Bayerische Motoren Werke AG

XETRA:BMW

Earnings Call Transcript 2018-Q2

[Maximilian Schöberl]

Ladies and gentlemen, good afternoon and welcome to our telephone conference for the second quarter results. With us today is Harald Krueger, Chairman of the Board of Management of BMW AG, and Dr. Nicolas Peter, our CFO. First Harald Krueger will give you an update on the business performance during the second quarter. Dr. Peter will then take you through our financial results. Afterwards we will have time for a Q&A session. Mr. Krueger, please go ahead.

[Harald Krüger, Chairman of Management Board & CEO]

Good afternoon, ladies and gentlemen. At the BMW Group, we have clear targets and we deliver on our promises. Our sights remain fixed on the long term. We are already anticipating what mobility will look like in 10, 15 years down the road and taking the necessary decisions today. Our strategy, NUMBER ONE > NEXT, gives us a clear direction and maps out our long term goals. Volatility and uncertainty have both been part of our daily business for a long time now. However, our strategy enables us to adjust to short term changes in our business environment. This flexible framework has been key to the BMW Group's success so far.We respond to new demands early and set the trends. Let me give you a few examples; first, the shift towards sustainable mobility with efficient dynamics since 2007; second, our pioneering role in e-mobility. In the first half of 2018, the i3 was once again the top-selling electric vehicle in the premium compact segment. We currently offer customers 10 electric or plug-in hybrid models. Since the start of this year, we have delivered more than 60,600 electrified vehicles to customers, an increase of over 40% year-on-year. We are therefore on track to meet our declared goal of at least 140,000 vehicles this year. Other fully electric models are also ready to go. We will release the MINI Electric late next year, followed in 2020 by the first fully electric BMW, the iX3.Third, expanding our mobility services into a strong business segment that will complement our core business. The planned joint venture with the Daimler Group is the next logical step. Together, we will take innovative mobility service to a whole new level.Fourth, our focus on achieving the most balanced distribution of sales possible, with local production in the main economic regions of Europe, the Americas, and Asia. This gives us greater flexibility in the current trade disputes. Our global production network opens up various possibilities for us. The new BMW X3 is now also being built in Shenyang and Rosslyn, as well as at our plant in Spartanburg.Fifth, switching BMW models to the new WLTP test procedure. With the exception of three model variants, we have already switched several hundred models well ahead of the September deadline. Since we integrated the WLTP switch into our production and sales and planning early, we are able to offer to our fleet customers the same wide range of products as usual. Delivery times for our models are the usual three months. We also have around 190 models that already meet the Euro 6d-TEMP emissions standard.Our forward planning underscores how we put the interests of our customers first. It also makes it quite clear that we face challenges head on regardless of where they come from. With our strategy, we are pursuing a clear vision to be number one, and we are steering the BMW Group according to several performance indicators crucial for our success. Three aspects are especially important to us, profitability, growth, and future competitiveness. In 2017, we were the world's most profitable car company. That's why we are able to continue investing in our future. We have the same aim for the current business year. In the first half of 2018, group earnings before tax exceeded EUR 6 billion. The EBIT margin in the automotive segment remains within our target range of 8% to 10%. The group EBT margin stands at 12.7% and is therefore above our target of 10%.Growth is very important in the highly competitive premium segment. We are targeting profitable growth and leadership in all segments where we do business. Between January and June 2018, with our three brands, BMW, MINI, and Rolls-Royce, we delivered more vehicles to customers than ever before in the first six months of a year.We are securing our future competitiveness by strengthening our brands and creating innovations, especially for autonomous driving and e-mobility. The work at our autonomous driving campus outside Munich is in full swing. In May, we became the first international carmaker to receive a license from the city of Shanghai to test autonomous driving. Early next year, we will open up our new battery cell competence center in Munich. This is where we will focus all our technological expertise in the development and production of battery cells, which are the heart of the battery.In a highly volatile environment, we are constantly finding the right balance between all three proof points, profitability, growth, and future competitiveness. Over the past few months, the business environment in which we operate has become even more challenging. Despite this, our operating business remains strong because our strategy enables us to maintain our course even through difficult conditions.For 2018, our goals remain unchanged; a slight increase in automotive deliveries to a new all-time sales high, group earnings before tax at the same high level as the previous year, and EBIT margin in the automotive segment of between 8% and 10%.Of course, these goals assume that economic and political conditions will not worsen any further. As you know, the BMW Group remains committed to free trade and open markets. Our global presence enables us to remain agile and flexible. More than ever, we are looking at different scenarios and are taking advantage of opportunities in the major regions.China is our most important single market and leads the way in e-mobility and connectivity. In recent weeks, we have laid the path for important strategic steps. We'll be expanding and strengthening our business in China over the long term. First, we are expanding our joint venture with BBA. We will increase our capacity to 520,000 vehicles. Moreover, the first fully electric X3 will be exported from China to other markets. We are the first international car company to receive an agreement from the Chinese government allowing us to increase our stake in a joint venture from 2022.Second, we have agreed to a 50/50 joint venture with Chinese manufacturer Great Wall Motor and plan to build electric MINIs together. The joint venture will also produce electric models for Great Wall Motor. This is a logical step into the electric future for MINI.Third, we have signed a memorandum of understanding with Baidu. The BMW Group will gain a seat on the board of Apollo, which is Baidu's open platform for automated driving.Fourth, we have awarded CATL a contract worth a total of EUR 4 billion. CATL will build the largest battery cell plant in Germany, which will supply battery cells for our BMW iNEXT from 2022. This means the entire value chain for production of electrified vehicles will be located here in Germany. This will be essential for expanding our leading position in e-mobility. We will also be purchasing raw materials for battery cells ourselves, especially cobalt, in the future.As you can see, we have enhanced our presence in China in a single stroke. At the same time, we are implementing our strategy in other market regions. Our largest plant is located in the United States. We remain committed to our investment and expansion plans there. Going forward, we will build up to 450,000 vehicles a year in Spartanburg and we will remain a net exporter. That means we will continue to produce more vehicles in Spartanburg than we sell in the U.S. The new X7 will also contribute to our growth strategy.In all three major sales regions, Europe, America, and Asia, we reported growth in the first half of the year. Europe remains our largest sales region. That's why we decided to build a BMW plant in Hungary. After significant investments in China, Mexico, and the USA, we are now focusing on our activities in Europe. This ensures our worldwide balance of production between Asia, America, and our home continent. The new plant will set new standards in digitalization, sustainability, and flexibility, and will also lead the way in new technologies.The foundation of our worldwide success is our strong model offensive. I am certain that the new Z4 will be turning heads in 2019. Journalists were just testing prototypes. Beginning with the X2, 2018 is our year of the X. We will offer three additional models. The new X4 has been on the market since July. The new X5 will be released in November. Production of the all new X7 will get underway towards the end of the year. This shows our clear commitment to fulfill our customers' increasing demand for SAVs.Ladies and gentlemen, we have another ace up our sleeve, a systematic expansion of our luxury segment. The new i8 Roadster is fresh on the market. Within the new 8 series model range, production of the new 8 Series coupe is already underway. The market launch is scheduled for November. This will be followed in 2019 by the convertible and Gran Coupe, as well as the corresponding M models. All models showcase our new design language.Rolls-Royce will also be releasing the Cullinan. The media resonance and numerous pre-orders show that the Cullinan perfectly reflects the pinnacle of luxury in the new off-road segment. In the second half of the year, there is even more to come, our BMW iNEXT vision vehicle, revealing new horizons.As you can see, ladies and gentlemen, we are driving full speed ahead in the major regions of the world, with innovative technologies and with new products. We continue to follow our clear strategic roadmap and remain highly flexible. Thank you.

[Maximilian Schöberl]

Thank you very much, Harald. And now Nicolas Peter, our CFO. Nicolas, please go ahead.

[Nicolas Peter, CFO & Member of Management Board]

Ladies and gentlemen, good afternoon. The BMW Group is on course to meet its targets for the year. As part of our corporate strategy, we remain fully committed to using our financial strength to invest in the future. The technologies we develop today will make us even more competitive in the future. Our clear strategic focus is on electromobility and autonomous driving. As expected, these high up front investments have affected our earnings development. R&D costs for the first half year are about EUR 300 million higher than for the same period last year. As previously announced, we also faced headwinds from currency and commodity prices.Nevertheless, the BMW Group continued its solid performance in the first half of 2018. The company achieved a strong EBT margin of 12.7% at group level. Pre-tax earnings once again exceeded the EUR 6 billion mark. In the automotive segment, the EBIT margin for the year to the end of June was also within our target range at 9.2%.We are systematically addressing the challenges resulting from the current geopolitical environment. Volatility has become a given in our business. And we have shown time and time again we know how to deal with such circumstances and we are able to respond flexibly to the ever-changing conditions.At the same time, we continue to maintain our strong financial footing, which enables us to make the right decisions quickly and effectively. The BMW Group posted solid earnings for the first six months of 2018. Due to negative currency effects, group revenues decreased by 4.0% year-on-year to around EUR 47.72 billion.Research and development spending, including capitalized development costs and minus depreciation, increased to EUR 2.76 billion in the year to the end of June. The income statement impact from R&D costs in the first half year amounted to EUR 2.61 billion. This is an increase of EUR 312 million or 14% over the same period last year.The R&D ratio for the first half year stands at 5.8%. This is higher than the figure for the previous year and for the first quarter. As previously announced, the ratio will reach around 7% by the end of the year. This increase is mainly driven by preparations for the 5th generation of the electric drive train, continued development of our flexible rear and front wheel architectures, autonomous driving, and development activities for the 8 Series model range and new X vehicles.We also expect capital expenditure to reach a new all-time high in 2018. The main reasons are the ongoing construction of the plant in Mexico and the large number of model ramp ups. This includes significantly increasing capacity for our X models. By the end of June, we had invested a total of EUR 1.58 billion, mainly in property, plant, and equipment. This amount is around EUR 120 million more than the previous year. The CapEx ratio was higher than in the first six months of 2017 at 3.3%. For the full year, we expect a ratio of around 5%. Despite these negative effects, pre-tax earnings totaled EUR 6.04 billion for the first six months and around EUR 2.87 billion for the second quarter. Both the EBT margin of 11.5% for the quarter and 12.7% for the first half year were above our 10% target. Ladies and gentlemen, now let's take a look at the individual segments, starting with the automotive segment. In the first half of 2018, we delivered more than 1.2 million vehicles to customers. All major sales regions reported growth. The slight downward trend in revenues is mainly due to currency headwinds and the competitive environment. Adjusted for currency effects, revenues were up 2.4%.To make rapid progress in future technologies, we also continued to hirequalified staff in the second quarter. As I already mentioned, we once again increased research and development spending. At the same time, we are currently in the process of modernizing and standardizing our IT landscape. Despite higher costs for future projects, additional currency headwinds, and intense competition, the automotive segment's operating earnings remained high at EUR 3.8 billion. In the second quarter, we were once again able to offset some of the high additional costs through efficiency measures. The EBIT margin of 9.2% for the half year and 8.6% for the quarter are within our target range. Thanks to new models like the 5 Series, the BBA joint venture contributed around EUR 100 million more to earnings than the previous year. Overall, BBA sales increased by around 15% to more than 215,000 units. The model offensive has also had a positive impact on pricing. Pre-tax earnings for the first half year totaled around EUR 4.34 billion. With a free cash flow of EUR 1.94 billion in the automotive segment at the half year mark, we are on track to meet our target for the year of more than EUR 3 billion.The financial services segment continued to perform well. Since the start of the year, the total portfolio has increased by 2.3% to more than 5.5 million contracts. More than 930,000 new contracts were concluded with customers in the first half of the year. The penetration rate was on a par with the previous year at 47.4%. Second quarter pre-tax earnings climbed 2.7% to EUR 605 million. We also remain well positioned on the risk side. Our credit loss ratio remains low and residual values for our leasing portfolio have developed as expected. For all risks, we have made appropriate provisions.Let's take a brief look at the motorcycle segment. Business development in the first half year was affected, among other things, by the ramp ups for various model changes. In the year to the end of June, motorcycle sales therefore decreased slightly. Despite these effects, the second quarter EBIT margin of 14.9% was still on par with last year. The segment EBIT for the first six months totaled EUR 175 million.Ladies and gentlemen, let's now turn to our outlook. New products will generate positive sales momentum in the second half of the year. The 5 Series is now fully available in China, where we have also just recently launched the new locally produced X3. We will be doubling capacity for the X3 and X4 to around 400,000 units per year over the medium term.More major launches are planned up in the autumn and winter with important, high margin models like the new X5, the X7, 8 Series, and the Rolls-Royce Cullinan in the pipeline. We are on schedule with the WLTP transition, which is almost complete.Against this background, we are able to confirm our guidance for the current year. Of course, we continue to monitor the current trade situation very closely. If conditions deteriorate any further, we cannot rule out effects on our guidance.At group level, we expect earnings before tax to be on par with the high level of the previous year. In the automotive segment, despite high R&D costs and a significant headwind from the strong euro, we anticipate a slight increase in deliveries and revenues. We also expect the EBIT margin to remain within the range of 8% to 10%.In the motorcycles segment, bolstered by new products, we expect to see aslight increase in deliveries, with an EBIT margin in the range of 8% to 10%. And in the financial services segment, we are aiming for a return on equity above our target figure of 14%.Ladies and gentlemen, profitability, growth, and innovation are the cornerstones of our businesses. The BMW Group aspires to be a clear technology leader. To achieve this, we are using our financial resources to make investments targeted for future success.Our business environment will remain volatile. However, challenging conditions are always an opportunity to leverage competitive advantages and to capitalize on new ones. Our strategic focus remains clear, and we continue to maintain our guidance for the full year. Thank you.

[Maximilian Schöberl]

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

[Operator]

[Operator Instructions.] The first question is from Arndt Ellinghorst of Evercore.

[Arndt Alexander Ellinghorst]

Firstly, you mentioned this morning positive mix and pricing expectations for the second half this year. Could you quantify your expectations in terms of margin support for the second half? That would be very helpful. And secondly, also on earnings for H2, concerning the adverse China pricing effects related to tariff changes, is it fair to assume some EUR 300 million negative effect also in the second half this year? And then more strategically for Harald Krueger, with Aston Martin and Volvo cars aiming for IPOs and Daimler openly flirting with an AMG and F1 float, is there anything within BMW that you could consider as potentially carving out of the current group structure? The most obviously opportunity would, of course, be Rolls-Royce.

[Maximilian Schöberl]

Thank you very much, Arndt. We'll start first with Nicolas and then Harald. Nicolas, please.

[Nicolas Peter, CFO & Member of Management Board]

Arndt, referring to your two questions, positive mix and pricing for the second half of 2018, I would answer this question as follows. First of all, we commit and stick to our guidance for the full year, 8% to 10%, in the automotive segment. Second, we will have, on one hand side, this positive mix and pricing effect coming from new model launches, as I already mentioned, on one hand side. On the other hand side, and this was your second question, we have some negative impact from tariff changes between the U.S. and China. Is it exactly EUR 300 million? Probably slightly lower. Why? Because we have -- as you probably have already seen, we have increased prices in China for the X models, which we import from U.S. to China, by between 4% and 7% two or three days ago.

[Harald Krüger, Chairman of Management Board & CEO]

And Arndt, good afternoon. Coming back to your question on the potential carving out of Rolls-Royce, the answer is definitely not. Yes, definitely not. We are enjoying the success of Rolls-Royce. I mean, Rolls-Royce had its 13% growth on sales in the first half of 2018. We have a high order intake for the new Cullinan. The Phantom, the new Phantom, which is on the market since January this year, is well received. So we enjoy the success at Rolls-Royce, but there is definitely no plan at all to carve it out.

[Arndt Alexander Ellinghorst]

Okay, that's clear. I didn't want to offend you at all.

[Nicolas Peter, CFO & Member of Management Board]

And Arndt, both cars contribute in a significant way to the positive profit development.

[Harald Krüger, Chairman of Management Board & CEO]

And finally on this one is, Arndt, we clearly enjoy our brands with MINI, with Rolls-Royce and BMW and BMW Motorrad, as being a pure premium manufacturer and deliverer. And Rolls-Royce is an integral part of that.

[Maximilian Schöberl]

So thank you very much, gentlemen. Thank you very much, Arndt, for your important question. And we go ahead with the second question.

[Operator]

The next question is from Dominic O'Brien of Exane.

[Dominic Patrick O'Brien, Analyst of Automotive]

My first one is actually just going back to Arndt's first question on trade. When you talk about the net impact being less than EUR 300 million, is that accounting for the lower tariffs from the European imports and the higher tariffs from the U.S.? And can I confirm that the full impact of that is now in your pre-tax profit guidance? And my second question was on the X5 CKD production in Thailand that you mentioned on the press call. Is this something that you were using already when you were importing into China? And what volume could it take at full production? Could it, for example, take all 40,000 also X5s imported into China last year? And finally, sorry, one more on China JV volumes. And you mentioned the strong growth through the first half, but should we actually expect to see an acceleration in the second half as local production of the X3 ramps? And will JV profits follow that ramp up?

[Maximilian Schöberl]

Okay. Thank you very much, Dominic. Yes, we'll start with Nicolas and then Harald and then again Nicolas. Yes?

[Nicolas Peter, CFO & Member of Management Board]

Dominic, the amount I've mentioned is related to additional tariffs between U.S. and China. Between Europe and U.S., we do not know at this point in time what is going to happen. And therefore, we have not included anything in our outlook for 2018 for the second half. And are we expecting JV profit to develop positively with the launch of the X3? Definitely yes. The X3 will be one of the, from a volume perspective and a profit perspective, strong contributors to our business in China.

[Harald Krüger, Chairman of Management Board & CEO]

Dominic, on your question concerning the CKD plant in Thailand, could it do 40,000 X5s? No, definitely not. We are more in the range of 10,000 to 20,000 vehicles and less, but this is still a significant portion of the volume we transport and import in China. So it's a lever, but it will not be the only solution for us.

[Maximilian Schöberl]

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

[Operator]

The next question is from Horst Schneider of HSBC.

[Horst Schneider, Global Head of Automotive Research and Analyst]

I want to come back on this automotive revenue guidance and you still target a slight increase for 2018. And given the fact that we had this little shortfall in H1, I just want to know what initiatives have you taken to increase sales momentum apart from all the model launches that you are about to do now? Are there any additional steps that you do? And then also, when you talked about automotive revenue growth in your speech, you were mentioning the competitive environment. Has that become any tougher? And in that context, maybe can you also comment on the price development by region maybe in the course of Q2?

[Maximilian Schöberl]

Yes. Nicolas, please?

[Nicolas Peter, CFO & Member of Management Board]

Horst, the revenue, the positive revenue development in the second half of 2018, will be mainly driven, on one hand side, as you've already mentioned, by volume. But this volume development includes also a positive mix development. Why? As the X3 is a strong contributor as the 8 Series, which will be launched in a couple of weeks from now, later in the year the first new X5 hitting the showrooms in the various markets around the world. So all those products will contribute to the positive revenue development.On pricing, I would -- and I think we have to focus on the three major regions. First of all, U.S. pricing remains competitive in the U.S. market. However, in particular as the U.S. market is becoming more and more an SAV/SUV market, we are positive that, with the higher availability of X models in the U.S. environment, we will see a further positive development.Second, in the European arena, we have seen rather stable development maybe with one exception. That's UK, where, due to the Brexit discussion, the market was developing -- the total market was developing in a negative way. And China, we had overall in the first half until end of May very positive development in pricing. June was some mixed scenarios, mainly due to the fact that those tariff changes have been announced. And we forecast that this is now stabilizing again and that we see a good momentum in the coming months.

[Horst Schneider, Global Head of Automotive Research and Analyst]

So the revenue growth will then pick up already in Q3, or is it really more focused on Q4?

[Nicolas Peter, CFO & Member of Management Board]

The higher impact will be in Q4, as in particular the X5 is going to hit the dealerships in Q4.

[Horst Schneider, Global Head of Automotive Research and Analyst]

But it will be positive also in Q3, right?

[Nicolas Peter, CFO & Member of Management Board]

Horst, we are not guiding quarter by quarter.

[Horst Schneider, Global Head of Automotive Research and Analyst]

I understand. That's fine. That's fine. It's okay. I know the answer.

[Maximilian Schöberl]

Okay? I have to interrupt now. Thank you very much, Horst. Next question, please?

[Operator]

The following question is from Kristina Church of Barclays.

[Kristina Church, Director]

Just a follow-on question on the CKDs. Just wondered how quickly you can ramp production there. I know you said you couldn't obviously completely take the 40,000 from Thailand, but I know there is some other CKD production in Asia as well, and how profitable that can be. Is it worth doing or is it better to sort out -- to stick with the U.S. production going into China?And then more of a housekeeping question just in terms of FX and hedging. Could you just update us on where you are, how far hedged you are for 2019 at the moment? That would be helpful.

[Harald Krüger, Chairman of Management Board & CEO]

Kristina, to answer your question on to adapt the ramp up of construction of the CKD in Thailand, CKD in Thailand for the X5 was already existing for the current generation and will exist also for the new X5, which will come to the market by the end of the year. So we did this one already for two, three years, so it's not something new. That's why we are already in the race for sending the X5 from Thailand to China.Capacity wise, it's limited because CKD plants are not fully operational plants with a huge capacity. But it's clearly profitable for us. We only do things if we are clearly profitable. And it helps the supply for the X5, which is under high demand in China. So that's the way and the reason why we do it; profitable clearly; volume limited. But this is one action to counteract.

[Nicolas Peter, CFO & Member of Management Board]

And Kristina, maybe to add to Harald's points from my perspective, as we speak we are investing in our Spartanburg plant to increase capacity from 400,000 to 450,000. And our forecast is the new X5 will be -- yes, will be sold out in the remaining months of '18 and '19. FX hedging, all the main currencies in '18 are fully hedged. And as you referred to '19, I would at this point in time say, well, probably 50% of our coverage for the main currencies in '19 is in place.

[Maximilian Schöberl]

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

[Operator]

The next question is from Jose Asumendi of JPMorgan.

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

Dr. Peter, if you could come back again a little bit to guide us on maybe the raw mat headwind for the second half, if at all any, and the capitalization of R&D ratio for the second half. And then for Harald, thank you for the additional disclosure on emissions on WLTP; I think very impressive. You mentioned your thoughts a bit on the expected software attrition rates of 48 volts, because I don't think you need a lot of 48 volts in your portfolio to meet the CO2 emission standards in Europe over the coming two years. So can you maybe discuss a little bit the 48 volt angle? And what are your thoughts with regards to the remaining technologies you have in the portfolio? And maybe final one, I would love to hear your thoughts on autonomous driving, please. And in terms of the mapping time, how long do you think we're going to be going through level 3? And how long do you think it will take to basically hit level 4 and 5 in light of the challenges to implement the technology?

[Maximilian Schöberl]

Okay, Jose, thank you very much. We'll start with Harald, yes?

[Harald Krüger, Chairman of Management Board & CEO]

Jose, starting with the autonomous driving, ADAS on level 3 and level 4 and level 5, as we communicated, we will try to achieve level 4 and level 5 with a smaller number of vehicles with our BMW i Vision next, yes? But when you come by today, we start at level 1 and level 2. We will, this year with the new X5 and then later on next year and the years, also even upgrade the level 2 with further functions which the customer will love, in my perspective. Then there's the next major step, going to level 3, and another major step to level 4 and 5. So it's a process which will take some time, definitely.Secondly, security and safety comes first for us. And thirdly, the regulation in the world is different, yes? So if you drive with level 4 or 5 in the city where you have pedestrians, bicyclists, and a lot of other traffic, it's much more complex than having it like a level 3 car on the highway. So this is an ongoing, continuous development which is driven by safety and data security first. Secondly, on your questions for the 48 volt technology, let's first share the bigger picture. BMW is having a clear strategy that we focus on flexible architectures and flexible plants where we can build, on the one side, pure electric vehicles like the i4. We can have then plug-in hybrids like a 3 series plug-in hybrid, for example, or an X3 plug-in hybrid. And we can have pure combustion engines. And the plug-in hybrids and the introduction of the 48 volt is first entry into the plug-in hybrid world and the hybrid world. So we will see more 48 volt technologies in the future. In the range of BMW, it will definitely increase. But the customer has the clear choice at BMW if he would like to have a fully electric vehicle like the i4, or if he would like or she would like to have a plug-in hybrid or an entry 48 volt technology.And that's why we believe we have the most flexible answer, because who knows what type and mix we will sell in Russia in 2023 or in Italy in 2025. And with that flexibility built into the plants and the architecture, we can easily react. But we are clearly on track to be a leader in e-mobility with 25 models by 2025, 12 of them pure electric. And we are by today the market leader in Europe.

[Maximilian Schöberl]

Okay, Jose. And the last part of your question about raw material -- possible raw material headwind will be answered by Nicolas.

[Nicolas Peter, CFO & Member of Management Board]

Jose, you had two parts of your question, first R&D capitalization ratio. We forecast for the full year roughly the same level as in 2017. We had 39.7% in 2017, so it will be in this area in '18 as well.Raw material headwind, if we take raw material plus FX, we continue to forecast for the full year a 3 digit negative impact in the middle to higher area. In the second half of the year, most of the negative impacts will come from currency and less from raw material.

[Maximilian Schöberl]

Thank you very much. Next question, please?

[Operator]

The next question is from Jurgen Pieper of Metzler Capital Markets.

[Jürgen Pieper, Senior Advisor]

It's two small questions on WLTP. It seems you manage the thing much better that your two main competitors here in Germany, and the question is on that. Are you already seeing some gains on the consumer side, people who are unhappy with the situation, mainly of Volkswagen, of not being able to deliver certain products? And are you already seeing some movements here to your favor?And secondly, it looks like, if you look at the July figures in Germany which were published today, it was a jump in new car sales of 12%. It looks like there is already a pricing factor in that, especially if you see that Volkswagen group sales took a large -- took a huge jump, that pricing plays a role. Do you expect in the second half, caused by WLTP, negative pricing effects mainly in Germany?

[Harald Krüger, Chairman of Management Board & CEO]

Jurgen, I'll start with your question. The first answer to -- I don't want to comment on the competition, but we clearly took the task head on, installed a taskforce early on. We secured testing facilities. And we are ready because we deliver -- we need to deliver to our customers the vehicles on time. So my answer is clearly we are ready and we are on time. Do I see some gains on the customer side? It's a little bit too early, but we see two things. The one is from the principal behavior of a customer. The customers don't want to wait too long. If they need to wait six or eight months, normally they swap even if they are loyal to the brand. So there are chances for us, definitely, with this one, because it makes a huge difference if you have a delivery time by three months or by 12 months. And that's in many places in the world, and Germany has the same situation. So there should be opportunities for us, but it's too early to say why and more in detail because that starts on the first of September, yes? The cars will be on the market with the WLTP legally by the first of September. So that's the situation. What you can see maybe, that registrations figures are going up with other companies. But that's the answer on this one, and the second one on the pricing Nicolas will answer.

[Nicolas Peter, CFO & Member of Management Board]

Jurgen, I of course cannot comment pricing strategy of our competitors. What I can comment what we are going to do based on, on the one hand side, on our strong product portfolio and on the fact that we are able, as Harald just mentioned, to supply all our different cars of our portfolio. We will maintain a very, very balanced approach between volume and pricing. We are a premium manufacturer, and profitability is clearly top in our -- top priority in our strategy.

[Maximilian Schöberl]

Thank you very much, Jurgen. The next question, please?

[Operator]

The next question is from Patrick Hummel of UBS.

[Patrick Hummel]

Two questions, please, for me. The first one, you signed a big deal with CATL for battery supply. They're going to build a plant in Germany. I'm just wondering what moved the needle for CATL as opposed to the Korean suppliers, because CATL, at least for the time being, is not necessarily seen as quite on par in terms of the technology compared to LG and Samsung STI, but very happy to hear your views there. Is it just the proximity to the German plants that you have that made you go with CATL? Is Poland or Hungary, which are the locations of LG and Samsung in Europe, is that too far away? Do you think you have a better handle on CATL than you would have on the Koreans? What's driving that decision? That's basically my first question.And my second question relates to the new capacity you are planning now in Hungary. You're doing this at or close to peak levels for the European car market. What makes you confident that now is the right time, in spite of all the other high investment needs for the megatrends, to put down EUR 1 billion for an additional capacity in Europe? And can you already give us a hint on start of production and the models that you're going to produce there?

[Maximilian Schöberl]

Thank you very much, Patrick. Both questions will be answered by Harald.

[Harald Krüger, Chairman of Management Board & CEO]

Patrick, the first point on the battery suppliers, first of all, we are in the happy situation to have two strong partners, yes? And this is CATL and Samsung, as you know. We receive sales from both of them. CATL was our partner in China because, if you are selling electric vehicles in China, you need a local partner. And we were developing together, and they were coming very competitive also with new technologies. And as we -- also having now flexibilized all the plants in Germany for electric vehicles, we needed a partner here as well. And that's why CATL was definitely on the way, saying we need a plant in Europe. And their decision was to go to Germany in Thuringia. And we appreciate that one, because it's lower logistics costs then for us and it's closer to the German vehicle plants. But the decision was finally by CATL, and we get sales from both suppliers, from Samsung and CATL in Europe. And that will continue. And for me, it's nothing better than competition, yes, and driven by quality and technology leadership. That's on the sale production.The capacity in the new plant in Hungary is close to peak levels in Europe, the question. We believe in growth in Europe. Definitely we believe in growth at BMW. We see further potentials. And that's why we would like to invest on time into additional capacity, because we see -- for example, take one segment which is growing very much in Europe is the X1, X2 segment, the small SUVs. And as we are now entering with the X2 this year, the first time in the market was a smaller SUV, our second SUV in this segment, there are definitely also new chances. And that trend continues. So that's why we have built and decided on a plant in Hungary. And the other final one is definitely also that we see growth with electric vehicles in Europe, and we need to prepare for this one on time as well.

[Maximilian Schöberl]

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

[Operator]

The next question is from Harald Hendrikse of Morgan Stanley.

[Harald Christiaan Hendrikse, Managing Director]

Two quick questions, really. One, just from the call this morning, I was surprised just how sharp the decline in Germany diesel market share was in May, I think you said, from 61% to 47%.

[Maximilian Schöberl]

Harald, this is a very bad connection. Could you repeat? It was about diesel or --?

[Harald Christiaan Hendrikse, Managing Director]

Yes, that's right. Sorry. Can you hear me now? Hello? Can you hear me better now?

[Maximilian Schöberl]

Okay. Yes, okay.

[Harald Christiaan Hendrikse, Managing Director]

Okay. Sorry, I was just on the secondary phone. So sorry. Two questions, one, on just the overall European sales situation, the premium brands, not just yourself but all the premium brands, have in July shown very, very weak market shares. And I'm just wondering what that's all about. And then secondly, this morning obviously you highlighted that your May diesel sales have dropped from 61% to 47%, which is my mind is a much, much sharper decline than what you were talking about last year. And I'm just wondering whether those two situations are related. And then secondly, on CO2, you I think are the first to give us a number for your new CO2 numbers on WLTP going from 122 to 128. After what Volkswagen's CEO told us yesterday and what a burden it would be to get that to the right levels for 2020, '21, can you talk about your plan in a bit more detail and whether you still have a level of confidence that you can get to the 101 gram per kilometer for that year?

[Maximilian Schöberl]

Okay. Yes. Harald?

[Harald Krüger, Chairman of Management Board & CEO]

It was a little bit difficult to understand, but I will try to answer what we understood here. The one question was a decline on the market share of diesel, as far as I understood it, in Germany and Europe in May 2017, to compare to May 2018. To repeat those numbers for BMW, in Germany we had in May 2017 a percentage of 61% of our sales was diesel. This declined to 47% in May 2018, from 61% to 47%. If you look at the European level, it declined from nearly 70% to 58% on the European level. And worldwide it was from 35% to 31%. So you can see a decline in the diesel from last year to this year. But if I look at the order intake in June and July for the diesel engine, it's definitely stabilizing. It was on a higher volume already in June and July. And that will remain what it happens in the second half of 2017, but we see a stabilization on diesel order intake. Then there was a question on Europe, weak market share in July that I understood, that Nicolas will answer in a minute. And the second one is on the WLTP numbers, higher than NEDC in terms of CO2. First of all, the WLTP testing, as you know, is much more closer to the reality. That's why you see that it will have higher values compared to the NEDC which was the previous European test cycle. And from first of September onwards, we need to publish those WLTP numbers. That's why you see that change. And we are very open and transparent on this one. But the key point is, as I mentioned before, we can offer already WLTP cars by the first of September. And we have a huge chance, in my perspective, to be ahead of the game here, but it goes hand in hand. And we are on track for the 2022 targets, but what does it mean? It includes that you'll see definitely a significant increase also by electric vehicles because you see a reduction by diesel engines. And that's why we target, for example, this year, and we achieve it in the first six months, a 40% growth of our electric vehicle sales.

[Maximilian Schöberl]

Okay. Thank you very much. The last part was about the Europe market share in July. Nicolas?

[Nicolas Peter, CFO & Member of Management Board]

And Harald, maybe to add on Harald's last point, we've seen the share of electric powered cars in Europe going up in the first six months from 5.1% to 6.3%, so a really good momentum.For Europe, we continue to forecast for the full year a low single digit growth. We are, including July, on track to achieve this target. The most competitive market is, as I've already mentioned, the UK, where we have seen an ongoing difficult development in the last couple of weeks. Otherwise, we are very well on track.

[Maximilian Schöberl]

Thank you very much, Nicolas. So, we have five minutes to 3:00. We have time for one more question.

[Operator]

The next question is from Philippe Houchois of Jefferies.

[Philippe Jean Houchois, Equity Analyst]

Two questions quickly on my side. I'm assuming -- every quarter I'm a bit surprised by the resilience of your performance in financial services with particularly good return on assets. I'm just trying to understand, because spreads, financing spreads, shouldn't be helpful anymore at this stage. So I'm just trying to understand, are we kind of misunderstanding the impact of businesses like Alphabet which contribute to your margins, or have you been possibly a bit heavy-handed on provisioning on your risk, diesel in particular, and you're in a position now where you're reversing some of those provisions? So I'd love to understand a bit better why you have such good news, about why you have such good resilience in the financial services side. And then the other question is -- I appreciate it's very long term, but you are the first mover really in securing the ability to buy out your JV partner in China. And I'm just wondering, it's several years out, but is there already a framework to value that business that gives you an ability to plan how much that might cost? And you're probably financially strong enough to do that acquisition anyway. I'm just wondering, are you starting from scratch, having to negotiate, or is there already kind of an agreement on the value of those JVs that enable you to confidently contemplate that purchase?

[Maximilian Schöberl]

Thank you very much. Nicolas?

[Nicolas Peter, CFO & Member of Management Board]

Maybe, Philippe, first of all, financial services, we are definitely on track to achieve our full year target within our financial services segment for the full year. We have I think very, very solid proactive risk management for credit risk and are de-risked. As we've said earlier, we have seen diesel sales stabilizing in Europe, and therefore I'm optimistic that we will definitely stay on course with financial services.Second question, JV China, we have really a very, very longstanding and very successful partnership with Brilliance Automotive in China. We have now a second partnership which is just underway for the MINI brand with Great Wall. And as you can imagine, any decision, including corresponding stakes, has to be discussed within the different partnerships to reach a mutual agreement and to develop a win-win situation. And we are definitely motivated to continue on this track and to develop jointly with our partner the operations in China to have, for both parties, a win-win situation.

[Maximilian Schöberl]

So, thank you very much, Philippe. Thank you very much, Nicolas and Harald. Ladies and gentlemen, thank you for joining us today. We wish you a wonderful summertime. Thank you very much and bye-bye.