Bayerische Motoren Werke AG (BAMXF) Q2 2016 Results - Earnings Call Transcript

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Bayerische Motoren Werke AG (OTCPK:BAMXF) Q2 2016 Earnings Conference Call August 2, 2016 8:00 AM ET

Executives

Harald Krueger - Chairman of the Board

Maximilian Schoeberl - Director of Corporate Affairs

Friedrich Eichiner - CFO & Member of the Management Board

Analysts

Patrick Hummel - UBS

Arndt Ellinghorst - Evercore ISI

Tim Rokossa - Deutsche Bank

Kristina Church - Barclays

Fraser Hill - BofA Merrill Lynch

Lello Della Ragione - Intermonte

Stuart Pearson - Exane

Maximilian Schoeberl

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 Krueger, Chairman of the Board of Management of BMW AG; and Dr. Eichiner our CFO.

First, Harald Krueger will give you an update on the business performance during the second quarter. Mr. Eichiner will then take you through our financial results for the second quarter. Afterwards, we will have time for a Q&A session. Mr. Krueger, please go ahead.

Harald Krueger

Good afternoon, ladies and gentlemen. It has been nearly five months since I presented to you the guidelines of our Strategy Number One Next, which formed the foundation for the future development of the BMW Group. Our goals remain to go from the world's leading provider of premium vehicles and premium services to a leading mobility provider and tech company. Our vision is clear; to be number one, to inspire people on the move, to shape tomorrow's premium individual mobility. The implementation of our strategy is now well underway. On the technology side, we will be focusing on power train technologies and digitalization. On the service side, we will be selectively expanding our customer offerings. None of this would be possible without a strong financial base. Profitability is a key pillar of our strategy. For the past 25 quarters, we have achieved an EBIT margin in our automotive segment within our target range of 8% to 10% or higher.

Our strategy will maintain this focus on sustainable profitability despite a highly volatile environment and the constantly changing conditions we operate in. We will continue to strive for an EBIT margin of 8% to 10% in the automotive segment. This will create the right conditions to reinforce the confidence placed in us by our shareholders and investors over the long term and to be able to continue investing into our future. We are convinced that profitable growth means much more than just being number one in sales and volumes, especially now that players in the premium segment are increasingly using discounts to gain a competitive advantage. The future viability of our Company consists of various key performance indicators. In addition to the sales figures, this includes the financial performance of the Company, the strength of the brand and innovative drive. All these indicators demonstrate the successful long term development of our Company.

Our Strategy Number One Next provides the BMW Group with a framework for our actions up to 2020 and 2025. Today, I would like to focus on two key points. Where do we stand after the first six months of 2016 and what are we doing to implement our Strategy Number One Next systematically? As to the first point, in the first half of 2016, the BMW Group once again remained the world's leading premium car manufacturer. We delivered more vehicles to customers worldwide than ever before during a six month period. More than 1.16 million vehicles, an increase of 5.8% over the same period of 2015. The BMW MINI and BMW Motorrad brands all reported new half year highs. Our key financials for the first six months are as follows. Earnings before tax of €5.17 billion, a 6.5% increase year on year and the highest half year earnings in the history of the Company. Group net profit rose to almost €3.6 billion, another all-time high.

An EBIT margin in the automotive segment of 9.5%. This demonstrates that we remain on track to achieve our targets for the 2016 business year. Our approach of balanced sales across the major regions continues to pay off.

In Europe, the BMW Group was able to make strong gains. We also reported growth in Asia and China. As forecast, development in China stabilized at a high level. Our sales figures for the Americas and the United States trended lower.

Estimates suggest that 17.5 million new vehicles will be registered in the US in 2016. It seems that the US market has settled at this high level. We continue to adapt our portfolio to the changing needs of our customers in the US, who primarily choose BMW X models.

Which leads me to look at our model portfolio. In the first half-year of 2016, demand for our BMW X1 and BMW 2 Series models were particularly strong. With increasing availability of all variants, more and more customers are now buying the new 7 Series. In June alone, we sold more than 6200 new BMW 7 Series.

The first 7 Series and performance model will provide a further boost. The BMW M760Li XDrive will be launched in late 2016. Additionally, our plant in Dingolfing has been shipping the plug-in hybrid version of the BMW 7 Series since early July.

New orders for the 740e are already exceeding expectations. In Germany, private individuals are mainly the ones taking advantage of the incentives for electric vehicles and plug-in hybrids.

Here, the government and the automotive industry are jointly covering the cost of the incentives. The plug-in hybrid versions of the 2 Series and 3 Series and the BMW i3 will all benefit from the purchase incentive.

I'm happy to see that most municipalities and institutions at the regional and local level continue to set a good example themselves. They are showing a growing interest in our electric-powered vehicles.

Our planned production of the iPerformance models of the BMW 740e, BMW 330e, BMW220xe for this year is already sold out. We will respond to this development. The BMW X5 plug-in hybrid is very successful in the US and in several other European countries.

Since the beginning of July, we have released our fully electric BMW i3 with 94 ampere-hours. Our incoming orders in Europe have increased significantly. One month after the launch, we have already received 7,158 orders for the i3, with 50% range increase. That is 5,190 more pre-orders than for the BMW i3 with the first generation battery at the same time after its launch in 2013. This proves that when technical conditions and the right regulatory framework are aligned, electric-powered vehicles enjoy greater popularity. The Netherlands, for example, has been promoting e-mobility for quite some time. In June, BMW i and iPerformance models accounted for almost 15% of all BMW vehicles sold in the Netherlands.

Worldwide, we delivered more than 23,600 BMW vehicles with an electric drive-train or as a plug-in hybrid in the first half of the year. This is an increase of 87% compared with the first half year 2015. Through May, this year BMW recorded the strongest absolute growth in the premium segment of electric-powered vehicles. Moreover, in this period BMW nearly doubled the dynamic growth of the entire plug-in hybrid and battery electric vehicle premium segment. Systematic electrification of our fleet is a core tenet of our Strategy Number One Next. We are also working together with public partners and other organizations in various markets to expand charging infrastructure. This currently includes China and the U.S. And in New Zealand we aim to install a comprehensive network of renewable energy power charging stations with local partners for BMW i vehicles. That brings me to my second point.

We have a clear objective to be the technology and innovation leader for individual mobility in the digital age. To achieve this, we are establishing selected partnerships. Together with Intel and Mobileye, we [Technical Difficulty] …us optimistic for the business year 2016.

Our performance targets remain unchanged. A slight increase in automotive sales to achieve another all-time high. A slight increase in earnings before tax, which would be another best for the company. And an EBIT margin in the automotive market with our target range of 8% to 10%. This guidance assumes, as always, that political and business conditions remain stable. However, we all currently experience just how quickly and fundamentally things can change. Economic growth and political stability in the world certainly cannot be taken for granted. With our BMW, MINI and Rolls Royce Vision vehicles, the BMW Group has sent a clear message; we are shaping the mobility of the present and the future. Our centenary celebration to the next 100 years will conclude in Los Angeles, after having been in Munich, Beijing and London. In October, I look forward to presenting our Vision 100 vehicle for Motorrad. It would be great to see you there and to offer you a full picture of the BMW Group's vision of the future. Thank you very much for your attention.

Maximilian Schoeberl

Thank you very much, Mr. Krueger. And now, Friedrich Eichiner will give you an update on the financials of the BMW Group. Mr. Eichiner, please go ahead.

Friedrich Eichiner

Good afternoon, ladies and gentlemen. The BMW Group's positive business performance continued in the second quarter of 2016. For the Company's strongest-ever quarter, sales grew by 5.7%, more than 605,000 BMW, MINI and Rolls Royce brand vehicles delivered to customers. Group pre-tax earnings also reached a new all-time high for a single quarter. Thanks to this positive business development and a healthy outlook for the second half of 2016, we continue to confirm our guidance for the full year.

Despite increasing volatility in all regions of the world, the BMW Group remains highly profitable. The EBIT margin for the automotive segment stood at 9.5%. This was the 25th consecutive quarter in which our operating EBIT margin was within or above our target range of 8% to 10%. The BMW Group's strength lies in profitability and stability at a high level. This shows clearly that the Company has the resources it needs to shape mobility of the future. The sustainable profitability of our core business lays the foundation for us to invest in the future of the Company.

The Strategy Number One Next we presented in spring emphasized this and is now being implemented step by step. Initial signs of success are already visible, confirming our approach. We continue to systematically implement our strategy. The strategy of profitable growth and globally balanced sales continues to pay off for the BMW Group. This allows us to compensate for volatility in individual markets and regions of the world. I would first like to say a few words about the sales situation in the second quarter.

In Europe, the positive trend continued. Both Northern and Southern European markets contributed to the increased deliveries. The referendum in the UK had not yet impacted sales in the second quarter. The BMW Group also had a good second quarter in China. This was partly due to the stable macroeconomic environment and our attractive model lineup. The locally produced long wheelbase version of the X1, which has been available since the end of May, will generate further momentum in the second half of the year.

In the premium segment of the U.S. automobile market, new vehicle registrations for the first half year trended slightly lower. Competition has further intensified, partly due to the strong dollar. Having optimized our inventories, we expect the sales situation to stabilize over the course of the year. Nevertheless, the market will remain challenging in the second half of 2016. Higher global sales volumes were also reflected in revenues. Group revenues for the first half year reached 45.87 billion, up 2.3% year on year. Adjusted for currency translation effects, revenues increased by 4.7%. Quarterly revenues were also slightly higher at 25.01 billion.

BMW Group pretax earnings for the first six months exceeded 5 billion for the first time, at 5.17 billion. This represents a solid increase of 6.5% over the previous year. Group EBT for the second quarter climbed 8.4% to 2.8 billion. At Group level, the EBT margin for the second quarter stood at 11.2% and therefore remains at a very high level. The BMW Group is making targeted investments to secure its future competitiveness. The Company invested around 1.04 billion in products and equipment in the first half of 2016. Capital expenditure was higher last year due to the ramp up of new models. The CapEx ratio for the first six months stood at 2.3%. In the second half of the year, capital investment is likely to be higher due to model launches and the usual seasonal factors.

In addition, the upfront investment for strategic projects I mentioned earlier will mainly have an impact in the second half of 2016. We expect the CapEx ratio for the full year to be on par with last year and below our 5% target extent. Research and development spending for the first half of 2016 totaled 2.1 billion and was therefore at the same level as the previous year. R&D activities mainly concentrated on development of new vehicle projects and architectures.

Additional focus areas include the first development of our connected drive offering, new driver assistance systems and investment in alternative drive technologies. The R&D ratio for the first half year was 4.6%, slightly below our long-term target range of 5% to 5.5%, due to ramp-up costs and seasonal factors. We expect the ratio for the first year to be on par with that of last year. BMW Group liquidity stood at EUR12.63 billion at the end of June 2016, confirming that the Company has solid financial resources.

Let's now take a look at earnings performance in the individual segments, starting with the automotive segment. In the first six months, deliveries of our BMW, MINI and Rolls Royce brands rose up by 5.8% to more than 1.16 million vehicles. Sales growth was also reflected in higher revenues of 41.69 billion. This represents a slight increase of 2.8% compared with the previous year. Adjusted for currency translation effects, revenues rose by 5.2%.

In the second quarter, segment revenues climbed by 5.6% to 22.87 billion. The increase in revenues was, however, dampened by currency translation effects. Automotive EBIT climbed 9.1% to reach 3.94 billion in the first half of the year. Second-quarter EBIT also increased significantly to 2.18 billion.

As already mentioned, the EBITDA margin remained in the upper half of our target corridor of 8% to 10%. The figure for both the first half year and second quarter was at 9.5%. Earnings benefited in particular from higher sales volumes. The BMW Group continues to invest in future projects, such as automatic driving and mobility services and is recruiting qualified specialists for these areas. Over the six-month period, the BMW Group workforce increased by 3.4% to a total of 123,597 increase, which has also increased the cost base.

Pricing on the global auto markets remains challenging. Competition is intense, especially in the US. In response, the BMW Group continues to focus on sustainable, profitable growth.

The segment financial result for the first half year improved by 205 million from the previous year, mainly due to the positive effect of the mark-to-market valuation of commodity derivatives. Our Chinese joint venture BBA contributed 241 million to the at-equity results for the six-month period. This figure is 43 million lower than the previous year due to launch costs of new models.

And now a few words about the financial situation in the automotive segment. Free cash flow totaled 2.52 billion at the end of the second quarter and is therefore on par with last year. We expect free cash flow for the full year to remain above our target of 3 billion. At the end of the second quarter, net financial assets in the automotive segment totaled 16.49 billion.

Now let's move onto the financial services segment. The segment performed well in the first six months, concluding more than 874,000 new leasing and financing contracts with retail customers. This represents a solid increase of 9.1% over the first half of last year.

The volume of new business climbed 7% to 26.35 billion over the same period. The increased number of contracts also reflected the positive development of new business. As of June 30, BMW Group Financial Services maintained nearly 4.5 million contracts with retail customers, 8.3% more than the previous year. Both leasing and financing contracts contributed to this solid growth.

The strongest growth was once again recorded in the Asia-Pacific region, where the total number of contracts climbed by 17.4%. The Europe, Middle East, Africa and Americas regions and the EU Bank also posted solid growth. The penetration rate, the percentage of new BMW Group vehicles financed or leased by the financial services segment stood at 47.4% for the first six months of the year. This is an increase of 2.3 percentage points over the previous year.

Demand for financial services products remains dynamic. BMW Group Financial Services continues to strive for a good balance between leasing and financing. The positive business development of the first half year lifted pre-tax earnings slightly to 1.07 billion. The figure for the second quarter was 503 million. Pricing on the international used car market remained mostly stable in the second quarter. The credit loss ratio of 0.29% for the first half year remains very low. The financial services segment adopts a proactive approach to risk management and has made appropriate risk provisions. We expect the segment's positive business development to continue throughout the rest of the year.

Let's now take a look at the motorcycle segment. BMW Motorrad posted record half-year sales for the fourth time in succession, selling more than 80,000 motorcycles for the first time in a six-month period. Europe was a strong growth driver, with Asia, particularly China, also achieving dynamic sales increases. The popular R1200GS Enduro is still the undisputed top-selling BMW Motorrad model. More than 14,000 were delivered to customers. Its sister model, the R1200GS Adventure also remains highly successful. Sales figures for the R nineT Roadster continued to exceed expectations. Segment revenues for the first half of 2016 reached 1.2 billion. EBIT for the same period totaled 192 million. This decrease from last year's record figure mainly stems from higher costs for strategic projects.

In the second half of the year, we expect a further sales boost from strategically important new models, like the G 310 R, which will take BMW Motorrad into the segment below 500cc. The R nineT Scrambler is also receiving very positive feedback from the public ahead of its market launch. We expect to see this positive development continue in the motorcycle segment in the second half of the year, backed by its young and attractive model lineup.

Ladies and gentlemen, I would now like to talk about the outlook for the second half of the year. Profitable growth is the focus of our Strategy Number One Next. We are steering the Company based on key performance indicators and the guidance we issued at the start of the year, which assumes that economic and political conditions do not deteriorate significantly. Upfront investments for future projects and measures to implement our Strategy Number One Next will have a greater impact on earnings in the second half of the year than in the first six months. Higher personnel costs from the collectively bargained pay increase in Germany as of July 1 will also have a dampening effect.

In view of the uncertain political developments worldwide, the business environment is likely to be more cautious. The Company remains committed to its ambitious targets for 2016. The BMW Group expects to see a slight increase in pre-tax earnings for the full year. The automotive segment is targeting slight increases in both sales and revenues. We intend to keep the EBIT margin for the automotive segment within our 8% to 10% target range. Since deliveries of BMW motorcycles in Europe, Latin America and Asia were higher than expected in the first half of the year, we now forecast a solid increase in sales for the full year 2016. In the financial services segment, we expect return on equity to remain at last year's level and therefore above our target of at least 18%. The actual business performance may deviate from our present forecast depending on global conditions.

The BMW Group remains optimistic about the second half of the year. With its strategy of globally balanced sales, the Company is well positioned for the future. Once again, our strong business performance in the first six months confirms the factors which set the Company apart, high profitability, stability and sustainability. This level of performance provides the BMW Group with the financial flexibility to develop new business areas and drive innovation. This secures our future competitiveness and long-term success. Thank you.

Maximilian Schoeberl

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from the line of Patrick Hummel at UBS. Please go ahead, your line is open.

Patrick Hummel

Thank you. Good afternoon, gentlemen. I would have two questions please. The first one relates to your comment about increasing competition in the market, with more discounts being seen. Can you be a bit more granular on the trends that you see by region? You already mentioned the situation in the US is quite competitive and difficult. But what about Europe and China? Any latest thoughts on these markets? And in that regard, how does the high production figure, you had 50,000 more units produced than delivered in the first half. How does that fit into the landscape? And my second question regarding the Chinese JV. You had a drop in earnings in the second quarter year over year. I guess a significant chunk is related to the launches that happened there during the quarter. But I was wondering if you can give us an update to which extent that profitability level in China should improve again in the second half? Thank you.

Maximilian Schoeberl

Okay. Thank you very much, Patrick. So we'll start with Mr. Eichiner and the increasing competition, and then Mr. Krueger about China and the high production figures.

Friedrich Eichiner

Hello, Mr. Hummel. So, first of all, let's start again with North America. There, in this market, competition is really fierce. And this has an effect on pricing as everybody was pushing into the market in 2015. Now we've seen a peak of sales in 2015 already and we should not expect another peak this year. That's what we've seen already in the beginning of the year. We started cutting down inventory levels and trying to compensate against the pressure we see in the market. But at the end of the day, there is an effect on pricing, a negative effect on pricing, particularly in this market.

Now as we think we have cleaned up most of the inventories after the second quarter, we are looking forward in a more healthier second half of the year, where new models like the new X9 could play a role and the new 7 Series, the same point in time. That's the situation in the U.S. Europe, fairly stable. Pricing environment also fairly stable. In some markets we even could improve a bit the pricing. So that is better than we've anticipated in our original plans.

And China is also doing a bit better than expected. So, first of all we see growth in China again. And environment so far is fairly stable in a more normalized market environment. That's what we can say about the market. So, in a nutshell, U.S. is a concern. The rest is doing quite well.

Maximilian Schoeberl

Thank you very much. Mr. Krueger?

Harald Krueger

Mr. Hummel, about the production figures, if you compare that ones to the Q2 of 2015, you have to keep two things in mind. 2015 second quarter was a lower production number because we had the run out of the previous X1 and the previous 7 Series. We are now running at full production for the new X1 as well as the new 7 Series. Also, the MINI convertible is in supply, which is a seasonal product, where you have the highest demand in quarter two and quarter three. So, overall we are keeping the pipelines very tight. If you look at the overall picture, it's definitely fine. But this is just quarter two 2015 to 2016 has a special effect due to the run out.

Patrick Hummel

Thank you.

Maximilian Schoeberl

Yes, about China, BBA, Mr. Eichiner? Thanks.

Friedrich Eichiner

Well a few words about BBA. Basically we expect that the sales will grow, especially on the local side, with the impulse of the new X1. Having said that, we have to consider that new launches that we are preparing will bring some burdens with it. And that is the reason why we cannot rule out that the profit of BBA this year would be slightly below last year's numbers.

Patrick Hummel

Thank you very much.

Maximilian Schoeberl

Thank you very much. Next question, please.

Operator

Is over to the line of Arndt Ellinghorst at Evercore ISI. Please go ahead, Arndt, your line is open.

Arndt Ellinghorst

Yes. Thank you very much. It's Arndt Ellinghorst from Evercore. Two questions. One on CapEx, please, and one just coming back to production. Firstly on CapEx, your investment in property, plant and equipment was down by about 36% in H1, which was a huge decline, and I think none of us has ever seen that from any car maker outside a major recession, so really well done on handling the business there. Now we all know in the second half CapEx will rise, and carmakers spend normally 60% of their CapEx really in Q4. But could you give us some color on your full-year projections for your investment activity and will CapEx be down? And by how much, roughly, versus the 3.7 billion last year? And then also following on from that, on cash flow, can you say by now that your free cash flow will be well north of 3 billion in 2016?

And on production, you've just talked about the very high production figure in the second quarter, up 16% on a consolidated basis. Can you talk a little bit about the utilization effects, the operational leverage effects and how that develops into the second half? Will you benefit from similar operational efficiency when it comes to production in the second half? Thank you.

Maximilian Schoeberl

Okay. Thank you very much. We start with Mr. Krueger about the projection utilization, and then Mr. Eichiner. Mr. Krueger, please.

Harald Krueger

Mr. Ellinghorst, on the production side, what you do in the quarter two is also to supply quarter three in overseas production, which has a lead time sometimes between six to eight weeks' transportation time if you go to the Asian markets, for example, or Africa or Japan, even to the US.

And as we have, for example, shutdowns in August in Germany and our German plants, we currently have a two-week shutdown in Dingolfing, for example, that's why you increase production in the second quarter, as long as you don't have a runout phase, to have the supply on time for the demand of the third quarter, because August is also a shutdown period in many of our plants in the international network.

So we are utilizing this one. This is what we did steadily. If you look at this one, I compared it with the 2014 figures, we are below the 2014 figures. Second quarter 2015, as I mentioned before, was very special because the start of production for the new 7 Series and the new X1 was July 1. So quarter two in 2015 was mainly driven by two big runouts of 7 Series and X1. And X1 is a big volume lever. And thirdly, we started the increase of the production of the X1 long wheelbase in China at the end of May, which will have now peaks in quarter three and quarter four. But overall, we are keeping the pipeline very tight, the stocks are on track. The things we did in the US have done very successfully in the first half. But that's the operational full standard normal plan. There's nothing which is not normal.

Maximilian Schoeberl

Thank you very much. Mr. Eichiner?

Friedrich Eichiner

Well, Arndt, coming back to your question about the CapEx ratio, so, first of all, we have to see this year is not a year where we have many launches. But we have a major one in the second half of the year, and this is basically the 5 Series launch which will drive all the CapEx. And so first half of the year, as I said, not many launches and a low momentum on the CapEx side.

Second half of the year will pick up. At the end of the year we expect CapEx ratio to be between 5% and 4%, so at a level more or less of last year.

Now your question about the free cash flow. What we've seen so far is that we increased working capital. Now in the second half of the year, it must be possible to reduce it again and this will have a positive influence on the free cash flow. Same point in time, CapEx will pick up. So we have two controversial developments. At the end of the day, when our plants will materialize, I think the free cash flow should again be strong and above the 3 billion. By how much, this is now depending on the sales results of the second half of the year.

Maximilian Schoeberl

Thank you very much. Next question, please.

Operator

Is over to the line of Tim Rokossa at Deutsche Bank. Please go ahead, your line is open.

Tim Rokossa

I would have three, please -- or let's start with two, maybe. Mr. Eichiner, can you just update us again what you see on the residual value side? And particularly in the U.S., have there been any impairments yet? Do you see any need for the second half potentially?

And then, Mr. Krueger, you spoke about the very interesting cooperation with Intel and Mobileye. And can you just help us understand again who keeps the IP in this cooperation and what do you consider to be BMW's core competence in the autonomous car of the future? Thank you.

Maximilian Schoeberl

Okay. Thank you very much. We'll start with Mr. Eichiner and then Mr. Krueger.

Friedrich Eichiner

Basically the residual values worldwide are under control. We even enjoyed the release of provisions in markets like Germany. The critical market, and you imagine it, is the U.S. That is not unexpected so we have provisioned for that. And we are expecting deteriorating used car prices over the next couple of months in the U.S. market, being driven out of the market situation where there's pressure on new car pricing. And this also is later on reflected on the used car side. That's what we are expecting in the market. But overall there should not be a need for impairments in that field.

Maximilian Schoeberl

Thank you very much, Mr. Krueger.

Harald Krueger

On the strategy, Number One Next clearly focuses on the autonomous driving. And this we did in a two-step approach.

The first step is the acquisition of HERE, because you need for the autonomous driving highly accurate, high-density live map, which is the first step, otherwise you can't do it. The second step is now the cooperation with Intel and Mobileye. What is the reason why Intel? You need -- if you go to the autonomous driving, you need supercomputers and chips for the cars, which definitely deliver a high performance. And the other one, Mobileye is bringing in its knowledge about sensors and models around the cars. And we are bringing in our motion control and full systems integration knowledge, so every one of these three parties is bringing their best knowledge together to develop autonomous driving.

We also would like to create an open standard platform. We see that the other partners could join that because we believe that a platform and a standard in the autonomous driving would make it much more safer for the future as well, so it's a clear two-step strategy, been successful so far, enjoyable with the partner. And we are targeting the BMW iNEXT in 2021 for that.

Maximilian Schoeberl

Thank you very much, Mr. Krueger. Next question, please.

Operator

We now go to the line of Kristina Church at Barclays. Please do go ahead, your line is open.

Kristina Church

Yes. Thank you. Kristina Church from Barclays. I've just got a question. Clearly your share price right now is reflecting some issues on the cycle for the sector as a whole. I know in the past you've talked about the 8% to 10% margin being through the cycle. Do you still believe that 8% is a worst-case scenario for the shares if we were to see downturns across the global sector, as some in the market are fearing? And then my second question is also related to the share price and how to extract value. You've talked a lot about autonomous driving and technology. And we're aware of all the work that you've been doing there. But how do you think you can -- the shareholders will see that coming back into value in the business? Currently obviously there's a lot of spending being done on these areas. But what can you do, do you think, to make the market realize how much technology there is sitting within BMW and therefore to value that at a reasonable price?

Maximilian Schoeberl

Thank you very much, Kristina. So we'll start with Mr. Eichiner and then Mr. Krueger. Mr. Eichiner, please.

Friedrich Eichiner

Well hello, Kristina. So first of all -- well, I don't want to comment on the share price a lot. That's not my part. But on some factors you mentioned. First of all, I think we have to see that we've done a lot in order to level out the cyclical elements in our business. Our global footprint is now much better balanced than it was in the past and our portfolio of cars is much broader. In the context of Strategy Number One, we realized a much higher level of profitability. Now we demonstrated 25 quarters in a row that the Company is capable to keep its profitability in a range of 8% to 10% or above. We expect that this will do for this year as well. Now it's up to the capital market to agree that we are no longer as cyclical as we were in the past.

Maximilian Schoeberl

Thank you very much, Mr. Eichiner. And the second part was about the autonomous driving, how can shareholders see that coming back? Mr. Krueger?

Harald Krueger

Kristina, welcome. The key point, this is first of all a long-term view on that because we need to have a clear strategy to achieve autonomous driving. Why is this one important? On the one side, it can make driving much more safer in the future, which is, I think, a huge benefit for the society and for all of us. Secondly, and assume one example, if you go into the rural areas in the UK, maybe people can't participate in the mobility and the traffic and driving a car. So you can have, in the future maybe, people benefiting and using autonomous cars to be part of the mobile world again. Thirdly is you can have services around, for example in the car sharing it would be an offer. Our Chinese customers, for example, are having 30 days a year they are spending in a traffic jam. If you offer them autonomous driving, during this time, you can do banking, you can do -- maybe see a movie, you can leisure. So there's a lot of features which you can offer as services or as relaxing offer to the customers, where you differentiate maybe for the competition. So the money will come back. And it's also good for the safety of the future of driving.

Operator

We go over to Daniel Schwarz at MainFirst Bank. Please go ahead, your line is open. I apologize, we're actually going over to Fraser Hill of Bank of America Merrill Lynch. Fraser, please go ahead, your line is open.

Fraser Hill

Good afternoon. It's Fraser Hill from Bank of America. Two questions from me. The first one's on your comments on hybrid and electric vehicles, which, as you point out, the incoming orders are now picking up quite nicely. So can you just give a little bit of an update on the profit contribution that you're starting to see or otherwise of those vehicles at the current run rate on orders? Obviously you're having to absorb some of the incentives in Germany. But you get some support from governments outside of that market. So, I'm sure you won't tell me what the profitability of those vehicles is today, but are you seeing a positive profit contribution from those vehicles, let's say, in the second half of 2016? And if not, in what year do you think we should start to think about those vehicles becoming accretive in an absolute sense to your profits?

The second question is a bit more short term, just thinking about the second half of the year. And obviously you've talked about a low burden so far on launch costs, production ramp on new models and so on and so forth. How should we think about that just into the second half of the year? Are we looking at mid triple digit million launch costs for the 5 Series? And any other commentary you could give us just to help us with the other costs in the auto division, which continued to surprise on the low side. Thank you.

Maximilian Schoeberl

Okay, thank you very much, Fraser. We start with Mr. Krueger about the PFs.

Harald Krueger

Fraser, first of all, I think we're quite happy that we see an increase of 87% compared to the first half of 2015 in the overall sales figures for the plug in hybrids as well as the battery electric vehicles, which is in total we sold 23,600. What you can see that the market is picking up, it begins. But as I always stated, this is a marathon, a marathon where you need to have three main pillars driving the business. The one is definitely that you have the range, that the car companies offer an attractive car with enough range. Then you need the infrastructure. And the third one, you need incentives. And what you can see, for example, in the order intake or the i3 in Europe, as well in Germany is clearly picking up due to the incentives we have seen also in Germany now. So, step by step, this is definitely moving forward on this.

It is also important strategically to ramp up the electric vehicles to meet the CO2 2020 targets. Without electrified cars, you can't meet 2020 targets in Europe, for example, and other parts of the world. So, we have a clearly strategic interest in developing those markets. And we can see that. In a market like the Netherlands, for example, where there is a very good infrastructure available, already 15% of our total sales of the brand BMW are electrified cars. So, if all three together there, like in Norway, and now we see things picking up in Germany. And if you see the Netherlands, those countries are driving e mobility. And I'm, in principle, optimistic that the best time is coming here.

Maximilian Schoeberl

Okay. Thank you very much. The second part will be answered by Mr. Eichiner.

Friedrich Eichiner

Well we already guided that in the second half of the year we have to digest a higher cost. And a part of this cost will be launch costs for the new 5 Series, higher R&D spending that we are expecting to come in the second half of the year. That's all part of the number or the order of magnitude we guided already for the second half of the year. So nothing extra; it's all in.

Maximilian Schoeberl

Thank you very much. Next question, please.

Operator

We go to the line of Lello Della Ragione of Intermonte. Please go ahead, your line is open.

Lello Della Ragione

Thank you for taking my question. I have actually one on the pricing in the US. You always mention the overall market and your strategy to focus on SUVs there. And I was wondering if you see the respect that the pricing that is actually hard in the passenger car, that that trend could also spread in the close future to the SUV demand? And on the other end, okay, let's stick to this one first, please. Thank you.

Maximilian Schoeberl

Okay, Mr. Krueger, please.

Harald Krueger

Yes, I think if I fully understand the question, if there is a shift in the demand from SUVs to sedans. Yes? And clear answer is yes, you can see that across the globe, that in nearly every country, the number of SUVs is increasing. BMW is in a good position because we have a perfect range of X3, X4, X5, X6. In the future we will have the X7 on the market. And we see that, for example, also in the compact segment, like where the X1 is operating, which is very successful and high on demand, you can see clearly a trend into SUVs, even in China, for example, like in the US, like in Europe, and that's a steady trend for the future.

Lello Della Ragione

Yes, but the point is since everyone is looking at this trend and more and more companies are focusing on SUVs, do you see the risk that pricing could become harsh even there?

Harald Krueger

You mean the competition gets more fierce? Definitely. Everyone has a fully spectrum to offer on this one. But there are still opportunities because there is still a change in certain markets where they were buying sedans in the past and they loved the upright seating position. And there are still people who love the functionality of the SUVs. And you still see a change.

Lello Della Ragione

Okay. Thank you. The other question is related to the net financial position. In terms of cash that you have, the minimum amount that you see as the right balance for your Company going forward, if you can give to us some guidance on the proper level that you should maintain over the cycle in the long term.

Maximilian Schoeberl

Okay. Thank you very much. Mr. Eichiner, please? Yes.

Friedrich Eichiner

Well based on our internal risk assessments and risk models and based on the requirements we get from the rating agencies, we believe that we need 10 billion to 12 billion liquidity on our balance sheet in order to protect our position going forward.

Maximilian Schoeberl

Thank you very much. I think we have time for one more question.

Operator

Okay, in that case the final question is from the line of Stuart Pearson at Exane BNP Paribas. Please go ahead, sir.

Stuart Pearson

Yes. Thank you. Good afternoon. So a couple of questions. Firstly, just looking ahead to the 5 Series that comes later in the year, given the weakness, I guess, of the sedan segment globally right now, whether you could just talk about your plans and expectations for that product versus the predecessor? How are you thinking about capacity planning for the new model versus the old?

And on the cost side for that model as well, I think when you launched the current generation model, you helpfully talked about, I think from memory, something like 15% gross savings, 5% net. I wondered if there was any similar color you could give on the cost side of if even there'll be any net saving given the cost that needs to go onto models these days? So that's the first area.

And then just a very quick follow-up on the pricing side. I guess I'm a little bit confused by what you're saying on pricing being intense competition, yet sequentially, your pricing seems to have been relatively flat. Mercedes say it was positive, Audi not so bad. So I just wonder where the pricing pressure's coming from. Are we seeing more of a challenge now to the German oligopoly from other brands like JLR, Volvo and of course the Japanese makers using currency gains? So just where that pricing pressure's coming from, not so much regionally but in terms of by competitor. Thank you.

Maximilian Schoeberl

Okay. We start with Mr. Krueger and then Mr. Eichiner about the pricing.

Harald Krueger

The question was on the 5 Series and the plans and expectations on that. We have a clear target for this one, to be the number one in the segment because BMW was leading globally clearly with the current car. The 5 Series is a segment leader nearly all over the world. And we will do and target this one for the next generation as well. There's also a very important car, which is the 5 Series in China, as you know, also for the Chinese market, a more chauffeur-driven version and the extended wheelbase is very important. So plans are clearly targeting the number-one position globally.

Maximilian Schoeberl

Thank you very much. Mr. Eichiner?

Friedrich Eichiner

Well again, pricing, I think we touched it already, but maybe I have to go into a bit more detail for you. Now basically we look around the world, we have a different picture. Europe actually is quiet promising. We see a quite stable environment. And in some European markets, we see some improvement, slight improvement but improvement.

Same is true for China. After this strong development in 2015, what we called a normalization, it seems to be that this is now flattening out and we have quite a fairly stable environment in China also, so no further concerns about pricing there. And U.S. is still the concern. I explained why, because everybody was pumping into the U.S. last year. High inventories at all manufacturers. We started early on to reduce. Reducing means you have to give support. That was a burden in the first half of the year. That was one of the reasons why pricing is not strengthening further.

Now the question is what should we expect from the second half of the year. We think we have a chance to make progress. Not much, but another step. And it is supported by the better product momentum, new cars coming in, like the X1, like still a good-selling 7 Series. And at the end of the year, we are waiting for the 5 Series to come. Those are the reasons.

Maximilian Schoeberl

So ladies and gentlemen, thank you very much for joining us today. We wish you a pleasant summertime and all the best to you. Bye-bye and thank you very much.

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