full range of drive technologies as a fully electric BEV, plug-in hybrid or with modern combustion engines. Our customers choose whatever suits their needs best without having to compromise.
Over the coming years and months, this rapid pace will continue. The e-iX1 will be released late this year. This means one of our highest volume models in the premium compact class will also be available as a pure electric vehicle. And next year, we will be electrifying another core BMW brand product, the BMW 5 Series. This year, we will already have 8 fully electric models on the road with plenty more ready to go. Including preproduction vehicles, we will be building 15 fully electric models already this year. This will give us a pure electric option in about 90% of our market segments.
The large number of new launches and strong demand for our product shows that we inspire people, develop innovations that are successful in the marketplace and create desirability. This is the basis for the growth that we have planned for the coming years not only in the purely electric vehicle segment but across our entire portfolio.
We will continue to rely on our open technology approach in the future. It is the right concept for our customers worldwide right now and accounts for different developments in different regions of the world. This enables us to offer the latest, most climate-friendly drive technology for various needs and thus, further increasing our contribution to a positive climate impact.
This breadth of technology enables us to meet both the demand of our customers and the expectations of our stakeholders during the current phase of the transformation. In this way, we are further optimizing all technologies. We are transforming the BMW Group effectively and swiftly. Our focus is on e-mobility, digitalization and a holistic approach to sustainability. And what sets us apart, we are performing while transforming. This is also shown by our strong first quarter.
The figures for the first 3 months benefited from the full consolidation of our Chinese joint venture, BMW Brilliance Automotive. This was an important strategic move for us. It will strengthen our long-term cooperation with our partners in China. We are expanding production capacity at our existing locations in Shenyang, and this is how we continue to increase our local-for-local share and thereby becoming more resilient. And we are systematically increasing localization of other models, including so-called net new energy vehicles.
The fully electric BMW 3 Series long version developed exclusively for the Chinese market is a good example of this. We also have a long wheelbase version of the X5 that has been tailored to the unique needs of Chinese customers. Both the electric 3 Series and the X5 long wheelbase versions are produced locally in China for the Chinese market. This puts us in an even better position to meet strong demand for these 2 models.
As a global company, the BMW Group operates at the intersection between different conditions in major regions of the world. The current picture could hardly be any more varied. A few weeks ago, I visited the United States of America. We presented our products for the next 2 years to over 1,000 retailers from across the Americas; last year, our fastest growing region. They were very impressed and are committed to investing billions in the future with us. The mood was positive and full of optimism.
This is also reflected in the sales figures for the first 3 months of the year. We continue to grow on the American continent compared to the prior year quarter. This applies to the United States in particular, which posted growth of 3.7%, once again earning the BMW Group a leading position in this key market. We're able to respond flexibly to growing demand across the region from our plant in Spartanburg, our biggest in our global production network, as well as our other plants in San Luis Potosí in Mexico and Manaus and Araquari in Brazil.
Europe is overshadowed by the impact of the Ukraine crisis. Energy supplies across the continent have been jeopardized by the war and the resulting tensions with Russia. Inflation remains high and the cost of food, energy and fuel are rising. And as a result, economic forecasts are constantly being revised downwards.
The war in Ukraine is also significantly impacting the local automotive supplier industry and leading to production downtimes at our European plants. We have been working with our partners and leveraging our ability to respond quickly, our high level of flexibility and HR methods to make up component shortages as a result of the war as quickly as possible, and we are still today relying on supplies from Ukraine. This continues to give those employed by our local partners a perspective for the future. Meanwhile, the supply situation has eased, and we expect that we will be able to keep the situation stable.
And that brings me to our third main market, China. The coronavirus pandemic is flaring up again. As a result, the metropolis of Shanghai is back in lockdown. Production facilities and ports have been closed to contain infections. Our plants in Dadong and Tiexi were also affected by temporary closures, but production there has resumed in the meantime.
One issue the industry has been dealing with worldwide for the past year is the shortage of semiconductors. And we don't expect to see an improvement until at least the second half of this year, and we will still be dealing with an underlying shortage throughout 2023. To limit the effects of the shortage, we are exploiting the flexibility of our production network to the full as we have done in the past. This enables us to relocate production volume at short notice. We are responding to the supply situation with maximum efficiency. This is a strength of the BMW Group that has set us apart in a positive way in the past.
We have also created flexibility in our main sales markets. Our 3 market regions are increasingly independent when it comes to sales, production and supplier networks. The current differences in their situation show how important this approach is. It creates resilience because when the market situation is difficult in one region of the world, the other markets carry us through. This means that despite the different challenges of our times, we are always able to work towards the success of the company as a whole. The results of the first quarter of 2022 are proof of this. Strong demand for our products enabled us to strengthen our competitive position in the first quarter of 2022 and grow our global market share year-on-year despite the difficult circumstances.
Bottlenecks in the supply components and measures to stop the spread of the coronavirus in China are the reasons why we were not fully able to meet the high demand for BMW, MINI and Rolls-Royce vehicles. While sales through February were slightly higher than in the same period of the previous year, the development in March was mainly characterized by supply bottlenecks of wire harnesses from Ukraine. As a result of this, we saw a moderate decrease in deliveries between January and March 2022 compared to the all-time high of the previous year.
Our sales of electrified vehicles increased significantly, climbing 28% to more than 89,000 units. During the same period, sales of fully electric vehicles more than doubled to over 35,000 units. The iX3 and MINI SE were the most in-demand fully electric models. Sales were significantly higher than in the prior year quarter.
Now the BMW iX and the BMW i4, which we presented last year, will be introduced in many more markets worldwide over the coming months, and the new i7 will also be in the showrooms from November onwards. All of this will accelerate sales growth even further. This puts us on track to more than double our sales of fully electric vehicles compared to last year. We aim to break through the sound barrier of a total of 2 million all-electric vehicles sold overall by 2025. And by 2030, at least half of our global deliveries should come from BEVs, and we are not -- and we are doing everything we can to meet this goal even earlier.
2025 will play a crucial part in this because that is when we will be launching our Neue Klasse. With its focus on electric, digital and circular, it represents a quantum leap technology. The Neue Klasse will also come with our new generation 6 drivetrain generation for the first time with more output, new cell chemistry and new cell formats. The Neue Klasse will give sales of fully electric vehicles another major boost.
We're consistently pushing forward the expansion of e-mobility in line with growing demand. That is how we are responding to our customers' desire for more emission-free mobility. At the same time, we are making sure we can achieve the strategic plan and reach the goals we have committed to because it is especially important in challenging times not to lose sight of our long-term objectives.
Our road to climate neutrality by 2050 follows a scientifically validated and transparent plan through the entire value chain. In this way, we will be able to reduce our products' total carbon footprint throughout their life cycle by 40% by 2030. And what is specifically important to me, we deliver on our promises. For example, in 2021, we once again overfulfilled our CO2 emission target for the European Union, and all drive technologies contributed to this.
In addition to reducing CO2, the topics of raw material efficiency and circularity will play an increasingly important role. We showed with the BMW i Vision Circular last year what luxurious yet sustainable mobility in the urban environment might look like. The use of secondary materials will be a basic requirement on the road to create closed material loops. That is why the BMW Group's approach is called secondary first.
We are consistently following this path, and our goal is to create the most sustainable supply chain in the entire automotive industry. The light alloy cast wheels for the new MINI Countryman are a very concrete result of this thinking. They are made of 70% secondary material. This enables us to avoid up to 80% of the CO2 emissions from reduction in this way.
In addition to relying on secondary materials, we are also concentrating on utilizing raw materials in such a way that they can be fed back into the material loop after being used. The Neue Klasse will set new benchmarks for this. 50% of the raw materials used to build, it will be recyclable.
But circularity does not just represent the future from an environmental perspective. We're currently seeing quite clearly how this approach also plays an increasingly important role from an economic and geopolitical standpoint. Due to the current events and the possibility of supply bottlenecks as a result, prices in the commodity markets are skyrocketing right now. Purchase prices for many industrials and precious metals have reached all-time highs.
Some of these are essential to technological change in the automotive industry and especially the transition to e-mobility. We are currently discussing quite rightly how to reduce our dependence on fossil energy, but at the same time, we have to be careful not to create new dependencies in other areas. For example, a battery alone contains several hundred kilos of raw materials, most of which do not come from Europe.
Circularity is an approach that will greatly reduce dependence on primary raw materials in the long term. Until then, only technological diversification and the availability of alternatives will create resilience. That is why we are also advocating in this context for an open technology approach with sustainable further development of all drive technologies, including support for hydrogen technology.
Ladies and gentlemen, having to deal with the combined burden of major overlapping challenges, that is the new normal. The BMW Group has always responded to challenges with an effective operating performance by the entire company and a high level of flexibility. In this way, we've always guaranteed commercial success of the company even in challenging situations. In fact, we have emerged stronger than ever from many of these challenging times. You can rest assured that we will continue to manage the BMW Group in this spirit in the future. Thank you very much.
Thank you, Oliver. Ladies and gentlemen, the line will shortly be open for your questions. Please wait for some technical instruction.
[Operator Instructions] And the first question is from Dorothee Cresswell, Exane.
It's Dorothee from Exane. I wondered if you could talk a little bit more about how you expect your model mix to evolve going forward. Because obviously, on the one hand, we have supply shortages easing, albeit quite gradually. And on the other, you have this additional X5 capacity coming online in China, you're renewing the 7 Series and you're adding the XM at the top of the range. So which of those 2 will be the dominant force if we think about the likely mix and ASP evolution through 2022 and also through 2023?
And then my second question is it seems likely that Germany will phase out PHEV support relatively quickly. If you needed to pivot more rapidly than currently planned towards BEVs and you would want to get to the cumulative 2 million BEV units sooner than 2025, would that actually be possible as regards to your supply chain and also your production capacity? Or what are the limitations we should be aware of there?
Dorothee, thank you for your questions. So we will start with the first question and Nicolas Peter. Please, Nicolas?
Dorothee, maybe first of all, to answer here the question, a short reflection on Q1 '22. While I've explained and you've seen it in the numbers, the overall -- the global sales dropped due to the supply situation by around 6% from a global perspective. If we look at our top end vehicles, and I include in the top end vehicles 7, 8 and X7, I include, of course, the M brand and I include Rolls-Royce, they are plus/minus flat, which is a good indicator and explaining also the positive development of our margin.
And taking this into account as a starting point, we are confident that with the new 7 Series with -- you probably have seen images of the life cycle impulse of the X7, which will, of course, support the sales development in all major regions, that we will be able to further grow this in the next couple of quarters. So we are confident that we continue to improve the mix from this perspective.
On the other hand side, I have to say, we are very pleased also with the development in terms of contribution of all -- of the total portfolio. And the whole range, we have seen a very strong price development -- pricing development in particular in the U.S. and China already starting last year. And we have been pleased to see that in the major European markets, there's a positive trend which started maybe a little bit later than in the 2 other regions in the second half '21, is continuing to develop in a positive way. So it's not a question of dominance. We are very confident to grow in a profitable way in all segments we are in.
Thank you. And the second question for you, Oliver?
Dorothee, I think in this time of the industry, flexibility is king. Flexibility has 3 components. The first is product strategy. As you know, we are pursuing an architecture which is a highly flexible, like the new 7 Series, which comes as an i7 but also with the plug-in hybrid elements or even fully combustion engine element. So that -- we have the -- this architecture gives us flexibility to respond depending on real market demand, even if what you're focusing at is the demand for the i7 will be high.
The second component is production and supply chain flexibility. All our plants have been rebuilt to be flexible in terms of what they produce, whether they produce fully electric, hybrid or other vehicles. That is already behind us. Look at our plant in Dingolfing which produces the iX, the i7, but at the same time, also specific to derivatives of 5 Series or 4 Series.
And the third part is which market segments do you cover. And as I said before, we can cover now with the current approach of 2022 90% of our market segments with fully electric, which means if there is a market in the world which kind of pushes forward to go all electric, we are already prepared. We can cover more than 90% of these markets already today. So we are not afraid that single markets will push further towards emission-free mobility and only allow electric vehicles. We will be prepared to go along. And if -- 2 million units, I think if that market required, then we will be prepared.
Thank you, Oliver.
Your next question is from George Galliers, Goldman Sachs.
The first question I had was just on share buybacks, subject to the approval of the AGM. With your stock trading on less than 5x earnings, a mid-teen free cash flow yield and a high single-digit dividend yield and given the strength of your balance sheet, unless you see further downside to your share price from here, conceptually, would it make most economic sense to carry out the full 10% on an accelerated basis in coming months? Or is that too simple a view? Am I missing other important considerations?
The second question I had was just on the i7 and the new theater screen, which looks an extremely attractive product. If I sign up to Amazon Prime or buy an app or a movie through BMW while sitting in the i7, does any of that revenue accrue to you?
Thank you, George, for those 2 questions. So we will start with Nicolas and the questions about share buyback.
George, good to hear you. Well, you probably anticipate what I'm going to answer. First of all, the AGM has to approve our proposal, which is planned to happen next week. And as you can imagine, we would not ask for approval if we would not have something in mind. On the other hand side, it's definitely too early to exactly state and communicate before the approval what we would do. So let's rediscuss this when the time has come to take a final decision what we are exactly doing.
Yes. And George, I would like to answer your second question. Yes, we agree with you, the theater screen is a phenomenal experience. And we hope to introduce it to you personally as soon we have the opportunity to do so. The theater screen is based on Amazon Fire TV, and you need to use your own Amazon account -- Amazon Prime account to do that. So it will be the same revenue methodology you will have on the iPhone.
Thank you.
Your next question is from Patrick Hummel, UBS.
First of all, I'd like to focus on that point, Oliver, you made about flexibility. Why is it actually that the order bank for EVs, for BEVs is much longer than for ICE cars given the flexibility? And specifically, it seems the iX is sold out already for the year. Is there anything that your flexibility approach can contribute to balancing the order bank so that there's not such a big overhang on the EV side?
My second question relates, if I can, on the product side to the i3 in China. If I look at the KPIs of this product, it looks actually quite weak relative to competitors, range of only 400 kilometers. Roughly WLTP and the price tag is much higher than local competition also, Tesla Model 3. So I'm just curious what your defense pitch or pushback would be to that assessment.
And then thirdly, that one goes to Nicolas. Regarding the guidance, you reiterate the 7% to 9% margin target, which looks reasonably conservative after Q1. So I'm just wondering -- if we look specifically at the 2 items of price/mix on the one hand and raw materials on the other hand, in Q1, you obviously had a better or bigger positive price contribution than you had a headwind from the raw mat side. I'm wondering how those 2 items will evolve in the coming quarters. Will that remain a net positive? Or will it turn into a net negative based on what you can see?
Thank you, Patrick. So the first 2 questions will go to Oliver and the third one to Nicolas.
Well, Patrick, just to correct you, the order bank is high on all derivatives of BMW. That is not exclusive for BEV-only vehicles. So we see on a wide range of vehicles high order banks, and we try to fulfill customer needs in all markets and for all derivatives.
And the iX and i4, they are still in the ramp-up phase. They've been communicated last year. They're now introduced in more and more markets. They're still in the ramp-up phase. And we are very confident that once the ramp-up phase is finalized, we will be able to fulfill all demands.
And your question to the i3, which is the long version of the 3 Series fully electric in China, this is a product which perfectly fits to the requirements of the Chinese market. And when talking about that product, the range of the car is comparatively high, and we don't see any problem with that product in the Chinese market. It's on the contrary. We consider it will be a big success in the Chinese marketplace.
Patrick, well, I'm definitely confident that we are able to reach our 7% to 9% based on what we've achieved in the very strong first quarter. On the other hand side, as we all know, there's a lot of volatility in the market. So the question is, is this the right point in time to review something. In particular, if we look at the full year, we continue to find, if we look at currency and raw material prices, a negative impact of the mid-3-digit million area. Pricing was again very strong in the first quarter. So I'm definitely not pessimistic, but the volatility is, due to geopolitical topics, extremely high. So -- and this could, of course, impact production in Q2.
We anticipate that the semiconductor situation will improve in the second half of the year. So we still have some issues. We have a clear plan, but as I said, there is volatility. And based on this, we believe -- definitely, you have to integrate as well the development of COVID in China. And based on these balancing pluses and minuses, we believe that at this point in time, it's the right way to move forward with the 7% to 9% guidance. Of course, we are pleased that we are in the upper part of this corridor.
Can I just ask, Nicolas, on the raw mats. Baking in the latest developments, what would be the guidance you would give for the full year?
Yes. For the full year, we have a good coverage in place. If we look at raw material stand-alone, it would be above EUR 500 million and positive impacts from FX, in the low to mid-3-digit million area coming from FX. So that's -- this is the equation between FX and raw material.
Thank you.
Your next question is from Daniel Schwarz, Stifel.
First one is on Financial Services. Dr. Peter, you mentioned that competitive pressure is up in China and in the U.S. And I think you have not mentioned that before. Is that a concern? And where does it show? Is it cheaper leasing rates or offers to consumers with lower credit quality? And is this pressure rather coming from automotive competitors or from third parties?
And the second question would be on the management compensation. The bonus includes an earnings component. And I just wanted to know -- will this be adjusted following the consolidation of the JVs, for example, for BBA? Or will the net income target thresholds be increased following the consolidation?
Thank you, Daniel. So maybe I'll start with the second question. It's obviously a question to be decided by the Supervisory Board and not by the Board of management. So please, we can't give that answer now.
And the first one is for Nicolas, please.
Daniel, very important topic thinking about our fin co business. Well, the pressure reflected on one hand side is third-party business, which is gaining share, and you see it in slightly, slightly lower penetration rates. So you don't see it, and that's my intention.
We buy strong business. We have not changed our high-quality credit assessment. And if we look at the bridge between Q1 '21 and Q1 '22, we see a positive development, of course, on residual values and -- on the credit side. But also from an operational perspective, there is a positive momentum. Credit risk continues to be extremely on a historical very low level, and I think in the area of [ 0.01 -- 0.9% -- 0.09% ], so very low.
Thank you.
The next question on the line is José Asumendi, JPMorgan.
A couple of questions, please. Oliver, one of your key German competitors defined software as mission critical, and we're starting to see some substantial investments being done. Can you comment please your vision within BMW and also the investments you're planning on software in the next 2 years?
And also, second question on battery. We are aware of the excellent work you're doing there on battery. When can we hear more around the work you're doing and whether you could also take some decisions regarding make or buy for your own production?
Thank you, José. Before we start with the answer for you, Nicolas wants to add something.
Daniel, just a short comment regarding lease rates. Of course, lease rates are not going down. Lease rates are going up. So it's not reflected in lease rates.
Okay. Thank you for that addition. So coming back to your questions. So we start with software. That's for Oliver. And also, the second one battery technology is for Oliver.
José, of course, the digitalization is mission critical. It has always been. I think that is not a new phenomenon. Look at the i7, which just hit the market now. It has the newest operating system in it, which is a technology masterpiece, I think, in terms of connectivity, in terms of automated driving and so forth. I think we are right at the forefront here.
And looking to the future now, we just signed a very big cooperation with Qualcomm and Arriver, as we've communicated, to drive that development even further to the next possible level, culminating then in our new architecture, Neue Klasse, as I mentioned, in 2025. So it's in the forefront of what we do here. BMW is a fully digitalized company already and tries -- and not only tries. And I think we will have a most convincing product offering which is fully digitalized, and we're driving the next step here now.
Second one about battery.
Okay. Second question, battery technology. You have to look very closely what are we talking about here. On the uppermost level, you have the energy module where the different battery cells come together and then goes to the car. That's fully in-house at BMW, whether that is in Europe or the United States or in China. The battery cell itself, we do everything in-house, R&D, knowledge transfer, production planning, besides the actual manufacturing. So this is the -- actually the only thing we don't do. And then you go one step further to the raw materials. For the most critical raw materials, we facilitate direct contracts with the producers of that raw material to safeguard access to these raw materials.
So when we talk about make or buy, it is much, much more than the battery cell. And the battery cell itself, there's ample competition. There are many, many suppliers already existing or beginning to come up. And I think most importantly is that you have a production which is local for local. So for European plants, it should be in Europe, independent of ownership structure. And then China should be for China. So I think it's much more important to look at these factors than to say who actually owns the battery cell production. It's much more complex, I think. And for us, I think we have exactly the right approach, and -- which will lead us in the future.
Thank you.
The next question is from Philippe Houchois, Jefferies.
I've got 2, please. One -- maybe a bigger picture question for Oliver and then more technical one for Nicolas. I was interested -- earlier in your prepared comments, you talked about the 3 regions in which you operate becoming increasingly independent and therefore, more resilient. Fully understand that. Now in the past, the driving force of BMW's globalization was, in response to the relatively small size, that you are able to optimize and compensate for small size by having a more global footprint and increased scale as a result. I'm just wondering what has changed there.
Is the change of ages because you've basically reached the size where you feel that it's less of an issue of scale? Is it driven more by political risk or the need to improve the CO2 or the emissions in general of the whole organization? Or is it a factor that basically, as we move towards a world of more electric cars, more modular, possibly that scale is less correlated with size? I'd love to have your views on that.
And then for Nicolas, more questions on the cash flow versus the P&L. Relatively weaker cash flow, by your standards, in Q1. I'm just wondering, what is the impact on cash flow of your -- the adjustments of the inventory that you've talked about? And I guess some of it is P&L, some of it is cash flow, some of it goes through the working capital. And I'm just wondering if -- how much of that is -- that adjustment is cash? Is that going to affect Q2 as well and then it's not until second half of this year that we get to more kind of a smoother cash flow profile than what we saw in the first quarter?
Thank you, Philippe. So Oliver, do you want to start?
Yes. Philippe, I think you're at the core of strategic discussions. I think we have not changed our approach that first of all, BMW is a global player with an international footprint. We had our first plant in the United States already in 1992, our first plants in China already in 2003. So that is a development.
What is -- of course, is on the increase is the volume, and you mentioned that. Of course, that's always a matter of economies of scale. And the bigger these regions' market is, the more it makes sense to localize, of course. And we just opened another plant up in Shenyang besides the 2 other plants we had there. So we have a third plant there now due to the market increase. And of course, that is localized. That's the first thing.
So we are continuing what we have been doing in the past. And that also is a kind of resilience factor because these factories have a natural hedging in themselves, which helps us a lot to balance our specific risk, especially on the FX side. What is coming on top though is that the regulators in these regions are becoming more diverse in terms of safety -- active safety of the cars, in terms of connectivity and of course, in terms of CO2 regulation.
So we do -- as I said before, the 3 Series long or the X5 long, we only offer in China. For the 7 Series, we will have diesel only in Europe and not in the United States. On the contrary, V8 engine, we only have in the United States and not in Europe. So with -- that global approach, together with flexible architecture, gives us the opportunity to respond very swiftly to specific market demand and at the same time, staying efficient and profitable.
So Philippe, if we look at free cash flow, on one hand side, on the working capital side, we had positive elements coming from decrease in inventory levels and decrease in trade receivables, but this was more than offset by a decrease in trade payables as production was constrained in Q1. And then on top -- and this was a very specific topic in China. We had a decline of down payments, quite substantial amount of cost due to the production and closing of the dealership at the end of the first quarter and additionally, higher tax payments due to the strong positive development of our results. And this is also explaining why we are very confident to be able to deliver in line with our EUR 12 billion target.
Thank you, Nicolas.
The next question is from Tim Rokossa of Deutsche Bank.
It's Tim from Deutsche Bank. I think the first 2 are probably to Nicolas.
As you said, it's more difficult than ever to predict current market developments. You already said something about your margin development and that you were happy to be at the upper end of this corridor. How should we think about absolute profitability for the next 3 quarters? Will Q2 be very weak because of the China impact and everything else that's going on and then sort of H2 stronger in absolute terms than H1? Or do you also expect that in absolute terms, with this strong Q1, actually, H1 will be better than H2?
Secondly, this can just be a yes. Nicolas, in contrast to the past, you gave us an underlying or some would say adjusted margin figure for the Chinese joint venture consolidation. Given the importance for your cash return story, is it still fair to assume that we think about -- when it comes to dividend, about your stated earnings figure alone and not some sort of adjusted figure?
And then lastly, Oliver, probably to you. You are part of the group of executives with regular [ communication ] with the German government. My impression from meeting them as well is that they are still quite reluctant to do this, but what would happen to your German production if Germany should indeed ultimately decide not to buy gas from Russia anymore? You must have played that to a scenario.
Okay. Nicolas, if you want to start?
Well, let's start with the dividend. Of course, based on stated earnings, so no change in the way we guide in this area. Absolute profitability for the next 3 quarters, you probably anticipate what I'm going to answer. Well, start into the year was very strong, as we've outlined, and this is why we are confident that we are able to stick to the 7% to 9% in terms of EBIT auto margin.
Of course, in particular, the development in China will, in a positive or negative way, impact probably very much Q2 results. But it's too early to make a final comment. We have some positive, some negative developments in this area. But as China is a very important market to our company, it will have an impact for the full year based on -- despite the fact that there is -- as we all know the different items and topics, there's a high volatility. But based on what we anticipate, based on our good order bank, strong order bank in all 3 major regions, all of the positive feedback we continue to get from our network in China, we are going to deliver against the 7% to 9% for the full year.
Yes, Tim. Tim, thank you for your question about the gas. And I think foremost of all, the current increase in electricity and also gas price are not impacting the power supply to our properties of our production. And since we have long term safeguarded ourself using various mechanisms, electricity prices are safeguarded for a longer period of time.
Currently, we are contributing positively about possible effects, which might have a gas shortage or even a gas disruption. Everything else, I think, would be speculation. And of course, please understand that we don't want to be part of a speculation. Of course, there are some areas, especially in production, where we need gas to -- for our production. But we are working very positively with the government officials here.
Okay. Thank you.
The next question is from Daniel Roeska of Bernstein Research.
This is Daniel from Bernstein. Two then, if I may, at the end. This morning and earlier, you highlighted the benefit of the flexibility of the drivetrain choices [ for your additional e-vehicles ]. Could you elaborate which drivetrain technologies are currently being integrated and developed for the Neue Klasse?
And then secondly, could you comment on BMW's progress on the E/E architectures? When do you expect to move from a domain-centric design to virtualized domains with kind of a more centric vehicle design? Is that also for Neue Klasse? Or is that something you would expect to achieve earlier?
So thank you, Daniel. And Oliver?
Yes. The Neue Klasse starting in 2025 will be mainly focused on the middle car segment of our product portfolio. So it does not cover from the lower segment all the way to the luxury segment. So when it hits the market, it will be concentrated on the 3 Series segment. And at that point in time, the market will have developed into a size where it is reasonable to have only one drivetrain in that architecture. So the Neue Klasse will have only one drivetrain, it's BEV only. And I think it's, from a timing point, exactly the right time to do so.
And in the E/E architecture, as we said, digital, electric and sustainable are the main 3 realms of that Neue Klasse. And of course, it will have the next step of development of our E/E architecture. And you will get more and more knowledge about this over the years, but it's too early to communicate anything already now.
Great. Oliver, one follow-up, if I may. Is that a change on Neue Klasse? Because I seem to remember that there were a couple of drivetrain options for Neue Klasse. So was that a conscious decision to switch to BEV only?
No. That must be -- I don't know where you have that from. For some time, we've communicated there's only one drive, it will be BEV only. And we've said that 1 year ago already.
Thank you.
The final question is from Stephen Reitman of Societe Generale.
My question is about how you see the market and how you see BMW. Your -- one of your principal competitors has gained a little bit of attention by announcing already, even before the semiconductor shortage became a thing, that they were renouncing their aim to be #1 in terms of volume in the luxury space but they want to be most profitable. And obviously, the semiconductor shortage has caused most manufacturers to try to concentrate on the highest contribution margin vehicles and less of the margins that we see today. How do you define BMW's mission now going forward when the semiconductor shortages ease and you are able to produce more vehicles?
You've seen in the U.S. that you've increased your sales despite having a substantial reduction in your days supply to your dealers. I think in 2018, 2019, you had an average about 50 days supply. You're down to 10 days supply, but still your sales are increasing. What lessons are you learning from that? And do you think that would give more confidence to the market that BMW and other manufacturers are concentrating more on profit and less on volume and maybe that changes some of the paradigms about the way your company is valued?
Thank you, Stephen. So Oliver, please?
Look, there is no such thing as a volume strategy. I mean in our industry, you wouldn't do that. In the year 2022, we have our biggest product offensive we've ever seen here at BMW. You have the i7, you have the iX1. And of course, with great -- putting profitability at the very forefront of our operation, we still want to gain market share. And then if you put that combination, gaining market share with high profitability, I wouldn't call that a volume strategy.
We have increasingly extremely competitive products with all different drivetrain. Look at the test results of our BEVs-only. They win one after the other test. That's why we are confident that we can gain market share especially in the BEV segment and we will become a very visible market player in that realm. And there is no such thing as a volume strategy here.
Thank you, Oliver. And ladies and gentlemen, thank you for joining us today in this call. We wish you all a pleasant day. Goodbye.
Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect now.