Bayerische Motoren Werke AG

XETRA:BMW

Earnings Call Transcript 2019-Q2

[Maximilian Schöberl]

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

[Harald Krueger, Chairman of Management Board & CEO]

Good afternoon, ladies and gentlemen.Today, I would like to address 3 main points: our electro model program, our market performance and our profitability.Many of you were at our first #NEXTGEN in the BMW Welt at the end of June. We were very pleased with your positive feedback and the feedback from the media and social networks. At the event, we showed our clear approach to the future: to offer sustainable mobility with a variety of drivetrain technologies, and our focus is clearly on the customer. Our customers' needs and desires are diverse across the globe, as are the regions and locations where they live. Therefore, we are offering our customers various attractive solutions during this phase of great technological change in our industry. Our approach towards sustainable mobility is holistic, including vehicles, production and the supply chain. Let me give you 2 examples: First, as of next year, all of our 31 production sites in 15 countries will obtain the electricity they need from renewable energies. Second, we are already developing our fifth-generation electric drivetrain. It will be first used to power the BMW iX3, starting next year. From then on, our electric engines will no longer use rare earths. We see all these things as part of our overall responsibility.We have set ourselves ambitious goals for the electrification of our fleet. By 2021, we will double sales of our electric models and plug-in hybrids. In 2023, 2 years earlier than planned, we will have 25 electrified models on the market. More than half will be fully electric. By 2025, we expect our electrified vehicles to be growing by an average of more than 30% per year. As you can see, we are making great strides in this area. The growth curve is exponential. In Germany alone we sold over 10,000 electrified vehicles in the first 6 months of 2019. That is around 60% more than in the same period last year. Sales of our fully electric BMW i3 surged 85% in our domestic market. 3 of the 5 top-selling plug-in hybrids in Germany are from the BMW Group. In the first half of the year, i3 sales climbed 21% worldwide even though it has been on the market since 2013. Electrification also continues at MINI. Sales of the Countryman plug-in hybrids were up more than 50%. In July, we presented our fully electric MINI in Rotterdam and Oxford. The MINI Cooper SE will roll off the production line in Oxford later this year. It's enjoying strong popularity with over 40,000 interested customers. Already today, with 10 models, we offer customers a wide range of electrified vehicles in all segments.In #NEXTGEN we made it very clear: We support the aim of a CO2-neutral society, the same goal formulated by the European Commission President for the EU by 2050. At the BMW Group we are consequently expanding our fully electric range, the iX3 from 2020, the i4 and the iNEXT from 2021. And our new technology flagship, the iNEXT, will provide us with building blocks for the future. To ensure that we can focus on both present and future needs and still remain profitable, we are relying on a mix of different technologies. That is clearly what our customers want.Now on to the second topic, our sales performance.We are growing in a declining and highly competitive world car market. The BMW Group achieved new all-time highs in both the second quarter and the first half of 2019. In the second quarter, that also applied to the brands BMW, Rolls-Royce and BMW Motorrad; as well as the BMW Group. In our largest sales market China, we beat the trend with growth of almost 24% in the second quarter. And we won market share. Through June, the brand BMW was #1 in the U.S., was #1 in the U.K. And in Germany we grew more strongly than the entire market in the premium segment. Globally, we were able to significantly reduce the difference between the brands BMW and Mercedes-Benz in the first half year. In the month of June, BMW was ahead of Mercedes. At group level, we continue to lead the premium segment.Our new model rollout continues at full speed. The new BMW 3 Series and the Z4 have been in showrooms since March. The new BMW 7 Series will now also be launched in China. Sales of our X models were up by almost 1/4 in the first half year. The new BMW X7 has been available since March and enjoys high demand as segment leader. The X7 brings the popular and highly successful X family to 7 models. In early July, we also announced the new BMW X6. This completes the renewal of our X series. Over the past 2 years, all X models from X1 to X7 have either been refreshed, newly launched or launched for the very first time.The new BMW 8 Series is part of our rollout plan in the luxury segment. In addition to the Coupé, the convertible has been available since March. Since July, production has begun for 3 more 8 Series models at our Dingolfing plant: the Gran Coupé and the M models of the Coupé and convertible. We expect the Gran Coupé to be the top-selling 8 Series model. In late September, BMW will launch the new 1 Series, the new 3 Series touring and the revised X1. X1 will also be available as a plug-in hybrid from 2020. This variant was previously only available in China. As you know, the brand BMW will be releasing 21 new or revised models this year alone.And now to my third point, our profitability.BMW Group has often successfully mastered turbulent times in its past. Today, volatility, changing conditions and increasing regulatory requirements are part of our everyday business. The BMW Group will continue its successful development and is investing heavily in future technologies to ensure this. We are able to do so because we are profitable. Our EBIT margin in the Automotive segment was 6.5% in the second quarter. Therefore, we are on course for the expected target range of between 4.5% to 6.5% for 2019. I would like to emphasize again, for the first half year, the EBIT margin without the provision related to ongoing antitrust allegations from the EU Commission was 6.1%. This would therefore fall within our original guidance of 6% to 8% for the entire year.As you can see, BMW Group is clearly on track to meet its goals for the financial year 2019.Ladies and gentlemen, allow me to finish on a personal note.This is my last quarterly conference as CEO of BMW AG. I joined the Board of Management in the midst of the global economic and financial crisis back in December 2008. As part of the Board, I could play a significant role in shaping the course of the BMW Group for more than 10 years, over 4 of those as Chairman. During this time, we forged new paths. I firmly believe the BMW Group is robust, innovative and in a strong position to manage the complex challenge that's facing the company today.BMW has been my professional home for more than 27 years. You will understand, and I'm sure, that the BMW Group will always have a special place in my heart. I wish my successor, Oliver Zipse, much success in the coming years as CEO. I also truly appreciate the telephone conferences with you over the years. It gave me the opportunity to share my views not only on our company but also to address the challenges facing our industry. Likewise, I also personally found our open and dynamic dialogues at our analyst meeting to be very productive and insightful. Here we address topics ranging from e-mobility and autonomous driving, the geopolitical developments around the world. Thank you for your constructive and at times critical views on our industry and beyond. I know you will certainly continue to do this in the future, as open exchange benefits us all. Challenging assumptions can often lead to improvements in industry and in the company's overall performance.Thank you.

[Maximilian Schöberl]

Harald, thank you very much.And now Nicolas Peter. Nicolas, please go ahead.

[Nicolas Peter, CFO & Member of Management Board]

Ladies and gentlemen, good afternoon.I would like to take this opportunity personally but also on behalf of my Board of Management colleagues and all our associates to thank Harald Krüger for the excellent and trusting cooperation over the years. It has been a pleasure working with you. The conditions in our industry are changing faster than ever and becoming more and more unpredictable. Taking on the responsibilities of a CEO in times like these deserves the utmost respect, as does your decision not to seek a second term of office after more than 10 years on the Board of Management.And I can say I look forward to working closely with Oliver Zipse in his new role, whom I have known for a long time and greatly respect.Ladies and gentlemen, let's now focus on business development in the second quarter in detail.The BMW Group remains on course after the first 6 months of 2019. In a challenging, declining overall market we increased our segment share. As previously announced, the operating result for the Automotive segment has improved compared to the first quarter, and we are on track to meet our goals for the year as planned. Our performance shows that we are in a strong position compared to many competitors despite a difficult political and economic environment. The company's half year sales topped 1.25 million vehicles for the first time, thanks largely to our young and attractive product portfolio. A good example of this is the X7. By the end of June, the X7 has already been delivered to more than 13,000 customers around the world. Our performance remains particularly dynamic in China, where despite a declining overall market we reported double-digit growth.Ladies and gentlemen, let's look first at our financial figures for the group.Group revenues for the second quarter rose by 2.9% to EUR 25.72 billion, benefiting in part from a slight currency tailwind. We once again made high upfront investments in the second quarter, as we strive to shape technological change. As expected, currency and commodity prices, higher depreciation and measures for emission-free mobility also had a dampening effect. The financial result for the second quarter came to minus EUR 148 million. I will provide more details later for each segment.Impacted by the lower financial result, second quarter pretax earnings totaled EUR 2.05 billion. Due to the provision made in the first quarter in connection with antitrust allegations by the European Commission, pretax earnings for the first 6 months decreased to EUR 2.82 billion. The group EBT margin stood at 8% for the quarter and 5.8% for the half year. Excluding the provision, the figure for the year to the end of June was 8.7%.Ladies and gentlemen, running a sustainable, profitable business remains our top priority. We are therefore making systematic investments today to secure our future even in the current challenging business environment. A high degree of flexibility is essential. With our efficient combustion engines, plug-in hybrids and battery electric drivetrains, we are highly diversified and open to different technologies. At the same time, we are continuing our research into fuel cells.In addition to further developing our drivetrains, we are also focusing on increased connectivity between drivers, vehicles and their environment; autonomous driving; and mobility services. Second quarter research and development expenditure, according to German Commercial Code, amounted to EUR 1.48 billion. The figure for the first half year was around EUR 2.83 billion. The R&D ratio for the second quarter stood at 5.7%. As previously announced, the ratio is likely to stay between 6% and 6.5% for the full year. It will therefore be lower than last year's exceptionally high figure of 7.1%, as planned.Ladies and gentlemen, we continue systematically gearing ourselves for future-oriented topics. This principle is also reflected in our investment strategy. In the second quarter, we invested a total of around EUR 1.18 billion. Capital expenditure for the year to the end of June reached EUR 2.18 billion. This seasonally atypical increase in the first half year stems mainly from the large number of product ramp-ups, as for example the new 3 Series and the 1 Series; and the opening of the new plant in Mexico. Going forward, we will be able to export the 3 Series Sedan from San Luis Potosí to more than 40 countries that have free trade agreements with Mexico.The CapEx ratio for the year to the end of June reached 4.5%. Despite the introduction of IFRS 16, we still expect the ratio for the full year to be only slightly higher than the previous year's 5.2%.Ladies and gentlemen, let's move on to the individual segments.In the Automotive segment, deliveries to customers remained stable from last year, as planned. Despite the model changeovers I mentioned and the highly competitive environment, especially in Europe, segment revenues for the second quarter increased to EUR 22.62 billion. The segment's operating earnings for the second quarter totaled EUR 1.47 billion. The EBIT margin was 6.5%. Due to the provision we recognized in the first quarter, the margin for the first half year was 2.8%. We are on course for the expected target range for the entire year of between 4.5% and 6.5%. Without the provision, the figure was 6.1% and therefore within our original guidance of 6% to 8%.The increasingly challenging market environment and sustained intense competitions dampened business development. As expected, higher manufacturing costs and scheduled depreciation also impacted earnings. R&D spending remained high, as planned, focusing in particular on development of vehicle architectures and drivetrain as well as new products, electrification and connectivity. The financial result, the preliminary onetime revaluation effect from combining mobility services with Daimler, was mostly offset by a planned loss in equity-accounted investments in YOUR NOW companies. In the previous year, the result included a positive valuation effect in connection with the acquisition of DriveNow.Let's look at the segment's free cash flow. At EUR 869 million for the second quarter, it was as expected significantly higher than in the first 3 months of the year. We are also targeting a positive free cash flow in the second half year and aiming for a figure which should approach a similar level as last year. In addition to high capital expenditure and upfront investments, market development in a number of regions is proving more challenging than originally anticipated. This is dampening earnings and cash flow generation.Ladies and gentlemen, let's move on to the Financial Services segment, which continued its growth in the second quarter. The number of new contracts concluded with retail customers rose by 4.4% in this quarter to more than 500,000 contracts. With more than 5.35 million retail contracts as of 30th of June, the total portfolio increased 2.3% from the end of 2018. The China region notably reported strong growth. Pretax earnings for the first half year rose 3.8% to EUR 1.2 billion. This positive development in the first half year is largely due to portfolio growth and the continued stability of the risk situation, with reduced residual value risk expenses in individual markets. The second quarter figure was EUR 573 million. This figure is impacted by negative effects in the financial result from the market valuation of interest rate derivatives due to falling interest rates across the globe. Let's look next at the Motorcycles segment. BMW Motorrad performed well in the first half of the year. A total of around 93,200 motorcycles were delivered to customers, an increase of 7.1%. This positive business development was reflected in the operating result, which at EUR 102 million for the second quarter was also higher year-on-year. The EBIT margin was 14%.Ladies and gentlemen, let's turn to the forecast for the current year.In the first 6 months, business developed in line with our expectations. As planned, we were able to improve on our first quarter performance. We expect this solid earnings development to continue into the second half of the year, boosted further by our product momentum. We are therefore able to confirm our outlook for 2019. As long as conditions do not deteriorate significantly, we expect to remain in our announced guidance range for the full year.In the Automotive segment, deliveries are forecast to increase slightly. More new models will be launched in the second half of the year. We expect the new 3 Series and the larger X models in particular to generate positive momentum. We remain on course for an EBIT margin within our adjusted range of 4.5% to 6.5% for 2019. In the Motorcycles segment, we are planning for a solid increase in deliveries. The EBIT margin should remain within our target range of 8% to 10%. In the Financial Services segment, we expect return on equity to be on par with last year and above our target figure of 14%.Group earnings before tax will also be significantly lower year-on-year as a result of the provision for ongoing antitrust proceedings and the decrease in the financial result from the previous year. Our guidance assumes that political and economic conditions will not change significantly.Ladies and gentlemen, our strong performance in a declining overall market shows that our attractive products and groundbreaking technologies are winning customers. Flexibility will also remain key to our future success. It allows us to respond to demand in different regions of the world at any time and adjust volumes in line with market development. At the same time, we continue to activate all levers at our disposal to secure our profitability.The BMW Group is and will remain a strong company. Our innovative strength and focus on growth based on a very solid financial profile provide the best basis for future success.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] Our first question is over to the line of Arndt Ellinghorst at Evercore.

[Arndt Alexander Ellinghorst]

Arndt Ellinghorst from Evercore. 2 questions from my side, please. Firstly, for Nicolas, on the cash flow. Nicolas, if I were to positively challenge you on the second half free cash flow: Just by the math, you had a EUR 3 billion working capital outflow in H1. And with the strong product momentum, there's a significant amount swinging back. If I understand you correctly, CapEx should broadly be flat in the second half versus the first. And you clearly have stronger earnings in H2 versus the first half, and so where am I wrong assuming that you should generate about EUR 3 billion, if not a bit more, of free cash flow in the second half alone after the EUR 300 million in H1? And the second question, please, is for Harald. Can you give us some color on your expectation of the full battery electric and PHEV mix in Europe, the percentage mix in Europe, for this year; what you expect for 2020; and for 2021? It would help us a lot to model you a bit more precisely given all the concerns and the CO2 targets.

[Maximilian Schöberl]

Thank you very much. And we start with Harald and then Nicolas. Harald, please.

[Harald Krueger, Chairman of Management Board & CEO]

Hybrid mix for Europe for this year and 2020. In the second half of 2019, we will have 2 more important volumes -- models for the plug-in hybrids being launched, which is the X5 and the 3 Series Sedan. We already have the 7 Series Sedan in place, but the 3 Series and the X5 series sedan are important volume-wise. By the end of 2019, we will have the X3, the X5, the 2 Series Active Tourer, the 5 Series, the 3 Series and the 7 Series as plug-in hybrids available, and the X1 as -- and extended [ wheel base ] in China. So we are targeting from 2019 to 2021 to double our electrification sales and vehicle sales and electrification, which is the push on the one side and demand by the plug-in hybrids as well as the electric and fully electric vehicles. Because we are launching the X1 and the MINI electric by the end of this year, and we have an interest around about 40,000 customers already which are interested in the vehicle. We will have the iX3 next year, and then in 2021 the iNEXT and the i4. If you look at the overall figures, we believe that we had a 15% to 25% electrification mix in the year 2025 originally. As we pulled 2 years forward, we will see that in 2023 or earlier. So that gives you a feeling about 2 main points: doubling the volume on to 2021, and the mixture of 15% to 25% electrified vehicle sales is definitely probably 2 years earlier than originally planned. So as -- this one as -- Arndt, as a cornerstone, and it depends a little bit also on the infrastructure development in Europe. It's not just with the companies. The German government, for example, is now supporting the financials [ sub wins ] and for a longer period of time until 2030. Also, that is of great help, but as you know, the infrastructure development in Europe, for example, is different in the countries, so we need that support. That's why it's overall still difficult to forecast, but it will be a strong, steep curve forward.

[Maximilian Schöberl]

Okay. Thank you very much, Harald. Nicolas?

[Nicolas Peter, CFO & Member of Management Board]

Arndt, maybe to start with. As always, we have a very strong focus in our company on free cash flow management. And I would agree with most of your comments despite your conclusion. So definitely, inventories, we had a little bit atypical seasonality as we were building up stocks as planned in the first quarter of the year. This was mainly due to the launch of the X5 and the X7, ramp-up of the 3 Series beginning of the year. Second quarter was already not flat but flatter compared to the first quarter. We will see a relatively flat Q3 and then an reduction in our inventories in the Q4, in particular based on the strong momentum of all our X model 3 Series now being successfully introduced into the market and the launch of the 1 Series. On CapEx, you are as well fully right. We had a little bit an atypical seasonality with some more CapEx in the first half of the year. This was in particular due to the fact that we had the ramp-up of our plant in Mexico. Conclusion of it, we stick to our guidance for 2019, meaning we will approach [ actually ] EUR 2.7 billion in free cash flow step by step, quarter by quarter.

[Maximilian Schöberl]

Good. Thank you very much, Nicolas.

[Operator]

The next question is over to the line of Henning Cosman at HSBC.

[Henning Cosman, Analyst]

Could you please talk about the expectation for the at-equity result and the financial result for the second half year a little bit, maybe both with respect to the China joint venture as well as the mobility joint venture? That will be great. And then I appreciate that you said earlier on the press call you were quite flexible with respect to maybe reallocating some production in the case of a hard Brexit. I think you're currently exporting about 140,000 units of the MINI from the U.K. for sales into Europe. Could you give us a bit of a better idea how flexible really you are in terms of how much of that you could possibly move to the Netherlands and how flexible the cost structures in the U.K. also are in case you would have to do that?

[Maximilian Schöberl]

Thank you very much, Henning. We'll start with the second part, flexible production in case of hard Brexit, with Harald; and then Nicolas. Harald, please.

[Harald Krueger, Chairman of Management Board & CEO]

I would like to start that the U.K. is an important market for us. It's the fourth biggest market in the world. We are a big player, and it's the home of 2 brands. And clearly when it comes to a hard Brexit, it's a lose-lose. There's nothing which is good for companies as well as for the people in the country. We are very flexible. We -- as we could adjust volumes, on the one side, at Oxford, also at Nedcar in the Netherlands, but we are also in the phase of ramping up the MINI electric in the third and fourth quarter of this year. And as I mentioned in my speech, there's a demand already which is increasing year by year. And I'm optimistic on the MINI electric as a very successful car. And we can adjust production between Oxford and as well as Netherlands at Nedcar. Both are very competitive in terms of costs, yes. And the flexibility is we are building the X version at Oxford as well as at Nedcar, so we can move around if required, but so far, I believe the demand is still ongoing for the MINI. And with the new MINI electric, we will see a further increase next year. So flexibility is we'll shift flexibilities with additional shifts, with potential shutdowns, but we haven't planned another shutdown in Oxford for this year as we are ramping up the MINI electric. And the models which we build at Nedcar, for sure, are flexible and the demand. And BMW is always having the most flexible production system, so we could build more or less whatever is required and making sure that our working capital is definitely in balance.

[Maximilian Schöberl]

Nicolas?

[Nicolas Peter, CFO & Member of Management Board]

And Henning, if we look at the walk-down from Q2 '18, 2Q '19 [ off ] first half '18 to first half '19 regarding the financial results, the main reason for the deviation is the NOW family as planned, as I said in my speech. BBA was flat, but on one hand side, we've seen a very positive development based on the more than 15% increase in deliveries in China. On the other hand side, we are investing as we speak in the start of production for the new 3 Series. We will launch later this year the X2. So this had an somewhat offsetting effect. Pricing in China was stable in a challenging environment. And to be very, very clear: I would expect for the second half of the year in terms of financial result [ and black 0 ].

[Maximilian Schöberl]

Good. Thank you very much, Henning Cosman.

[Operator]

We go to the line of Dorothee Cresswell at Barclays.

[Hanna Dorothee Hellmuth Cresswell, Research Analyst]

The first is around cost-cutting efforts. And I wondered whether you could give us some idea by how much the Performance > NEXT efficiency program has already boosted your EBIT year-to-date and what the biggest areas of improvement are there so far. And then just coming back to the NOW joint venture: If I understood you correctly on the call this morning, the losses there will be more than EUR 300 million in the year, and I wondered. Is that just reflective of the cost that comes with growth in mobility services, or is there an element this year of setup and merger costs that dragged that down?

[Maximilian Schöberl]

Thank you very much. This will be answered by Nicolas Peter.

[Nicolas Peter, CFO & Member of Management Board]

Dorothee, thanks for your questions. I will start with your second one. No, this is exactly as planned. We are exactly in line with our business cases, and there are no costs related to any merger activities in those numbers. Number two, Performance > NEXT. We kicked off Performance > NEXT already and in very early stage, as you know, in 2017. And we are covering with Performance > NEXT really all relevant performance areas of the companies. And we are permanently expanding and stepping up those efforts, which means that the program is really dynamic. We have in particular over the last couple of months been focused on material costs for current models. We have -- we are very, very focused on prioritizing future investments. We have developed some IT systems which will help us to analyze more precisely further potentials within our companies and our processes. Focus is ongoing, on one hand side, on reducing complexity in our portfolio, lowering manufacturing costs. And reducing complexity, as you know, means optimizing number of delivery. It's drivetrains and focusing on optional equipment and colors. We focus as well on indirect purchasing. Indirect purchasing is extremely relevant as well because it is an annual volume of more than EUR 20 billion. We can easily calculate what the impact could be. To give you an idea what we've achieved already in the first half year of 2019: It's a low 3-digit-million additional saving amount. And we expect something in the same magnitude for the second half, which means a mid-3-digit-million euro amount for the full year.

[Operator]

Over to the line of Ashlee Ramanathan of Redburn Partners.

[Ashlee Ramanathan, Research Analyst]

It's Ashlee from Redburn here. 2 questions for Dr. Peter, please. First of all, the China dividends, I believe it made up about EUR 640 million of your EUR 869 million free cash flow in the second quarter. That represents a pretty strong conversion ratio from the 2018 income of BBA. So something like 90%. My question is how does this look going forward. Do we expect the cash dividend from China to continue to rise as you localize further? Or will that be offset by the ramp-up costs in China, particularly for the iX3? I'm thinking now to your competitor in Germany who received something closer to EUR 1 billion from their Chinese JV. Would this EUR 1 billion cash dividend be an achievable target for BMW in the next couple of years? That's my first question. And then my second question is on the topic of localization. So I just wondered if you could help me understand the impact of localization on your core P&L. So if we take the X3 as an example, previously that was imported into China from the U.S. And say we index that at 100. Once we localize, we only get 50% of the profits, but we benefit from royalties and part sales. Does this mean that index profits drop to around 75? Or am I in the right ballpark here? Is that much slower or much higher? I'm just trying to understand the relative dynamics as we increase the localization rate through to 2022 with the X2 and potentially the X5.

[Nicolas Peter, CFO & Member of Management Board]

Ashlee, so maybe to start with, first, the topic of dividend. So you're absolutely right. EUR 643 million is the correct amount. And as you are fully aware, today we are in a 50-50 joint venture with our partner Brilliance. And the annual dividend amount is as always subject to an agreement between both shareholders, and this is something we review based on the results but on -- also on other relevant items year-on-year. And we have not fixed ourselves a target of a dividend payout of, you've mentioned, EUR 1 billion in the years to come. Why? Because our business model will change in a significant way once we've increased from 50% to 75% our stake in the joint venture, which will happen in 2022. And coming to your second question: From -- starting from 2022, this of course will be different, the calculation you made. Why? Because we will have the full impact of our Automotive business -- in our Automotive segment, as we have today just the sales of the [ kit margin ] between BMW AG and our joint venture in our Automotive business. And this is why a dividend payment can be seen as an very operational...

[Unknown Executive]

[ Asset ].

[Nicolas Peter, CFO & Member of Management Board]

Yes, effect.

[Maximilian Schöberl]

Okay. Thank you very much, Ashlee.

[Operator]

Over to the line of Kai Mueller at Bank of America Merrill Lynch.

[Kai Alexander Mueller, Associate and Analyst]

The first one is you mentioned earlier you'll continue to do your fuel cell research and investing. And I know you've been working closely with Toyota as well. They're now moving also in the EV field. Is that something you would potentially also think of partnering up in the longer term on maybe some newer platforms later down the line? And then on a second point is really your Rolls-Royce numbers have been very strong in terms of their units. You flagged the Cullinan being the big driver for that. I know you don't disclose profitability, but can you give us a sense of, when you talk of units up 42% year-on-year, can we think about the profitability being at least the similar amount? And to what extent is that now becoming a bigger and more meaningful portion of your Automotive results?

[Maximilian Schöberl]

Thank you very much for your question, Kai. We start with Harald and then Nicolas. Harald?

[Harald Krueger, Chairman of Management Board & CEO]

First of all, I'll start on the question of the fuel cell with [ Dutch ] cooperation with Toyota, which is very successful and is running for a couple of years already and will continue in the future. And we will also come up with cars and smaller series on fuel cell vehicles at BMW, so that is something which we see as a part of our future. It depends on when the breakthrough for that technology is. It will start with bigger and large cars. And it's definitely what we call technology-wise you must be open, and there is not the one battery electric solution for the future. It can be fuel cell vehicles in the longer term as well. That's why we focus on combustion engines, on diesel engines, on electric drivetrains like plug-in hybrids, like fuel electric vehicles and like fuel cell. Can we imagine to work also on EVs with Toyota? We had a very successful project with Toyota, which is the Z4. That Z4 project was very successful. We launched the product together with Toyota and their product. And we are in working relationship with Toyota. There is currently nothing planned in terms of EV cooperation. As you know, we have a cooperation with Jaguar Land Rover on the electric drivetrains. Well, what does this mean? BMW has a high competence and is driving it in its strategic cooperations in certain ways, but you need to be very competitive at your core.Secondly was the Rolls-Royce item, about the profitability that Nicolas was -- talked, but on the sales side the Cullinan is very, very successful. We are on high demand. The order income is already reaching into 2020. So if order a Cullinan by today, you probably will get one in 2020 first quarter, but all the other models as well are running good. So Rolls-Royce is currently very positive. And we believe that with the Cullinan we will conquer new customers and we will continue to conquer new customers which were driving different products before. And it shows that there is a demand for those type of cars in the world, not high volume but profitable, I can say clearly profitable, and also very good for the brand...

[Nicolas Peter, CFO & Member of Management Board]

Kai, if we talk about the profitability of Rolls-Royce maybe 2 or 3 remarks. When we talk about engine output of Rolls-Royce, we tend to say sufficient. And this is exactly what I would answer regarding the financial strengths of the Rolls-Royce brand, definitely very, very pleasant. And if we would be in a videoconference, you would be able to see me smiling. Joking aside, this is clearly underlying that our strategy, with a focus on SUV not only with Rolls-Royce but also with the BMW brand, is working out extremely well. We've launched the X5 less than 8, 9 months ago, doing very well in its segment, dominating the segment. The X7 from the very beginning is outselling the competitors. We are gaining customers from other brands. The X3, if you look at our yearly sales -- or our half year sales numbers, an increase year-on-year of more than 90,000 cars sold worldwide. So this is showing that in those segment, those segments have an higher contribution per unit than other segments. We are doing really well.

[Harald Krueger, Chairman of Management Board & CEO]

Yes. And if there's somebody would like to go for a test drive of a Rolls-Royce, please let us know.

[Operator]

Over to the line of Tom Narayan at RBC Capital Markets.

[Gautam Narayan, Associate Vice President]

Tom Narayan, RBC Capital Markets. The first question is on the MINI brand. Given declines in deliveries there, presumably SUV demand has been one of the drivers in that dynamic. The question is that, with SUV vacation happening and not seemingly slowing down, does this pose a structural threat to the MINI brand longer term? Secondly on EVs, specifically the strategy of dedicated platform, full BEV versus flexible-architecture plug-in hybrid and BEV combination: One of your large German peers is doing an aggressive BEV approach with a dedicated platform. You're doing a more flexible one with more plug-in hybrids. Just curious as to the rationale there. If you were bigger perhaps like your German peer, would you perhaps take their approach, or is this simply just a difference in philosophy?

[Maximilian Schöberl]

Okay, Tom, thank you very much. We start with flexible platform and Harald.

[Harald Krueger, Chairman of Management Board & CEO]

The key question on the flexible platform, our dedicated EV platform. There are 2 main criteria which makes the difference in that decision. One is how do you assume that the [ world is continue in the ] next months, weeks and years to come. And we see a very different approach from country to country. If you look -- by today, and I would like to explain that. If we look at Norway, for example, [ in there you're selling ] -- around about 75% of its fleet is already electrified vehicles because there is a very good infrastructure. There's financial support. There's low costs of energy. If I look like countries in the South of Europe, or in the Southeast or Southeastern Europe, we have low, low volumes in terms of electrification because the infrastructure is not there. Reliability is not there, so even if you offer the same product, the customers decide different. Secondly, it's why the plug-in hybrid will be also for long-distance driving solution. You can drive purely electric in the city. We have a pilot in Rotterdam which shows that the customers are, with a plug-in, driving, hybrid driving, purely electric in the city and drive then with a combustion engine for the long distances. This is also the case for the United States because in the United States a city like Los Angeles is completely different, as driving through the countryside in Ohio. That's why we believe we would like to leave the customer the choice. The pure electric vehicle platform is only benefiting if you have high volumes and high scale. And for the transition phase -- because who of you would love to know or doesn't know how many electrified vehicles BMW will sell in 2023 in Russia? The answer is very difficult to prognose. So the flexibility to react in both directions, yes. And take Plant Oxford as an example. If the customers demand 50% MINI electric volume, we can deliver. If the customers demand 10% electric volume, we can deliver as well and always fully utilizing our plants. And that's why we have a major -- the preparations and flexibility put into the manufacturing processes of all our plants, because that demand is changing from week to week, from month to month. And it's depending also very highly on the infrastructure development. And that across the globe is different. That's why we believe with our approach of a flexible platform is definitely the right approach for the next years, and that's why we are doing it.

[Maximilian Schöberl]

Okay. Harald, thank you very much. The first part was the MINI demand. SUV demand is strong. Nicolas?

[Nicolas Peter, CFO & Member of Management Board]

Well, Tom, maybe first of all, MINI is definitely not depending on the strong result of the Countryman. Countryman, doing absolutely right, extremely well, but Countryman accounts for approximately 25% of the overall MINI volume. So 75% coming from the other models. And in particular the 3-door and the 5-door classic MINI; and the convertibles, the convertible is the strongest convertible in terms of sales numbers in the whole segment, are doing all very, very well. So beyond this, we are optimistic that with the MINI electric, which has just been introduced a couple of days ago, we will gain further momentum in our EV approach. So I would really summarize the MINI brand is based on a strong product portfolio. And definitely the MINI E will support this in the years to come. Incoming orders already indicate that this car is [ right on spot ].

[Maximilian Schöberl]

Thank you very much, Tom.

[Operator]

Over to the line of Daniel Schwarz at Crédit Suisse.

[Daniel Schwarz, Research Analyst]

I have a follow-up question on China. And how healthy or profitable is the supplier base in China? I'm asking because we have seen significant drop in share prices and earnings estimates of dealers that have above-average exposure to BMW. Is that of any concern for you? And are you planning any support for dealers in China? And the second question would be on M&A. I mean you -- obviously you have a very solid net cash position. You already own MINI and Rolls-Royce, and as you said, you're very happy with the performance of Rolls-Royce. Could you imagine adding another British brand to your portfolio if it was a good fit to the existing portfolio?

[Maximilian Schöberl]

Thank you very much, Daniel...

[Harald Krueger, Chairman of Management Board & CEO]

Thanks. You're getting -- Daniel, you're getting a very quick answer on the second question. We don't think at all to add one more brand. We are very happy with the 3 brands. And we have -- don't underestimate also Motorrad, BMW Motorrad. And we will electrify the Motorrad products as well. So that's also for future of mobility an important pillar because even with an electric vehicle you can stand under a traffic jam and not moving forward in a city like Paris or a Rome. So electric motorcycles are important for us as well, but we are very happy with the 3 brands MINI, Rolls-Royce, Motorrad; and BMW.

[Maximilian Schöberl]

Okay. Thank you very much, Harald. And the first part of your question, about dealer profitability in China, this will be handled by Nicolas.

[Nicolas Peter, CFO & Member of Management Board]

Yes. Daniel, first of all, I think your question is very relevant. We are fully aware that dealer profitability is something which is of high relevance for our business model, and this is why we are focusing not only in China but in all markets on dealer profitability. Talking more specifically about the situation in China: As we -- as you know, when we talked about it 9 months ago, we supported the network with an special payment at the end of 2018 to stabilize in this complex environment when we had the significant trade tensions between U.S. and China which impacted the Chinese market. We have not planned a similar action at this point in time, as we are quite satisfied with the development of our network's profitability. And this is based on the strong product and volume momentum. We've increased sales in the first 6 months in China by more than 15%, but of course, we are following it very closely. Why? Because we have multi-franchise dealers which might be impacted by the development of other brands [ and assets ].

[Operator]

Okay. The last question is over to the line of Arndt Ellinghorst again at Evercore.

[Arndt Alexander Ellinghorst]

And it's actually not a question. I really wanted to say something to Harald. On behalf of the entire finance community, I would like to thank you very much for the very open and consistent discussions throughout the past 4 years. And I'm also really glad to hear that you found our feedback mostly constructive as well. As you can imagine, it's extremely important for us to have a good and open dialogue with management teams that listen to our concerns, the criticism and the feedback. And taking a step back, it certainly speaks for the quality of the company and your leadership that BMW didn't have some of the very embarrassing diesel issues or problems with WLTP. You've launched more EVs and PHEVs than all of your peers. You're shaping your China exposure. And you keep delivering sustainable earnings and cash flow. I think that should be really applauded. You're leaving the company really in a good financial health and with pretty sound earnings momentum even though it's a bit depressed for all the reasons that we know. So again, Harald, really thank you very much for all the insightful discussions. And we wish you all the very best for your personal and the professional future. And importantly, we also hope that Oliver Zipse will also take the dialogue with minority shareholders very, very seriously. So thanks very much, Harald. And I wish everyone on the call a great summer.

[Harald Krueger, Chairman of Management Board & CEO]

And Arndt, thank you very much on behalf of the financial community. And I would like to thank back. It was always very good discussions and good questions. And I loved the dialogue. I loved the relationships. And I think we'll keep in touch, and please continue really the trustful partnership with BMW. That is absolutely important to us. And I can just send the message, challenge my colleagues as well in the future. They will love it and -- Arndt. And thank you very much really for our trustful partnership together with all of our colleagues. I do wish you all a very good summer and -- yes, and a good way forward. And I'm thankful for our discussions we had in the past. And we keep in touch.Thank you.

[Maximilian Schöberl]

Thank you very much.Ladies and gentlemen, thank you for joining us today. At our next quarterly conference call in early November, you will already have the opportunity to speak with Oliver Zipse as the new Chairman of the Board of Management; and of course, Nicolas Peter. We wish you a pleasant day and look forward to seeing you next time. All the best. Bye-bye.