Bayerische Motoren Werke's (BMWYY) Management on Q1 2018 Results - Earnings Call Transcript

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About: Bayerische Motoren Werke AG ADR (BMWYY)
by: SA Transcripts

Bayerische Motoren Werke AG ADR (OTCPK:BMWYY) Q1 2018 Results Earnings Conference Call May 4, 2018 8:00 AM ET

Executives

Maximilian Schöberl - Senior Vice President, Corporate and Governmental Affairs

Harald Krüger - Chairman of the Board of Management

Nicolas Peter - Chief Financial Officer

Analysts

Tim Rokossa - Deutsche Bank

Horst Schneider - HSBC

Arndt Ellinghorst - Evercore ISI

Patrick Hummel - UBS

Stephen Reitman - Société Générale

Christian Ludwig - Bankhaus Lampe KG

Stuart Pearson - Exane BNP Paribas

Harald Hendrikse - Morgan Stanley

Dorothee Cresswell - Barclays Capital

Jürgen Pieper - Metzler Capital Markets

Operator

Good afternoon, ladies and gentlemen. I would like to welcome you all to our telephone conference for the first quarter results. With us today is Harald Krüger, Chairman of the Board of Management, and Nicolas Peter, our CFO.

First, Mr. Krüger will give you an update on the business performance during the first quarter of 2018. Mr. Peter will then take you through our financial results. Afterwards, we will have time for a question-and-answer session.

Mr. Krüger, please go ahead.

Harald Krüger

Good afternoon, ladies and gentlemen. The first quarter of 2018 continued to build on our successful 2017 financial year. And the BMW Group remains the world’s most profitable car company in the world.

This underscores our core philosophy. We continue to chart our own course even in a volatile environment.

Our Strategy NUMBER ONE > NEXT provides a clear direction for shaping future mobility.

We have once again set the bar even higher with our goals for the current financial year. We are targeting a slight increase in automotive deliveries and a new all-time high, group earnings before tax at the same high level as last year, and an EBIT margin in the Automotive Segment within our target range of 8% to 10%.

After the first three months, we are right on track. For the first time, we delivered more than 600,000 vehicles in a first quarter. Our BMW, MINI and Motorrad brands all achieved new first-quarter sales highs.

We made gains in all major market regions – Asia, including China; Europe, including Germany; and the Americas, including the US.

Our EBIT margin in the Automotive Segment is at the high end of our target range, at 9.7%. At the same time – and we believe this is crucial – we are continuing to invest in our future. We are tackling several key areas at the same time.

First, we will continue to expand the electrification of our portfolio. Second, we will be launching various new models. And, third, we are accelerating our autonomous driving activities.

First, a few words about electrification. I have often said that the e-mobility growth curve is exponential. This is confirmed by our sales figures for the first quarter of 2018 compared with the first three months of last year.

Between January and March, we sold over a third more electrified vehicles. Sales of our BMW iPerformance plug-in hybrids are up more than 40%. Our MINI Countryman, with plug-in-hybrid drive train, is also in strong demand.

In the US, demand for BMW i, BMW iPerformance and MINI Electric vehicles increased by an impressive 78% during this period.

I have stated our goal for the full year very clearly. We aim to sell at least 140,000 electrified vehicles this year. Our new models will help us to achieve this. I am talking, of course, about the BMW i8 Roadster and the revised BMW i8 Coupé, which will be launched in May.

Both come with the fourth generation of the BMW eDrive technology for plug-in hybrids. This enhances significantly their electric range. You already know that we plan to offer 25 electrified models by 2025 – 12 of them pure electric.

You can already see what lies ahead this year. We will be presenting three all-electric concept vehicles. Our new technology flagship, the BMW iNEXT, the BMW i4 as a four-door coupé, and the first fully-electric vehicle of our core brand will be the BMW iX3, which I presented in China this April.

All these vehicles will go into serious production over the next few years. The BMW iNEXT combines the key technologies for future mobility. Its innovative design brings these technologies to life. It serves as a modular kit and an innovative enabler for all our future vehicles within the group.

We are building the iNEXT and i4 here in Germany in Dingolfing and Munich, respectively.

On the one hand, we are clearly strengthening relevant technologies for future mobility at our home base in Germany. On the other, we our focusing on China as it is the world’s biggest market and the real driving force in e-mobility.

Through this, we are sending a strong signal for sustainable mobility in China. From 2020, we will be producing our first fully-electric BMW – the iX3 – in Shenyang, which will be the start of using pure electric drivetrains within our core brand. The iX3 will be the first to use our fifth-generation electric drivetrains.

Our customers in China already have six electrified models to choose from. And they also have access to the world’s largest network of public charging points. By the end of this year alone, there will be 80,000 ChargeNow charging points in more than 100 cities.

We also plan to build pure electric MINI vehicles in China in the future. For this reason, we have signed a letter of intent with Great Wall Motor to create a second joint venture in China. And we will continue to work successfully with our joint-venture partner, BBA, which is now in its 15th year.

Now, we will be adding another local model – the new BMW X3. Starting in the summer, this model will also be produced in China, as well as in Spartanburg in the US, and Rosslyn, South Africa, to meet worldwide high demand. The X3 brings the number of BMW models produced in China to six.

With our local partners, the long-term focus is on creating a win-win situation for everyone.

China has signaled plans to eliminate tariffs and to open its auto market further.

Global thinking and global acting are what have made the BMW Group successful. Our business approach has always been based on free trade and open markets.

Customs duties and trade barriers only divide the world into regions and are not conducive towards global prosperity and worldwide economic development. That is why we will continue to advocate for customs duties to be dismantled.

Let’s move on to my second point – new models. We are now in phase two of our model offensive where the focus is on luxury and the X family. We earn high margins in this segment. Our offensive will receive a major boost over the coming months from the new BMW X2, the new X4, the BMW 8 Series Coupé which launches the 8 Series range with a total of six models, model updates to the 3 and 5 door MINIs and the MINI Convertible, and the new Rolls-Royce Phantom.

Earlier this year, I made it a point to meet with our dealers in the US and China. We showed them our new models for the coming months. The dealers in both countries were extremely pleased and could hardly wait to have these new models in their showrooms.

These new models offer growth opportunities for the dealers and for our company. For us, new products and new technologies go hand in hand.

And that brings me to my third point, autonomous driving. In April, we officially opened our Autonomous Driving Campus outside Munich. We intend to play a leading role in autonomous driving. And safety remains the absolute priority for us in this technological advancement.

Our iNEXT, which we will launch in 2021, will be fully electric and completely connected. It will not only be partially autonomous, but also completely safe. The iNEXT will be followed by a whole range of additional highly-automated models.

For this reason, we are combining all our expertise in vehicle connectivity and automated driving at the new campus. We will also be introducing new forms of collaboration in a highly flexible working environment, designed for quick decision-making.

Our new campus is further proof that the customer is at the center of all that we do. To build a base of 100 million active customers by 2025, we will need a complete ecosystem that provides an all-round service to fulfill all our customers’ demands and needs.

To strengthen our mobility services, we are combining our activities in this area with those of Daimler AG. The planned joint venture will combine both on-demand mobility offerings on an equal footing.

Together, we will define the development of services and digitalization in our industry. We want to take our customers’ experience of premium mobility beyond the vehicle.

Ladies and gentlemen, as you can see, we take a clear holistic approach towards bringing future mobility into the lives of our customers. And I remain confident that the BMW Group will be in the forefront of these future advancements within our industry and beyond.

This is the message I will share with our shareholders at our Annual General Meeting in a fortnight, and that 2018 is set to become another record year – the ninth in a row to be exact.

Thank you.

Maximilian Schöberl

Thank you very much, Harald. And now, Nicolas Peter will give you an update on the financials of the BMW Group. Please go ahead.

Nicolas Peter

Ladies and gentlemen, good afternoon. The BMW Group performed well in the first quarter, fulfilling all our expectations. Our positive operating performance shows our strategy is generating strong results.

Group earnings again reached the same high level as last year. The EBIT margin in the Automotive Segment rose to 9.7% despite higher R&D costs. We are well positioned in our target corridor of 8% to 10%.

Segment EBIT is on par with the previous year, despite high upfront investments and headwinds from currency and commodity prices. We already announced at the annual press conference that our R&D spending for this year will reach a new record high.

We are investing in future projects and expanding our innovation leadership. R&D costs increased by over €100 million in the first quarter. As planned, we were able to partially offset this additional expenditure with internal efficiency improvements.

However, as already announced in March, we will see a significant increase in costs in the second half of the year. This is due to the large number of vehicle launches and continued upfront investments in future technologies.

The negative impact of currency and commodity prices dampened earnings. For the full year, we expect a headwind in the mid to high three-digit million-euro-range due to various economic and political conditions.

As part of the transition to the new IFRS 15 accounting standard, certain comparative figures from the previous year had to be adjusted. You will find more details on this in the current quarterly report.

First, let’s take a closer look at the group figures. First-quarter revenues equaled €22.69 billion euros. Adjusted for negative currency effects, they were approximately on par with the previous year.

Group earnings before tax totaled €3.17 billion, which is on par with the high level of the previous year. The EBT margin was 13.9%.

The higher financial result reflects the positive earnings contribution of our Chinese joint venture and valuation effects from the acquisition of DriveNow, among other factors.

In line with this strong business performance, Group net profit rose slightly to €2.30 billion.

Ladies and gentlemen, we are strengthening our product portfolio this year. This includes renewing and expanding our X family, as well as our product offensive in the luxury segment.

When it comes to future technologies, we are also competing in the Champions League. Our newly-opened Autonomous Driving Campus and our Battery Cell Competence Centre underline this commitment.

Flexibility is an essential component of this. It is what makes us robust and competitive. As part of our continuing strategic development, we invested almost €130 million more in the first quarter than in the same period of 2017 – a total investment of around €734 million.

As a result, the CapEx ratio rose to 3.2%. For the full year, we expect a ratio of up to 5%. We will therefore continue to remain in our long-term target corridor.

As announced, R&D expenditure also remained at a high level and totaled €1.27 billion for the year to the end of March. Due to high upfront investments in new products and technologies, we expect this figure to reach around €7 billion over the course of the year.

The R&D ratio currently stands at 5.6%. The figure for the full year 2018 will be between 6.5% and 7%.

Let’s take a look at the Automotive Segment. In the first quarter of 2018, global sales performed well, increasing by 3.0%. The strong euro meant that segment revenues were slightly lower than the previous year. Adjusted for currency effects, revenues were up 1.5%.

The segment EBIT of €1.88 billion was on par with the previous year despite higher R&D costs and headwinds from currency and commodity prices.

This was offset somewhat by positive effects from volume/mix/market and efficiency improvements. The financial result once again contributed to positive pre-tax earnings.

Our Chinese joint venture, BBA, increased its earnings contribution to €240 million. Sales climbed 20% in the year to the end of March. The X1 and the new 5 Series in particular are highly popular.

The valuation effect from the acquisition of DriveNow also had a positive impact. This was offset by a similarly high positive valuation effect from the previous year in connection with new investors acquiring a stake in the mapping service HERE.

Pre-tax earnings amounted to €2.28 billion.

Ladies and gentlemen, these figures underline that our core business is built on a very solid foundation. At the end of the first quarter, despite a planned significantly higher accumulation of working capital, free cash flow stood at €302 million euros.

For the full year, we continue to target a free cash flow of more than €3 billion.

In the Financial Services Segment, the total portfolio of customer financing contracts reached almost €5 million. In the first quarter, 47.3% of all BMW Group new vehicles were leased or financed by the Financial Services Segment. Almost 452,000 new contracts were concluded with retail customers.

The segment’s risk situation remained stable. Overall, used car prices are trending downward slightly in international markets, as expected. We place a strong emphasis on proactive risk management. We evaluate our portfolio on a regular basis, so that we can make adequate provisions for our business risks at all times.

Let’s move on to the Motorcycles Segment. Almost 36,000 motorcycles were delivered to customers in the first three months of 2018. Revenues were 15.5% lower than the previous year at €524 million.

Due to the ramp-up of new models, including the impact of various model changeovers, total production declined in the first quarter. Consequently, sales to the retail organization, which form the basis for revenue recognition, decreased.

Currency effects also had a negative impact. As a result, the segment’s operating earnings for the first quarter were lower than the previous year. The EBIT margin was 14.7%.

Now, to the outlook for the full year. As long as political and economic conditions do not deteriorate significantly, we expect a positive business development in 2018. We are targeting group earnings before tax at least on par with the high level of the previous year.

In late March, BMW AG and Daimler AG signed an agreement to combine their mobility services. If approved by the relevant authorities in the course of this year, the formation of the joint venture will trigger a one-time valuation and earnings effect in the BMW AG’s group financial statement and thus lead to an adjustment of the company’s guidance.

Under these circumstances, pre-tax earnings on group level would increase slightly in 2018 compared with the previous year.

In the Automotive Segment, we anticipate a slight increase in deliveries and revenues for 2018. Despite high upfront investments, we aim to keep the EBIT margin between 8% and 10%.

We now expect a slight increase in deliveries in the Motorcycles Segment in 2018. Our target for the EBIT margin remains unchanged between 8% and 10%. In the Financial Services Segment, we expect return on equity to exceed our new target figure of 14%.

Ladies and gentlemen, the BMW Group is on course to meet its guidance for the full year. In 2018, we will continue to make important strategic decisions. And, as you know: whatever we start is well thought through, and we implement it sustainably.

In such a volatile environment, our core business delivers the highest level of performance from one quarter to the next. This gives us the freedom we need to continue investing in our future.

Thank you.

Maximilian Schöberl

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

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]. And our first question comes from the line of Tim Rokossa of Deutsche Bank. Please go ahead. Your line is now open.

Tim Rokossa

Yeah. Thank you very much to both of you. It's Tim from Deutsche Bank. I would have two questions please. The first one is on the free cash flow and the second one is on electric cars. If we think about free cash flow, many people I spoke to today said it didn't look too great, specifically compared to your profitability in the first quarter. But the €1.3 billion shortfall versus last year seems to be pretty much only working capital related. Now, I understand you confirmed your full year target, but can you say a few words about what caused the impact in this quarter and also if you already see it swinging back in Q2?

The second question would be on electric car profitability. We have seen that you're growing very nicely with these vehicles. The EBIT impact seems to be very small, looking at your margin. Can we take this as a sign that you're making progress on profitability of these vehicles and where do you stand relative to an internal combustion engine where Daimler, for example, tells us they would probably make a similar margin by 2025.

Maximilian Schöberl

Thank you very much, Tim. This question will be answered by Nicolas. Nicolas?

Nicolas Peter

Tim, maybe starting with the free cash flow, there's a good reason why we only guide full year free cash flow because, as you know, we have, in particular, in the working capital area, a lot of changes from quarter to quarter.

If we reflect on Q1 and you have seen this in the past, if you look back, we had swings from one quarter to another exceeding €1.5 billion and sometimes even €2 billion.

If you reflect on Q1, we are absolutely in line with our planning. The free cash flow was, in particular, influenced by two factors. On one hand side, anticipated buildup of inventories, which put us in a strong position for Q2. And on the other hand side, a planned reduction in trade payables. So, therefore, we are definitely committed and continue to guide free cash flow for the full year of more than €3 billion.

Second, profitability of electric-powered cars. First of all, your comment is absolutely allied. If you look at the first quarter, in line with our full year guidance, we have seen retail sales of electric-powered cars going up by approximately 40% in a year in a quarter-by-quarter comparison, so Q1 2017 to Q1 2018. So, we are on track to achieve our full year guidance of plus 140,000 electrified vehicles.

If you look at the profitability from the company's perspective, there are a couple of factors which influence in a positive way our development. On one hand side, full availability of 5 Series mix improvements, which will become even stronger in the course of 2018. Efficiency gains in some areas.

And you're absolutely right. We make progress also related to costs regarding electric drivetrain, in particular if we compare generation 4 and generation 5. We've presented generation 5 electric drivetrain last week in the Beijing. Car will be on the market in 2020. We expect further improvement.

Tim Rokossa

Thank you.

Maximilian Schöberl

Good. Thank you very much. Next question please.

Operator

Thank you. Our next question comes from the line of Horst Schneider of HSBC. Please go ahead. Your line is open.

Horst Schneider

Good afternoon. And thanks for taking my questions. More housekeeping related. I want to get some better feeling for the seasonality this year for the EBIT margin. We used to see that H2 margin is weaker than H1. But I think, this year, you have got some higher-volume growth in H2 due to the new model launches. Will we see this time a different seasonal pattern, that maybe H2 margins will hold up better compared to H1?

Then the other question that I had related to your FX guidance, you guide for quite high FX burden. I want to get a better feeling for the sensitivity in this guidance. That means what happens if now the US dollar strengthens. Could that maybe lead to a lower burden in the course of 2018 that you expect at the moment?

And the last question that I had would be on the pricing situation, if you could maybe give us an update how the pricing was by region in Q1. Thank you.

Maximilian Schöberl

Thank you very much, Horst. Nicolas?

Nicolas Peter

Horst, to start with the seasonality of EBIT margin, as you know, we do not guide quarter-by-quarter EBIT. I think our start into 2018 was impressive in the upper range of our corridor, 8% to 10%. We continue to guide 8% to 10% for the full year. On one hand side, you will have on the positive side a further positive development in particular regarding our product portfolio full year availability of the X3 of the 5 series. The X3 will be launched in China in a couple of weeks from now. We just ramp up production. We will, later this year, introduce the X5. M5 is just arriving in the showrooms. 8 Series in a couple of weeks from now. So, all models with, on one hand side, positive contribution. On the other hand side, as we said, we will see higher R&D expenditure and FX and raw material impact, which is somewhere between €500 million and €1 billion.

It's definitely too early in the year to say, well, it will be more in the one or the other direction. Can it develop in a positive way? Yes, it can develop. As I said, it's too early. We are four months into the year. We have, I think, a very sustainable hedging strategy. And I'm, on one hand side, optimistic that the corridor is set exactly the right way, but it's a corridor and that we will achieve our 8% to 10% full year profit margin.

Pricing situation by region, excellent development in China. Definitely trending in the right direction, similar to the US. If you compare it to our situation in the US market we had in the second half of 2016, we've seen first improvements in 2017. And I'm very optimistic that, based on Q1, based on the availability of even more X models in the US market, we will see a further improvement in Europe.

We have related to the diesel topic, which is, in particular, impacting Germany and the UK, on one hand side, some challenges on the other hand side. Overall, in Europe, business is very solid as well. As planned, we have seen sales growth in all three major regions of the world.

So, based on this, we are well on track.

Horst Schneider

All right, thank you.

Maximilian Schöberl

Thank you very much. Next question please.

Operator

Thank you. Our next question comes from the line of Arndt Ellinghorst of Evercore. Please go ahead. Your line is now open.

Arndt Ellinghorst

Many thanks. And good afternoon, everyone. Two questions please. Firstly, concerning your disclosure, you're increasingly understating your performance by reporting the China equity contribution below the EBIT line. In Q1, if you had included the €240 million from BBA, the auto Q1 EBIT margin would have been at around 11%. And that compares to 9% at Mercedes, which did include their €332 million China equity number within their EBIT. Now, China, as we know, it keeps growing. That equity line is becoming very material.

So, the question is – and I think I've asked you that before – whether you shouldn't really reconsider your disclosure, whatever that is, whether you include their equity contribution in the EBIT line or you report on pretax, it just really feels that your understating the true underlying performance of the business by reporting the way you do?

And then, secondly, on pricing, and thanks for your remarks, Dr. Peter, could you be a little bit more specific what you expect for the rest of this year and also 2019 in terms of pricing? We've discussed this many, many times. And I know that you really focus on that area. So, the question is, can you commit to a net pricing improvement this year? Can you commit to positive pricing in 2019? Because so far, I think, last year was flat, Q1 was broadly flat. When do we see some more material improvement?

Thank you very much.

Maximilian Schöberl

Thank you very much. Nicolas?

Nicolas Peter

Arndt, maybe starting with your disclosure topic, this is exactly the reason why we not only guided automotive EBIT, but we also guide to EBT because I think this is exactly reflecting the group's strength and the group performance.

I have to say your calculation is pretty accurate. If we calculate, we do exactly the same math. We are even closer to 12% for Q1, but it's very accurate what you've calculated.

Regarding pricing –

Arndt Ellinghorst

Dr. Peter, if I may step in here. The valuation of the company depends far more on the profitability that all of focus on rather than the guidance that you give on pretax.

Nicolas Peter

Yeah. And this is exactly why we focus so much on profitability. And if you look, in particular, Q1 2018 is, I think, underlining our strong focus on profitability and this is why your second question is so important as well because this is, of course, one of the key drivers for profitability in our industry.

And if you look at age of our product portfolio and how the product portfolio will develop in the month to come and, in particular, with the launch of additional and new X models – and X models in very high demand across all sales regions – this is making us very optimistic that we will be able, thanks to pricing discipline and thanks to those new models, to offset the impact we have, in particular, from the R&D area because we believe we have to invest in those future technologies.

Arndt Ellinghorst

So positive net pricing this year and next year?

Nicolas Peter

Arndt, I've, I think, commented very precisely what we expect. And 2019 is too early to guide. We will have many occasions in the months to come to reflect on 2019. We still have eight months to go in 2018.

Harald Krüger

And, Arndt, from my side – Harald speaking – there's two clear things. So, one is, we have a clear target, NUMBER ONE strategy, which means we would like to be and remain the most profitable car company as we were in 2017, as we were in 2016 and as we were in the first quarter of 2018. That's why we are clearly focusing on pricing, as Nicolas explained, but also that the strategy is expanding especially in the luxury segments because we see then that we can gain more better margins in those areas. And if we will have, in 2019, the X7 on the market, if we will have in the fourth quarter of 2018 the new 8 series and there are, as I mentioned, six models coming, this is clearly our strategy to improve on our margins and fighting back more – across on e-mobility and other things. And I'm sure that this can take off.

Arndt Ellinghorst

Thank you very much.

Maximilian Schöberl

Thank you, gentlemen. Next question please.

Operator

Thank you. Our next question comes from the line of Patrick Hummel of UBS. Please go ahead. Your line is now open.

Patrick Hummel

Thank you, operator. Good afternoon, everybody. Two questions also from my side. The first one relates to the ownership structure in China and it's sort of linked also to the profitability question. As far as I understand, the joint venture which is about be set up with Great Wall Motor for the E MINI is not concluded yet. So, is there a chance that BMW is going to have a stake that's higher than 50% in that partnership with Great Wall?

And also, as far as BBA is concerned, you will build the electric X3 in China and you announced that you will sell it into the world markets. In that context, as China becomes global production hub for you, not just for the local market, wouldn't it be the right time to revisit the ownership structure also in that BBA joint venture in light of the new rules?

And my second question, very simple question, the guidance you gave for free cash for this year. Does that include or exclude any cash consideration you may have to pay to Daimler for getting a 50% stake in the mobility service joint venture? Thank you.

Maximilian Schöberl

Thank you, Patrick. We start with Harald and then Nicolas. Harald?

Harald Krüger

Patrick, first of all, I think very much welcome the words and the speech from the Chinese President Xi at the Boao Forum that he would like to open up markets as free trade and open markets, in my view, are definitely a lever and a win-win for both sides to create jobs and wealth.

But if you look at the BMW situation, we have, for nearly 15 years, and we will celebrate this one in October, a very good relationship with Brilliance and we're going to continue that partnership. And that partnership is not just the financial side. It's competent side, it's people side, so we're going to continue this partnership with new products. And the iX3 is the product we will build there in 2020. We said there might be also the opportunity to export it, but that's early to say. We just want to start the production there because the China market is – our something is production for those markets. The China market is the biggest market in the world for e-mobility and that segment is interesting.

Concerning Great Wall, this was the other point. We are in early discussions of this one. And if we would like to set something up for the long-term, I'm optimistic on this one. We have a good partner discussion there with Great Wall, but it's too early to say because we are discussing technical details like the architecture, future models. And in my experience, it always must be a win-win on both sides. Otherwise, it's not successful.

So, strategically, we are knowing exactly what we want with the brand BMW, with the brand MINI in China. We will definitely push electrification in this market. But we are in discussions with our partner how to proceed.

Nicolas Peter

Maybe one comment on financial perspective regarding export of electric X3 to other markets. We have agreed with a joint venture partner a different business model for those cars exported from China.

And, Patrick, your second question, our minimum €3 billion free cash flow guidance includes conventional agreements this year with Daimler.

Patrick Hummel

Very clear, thank you.

Maximilian Schöberl

Thank you very much, Patrick. Next question please.

Operator

Our next question comes from the line of Stephen Reitman of Société Générale. Please go ahead. Your line is now open.

Stephen Reitman

Yes, thank you. My question is about the SUV. With the conversion of Rosslyn to the X3, the starting production of X3 in China as well, what is the incremental volume of SUVs you think you're going to be able to achieve this year and next year? And to what extent are you approaching now your ideal mix, you think, in terms of having right balance of SUVs and traditional sedans?

Maximilian Schöberl

Harald?

Harald Krüger

Just think about from two perspectives. One is for the X1. We already have three locations in the world. One in Regensburg. One in Nedcar, Born and one in China. And we sold last year on about 280,000 vehicles with these three locations. If you think about that, we did 150,000 around with one Spartanburg location. You can assume that that segment is growing fast. There's a high demand on X3 in China. There's a high demand on X3 also in Africa, in Japan, Australia, many countries. It gives you an idea that we have opportunities there. And these will be seen in the second half of 2018 because then all three production locations are at ramp-up line and will deliver to the market.

But the reception in China on the auto show, for example, for the new X3 was very positive.

Maximilian Schöberl

Thank you very much, Stephen. Next question please.

Operator

Thank you. Our next question comes from the line of Christian Ludwig of Bankhaus Lampe. Please go ahead. Your line is now open.

Christian Ludwig

Yes. Good afternoon, gentlemen. Also, two questions from my side. First of all, one more follow-up on the FX and raw material headwinds that you mentioned, Dr. Peter. This number, how much of that have we already seen in Q1 or is this what is going to impact your revenue – your earnings in the remaining nine months, will be question number one.

And the second question is on e-mobility. With diesel, Volkswagen now has said that they may be looking into battery cell production again. So far, you have ruled that out for you or do you think there may be a change for the industry that that might be something that you have to look at if competition is doing the same thing? Thank you.

Maximilian Schöberl

So, thank you, Christian. We start with Harald and then Nicolas.

Harald Krüger

Concerning the questions on the battery cell production, we have long-running contracts already. We get supply from Asia, as you know, from Korea. We have also definitely – for our China vehicles, we get battery cells from China, from local partner, CATL. So, we have running contracts. We have good partners. And you probably should be aware as well, Christian, there's also some – the other company already moving to Europe and opening their battery production there. We have highly invested on our own side into the R&D of cell production, on cell development that we know the details on the chemical side, that we know the details on how to pack it and whatever. So, at BMW, we're focused strategically on having all knowledge on all of these individual steps, but we're running contracts with our suppliers and that's the current basis.

Nicolas Peter

Christian, regarding FX raw material impact in Q1, we've seen an impact in the higher double-digit area in Q1 2018. And if you reflect on what we said earlier, on one hand side, we will see in the next three quarters a positive impact from our product momentum, from – in particular, the X models and cars like the M5, 8 Series generating strong profitability. On the other hand side, we will continue to have strong headwinds from FX, raw material and increased R&D spending. Overall, 8% to 10% EBIT margin.

Maximilian Schöberl

Thank you very much, Christian. Next question please.

Operator

Our next question comes from the line of Stuart Pearson of Exane BNP Paribas. Please go ahead. Your line is now open.

Stuart Pearson

Yeah. Thank you. And good afternoon. So, two questions. One, just revisiting the China JV point from Patrick and Arndt because I think maybe half answered, but, obviously, you want to continue the relationship with Brilliance, but there's different levels of that. So, I wonder – what discussions are there, if any, and what kind of capital could you put to work to increasing that stake in the Brilliance JV? Is that something you could discuss this year? And just technically, what ownership level would you consolidate that because adding the equity income doesn't really help anybody. A bit distorting. So, at what stage of ownership could you consolidate that?

And then, the second question, just on the X3, precisely just on the capacity side, obviously, you've made some changes to the footprint this year, adding China and South Africa to the capacity for the X3. So, I wonder, by the end of the year, once those plants are ramped up, what kind of annualized capacity you expect for the X3 versus the prior model? Thank you.

Maximilian Schöberl

Okay. We start with Nicolas and then Harald. Okay.

Harald Krüger

Stuart, maybe starting with China joint venture, China as a country and we as a company, we have very long-term strategy and we've been very successful with our long-term focused strategy over the last 15 years. We will continue to develop this partnership. We really appreciate the guidance given by the Chinese president in the last couple of weeks. This is from our perspective trending exactly in the right direction. But, of course, as you can imagine, it's by far too early to comment now what might be further developments in the years to come. So, this from – regarding China joint venture, but we are optimistic also for 2018 as I've stated.

Harald Krüger

And on the question on the capacity for X3, you can assume a range. At BMW, the production and manufacturing, it's very flexible and ramping up and ramping down. But a corridor of this one can be for the X3 if we have all three manufacturing locations at the production network full running from 200,000 to 250,000 units, 50,000 in South Africa roundabout is the figure, and if you think about 100,000 in the United States. 120,000 in China. So, it's a little bit flexible, but a range above 200,000 is the figure I could give you.

Stuart Pearson

Okay, thank you.

Maximilian Schöberl

Thank you very much, Stuart. Next question please.

Operator

Thank you. Our next question comes from the line of Harald Hendrikse of Morgan Stanley. Please go ahead. Your line is now open.

Harald Hendrikse

Hey, guys. It's Harald at Morgan Stanley. Three quick questions, if you don't mind. One, rather than the ownership question, I think it's difficult to gauge what any change in the import taxes in China may have in terms of elasticity of demand. Can you sort of maybe give me some anecdotes or some idea of what you think could happen to import sales in China if we do actually have a 10% or 15% reduction?

And secondly, in terms of pricing in China, are consumers already starting to expect those price reductions? And what is that doing to competitive pricing in China? What some of your competitors are saying? It's already becoming a very competitive market.

Second question I had, just to clarify some accounting for me, but if we're going to consolidate other assets, do we not have to consolidate revenue as well as EBIT, in which case I imagine the impact on margins is not quite what we were calculating a little bit earlier in this call?

And then, lastly, Financial Services. Can you just make some commentary on Financial Services? That was the only bit, I think, in the Q1 that was maybe a bit weaker than we had expected. Is there any impact on net interest margins from the higher rates or are these further diesel questions?

Maximilian Schöberl

Okay, thank you very much, Harald. We start with Nicolas and then Harald.

Nicolas Peter

So, starting with change in import taxes in China, Harald, two aspects which are very relevant regarding this topic. On one hand side, we have already localized more than 70% of our Chinese business in China and we are now adding – and this will definitely add additional product and volume and segment share momentum in China. We are adding now the sixth model with the X3.

If you look at all those discussions related to tariffs, I think the BMW group is in an extremely strong position. Why? Because we have a strong production footprint in all three major geographical parts of the world and we have a very flexible production system. Our number one factory from pure volume perspective is in the United States in the Spartanburg. We have a strong footprint in China and in Europe, including the UK.

Pricing in China, definitely, in the Chinese environment, our strong product momentum is supporting our business and pricing in China. X1, 5 Series and the X3, which will be launched in a couple of weeks from now, will definitely support our positive pricing development in China in the month to come.

Financial Services, if you look at the on the revenue side of Financial Services, if you adjust by currency effects which we had Financial Services as well, revenue is slightly up, 1.20 – I think 1.2% to 2%. And we view in a very, very systematic way the development of residual values and adjust correspondingly our provisions.

If we look at diesel, in particular, Euro 4 and Euro 5 diesel engines in our leasing portfolio, this will be fully closed, this topic, by end of this year. We are already below 100,000 – significantly below 100,000 Euro 4 and Euro 5. In our leasing portfolio, we have hardly any Euro 4. And it's going down month by month by month.

And your last topic was related to the consolidated revenues, the joint venture is at equity in the financial results, but, of course, the shipment of parts and the royalties are in the consolidated revenues.

Maximilian Schöberl

Thank you very much. Perfect answer from our CFO. Next question please.

Operator

Thank you. Our next question comes from the line of Dorothee Cresswell of Barclays. Please go ahead. Your line is now open.

Dorothee Cresswell

Hi there. It's Dorothee Cresswell from Barclays. I was just wondering if you could tell us a bit more about your cost-cutting and efficiency efforts. What measures are you taking? I think, in the past, you've spoken about lower complexity and faster development times. Perhaps you could also give us an idea of the size of the tailwind from those efforts this year.

And my last question is, do you step up those efforts in light of the greater headwind from raw material and forex?

Maximilian Schöberl

Nicolas?

Nicolas Peter

So, Dorothy, definitely the two topics you've raised are still of top priority in our daily business. Reducing complexity is a key focus in all areas, in all areas starting with research and development, continuing with production, procurement and having positive impact in sales and marketing, including financial services.

Of course, as you can imagine, in a business, in an industry which has development times between four and five years for a new product, seven years on the market. This is definitely not like switching on or off the light, but we are very well on track to achieve significant improvements in those areas. And those improvements already supported us also in Q1 as I said in my speech to offset part of the negative impacts we had, in particular, from increased R&D spending and some FX headwinds.

Harald Krüger

And, Dorothy, and one more. BMW has a clear target to be the most efficient one in production as well as on the material cost side and in the past have shown that we've made much progress on these things.

Dorothee Cresswell

Okay, thank you.

Maximilian Schöberl

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

Operator

Thank you. In that case, our next question comes from the line of Jürgen Pieper of Metzler Capital Markets. Please go ahead. Your line is open.

Jürgen Pieper

Yes, thanks. Two quick ones. First one is on your headwind, FX and raw material headwind guidance. Is it right that you had changed it from the recent analyst meeting? Your figure looks a little higher than a few weeks ago? And if yes, why is that – if I look at the euro/dollar, for example, that has changed in your favor, I think, over the last couple of weeks.

And second thing on electric cars, you're absolutely right. The growth is nice. You're on plan. But if I look at the overall market, I think the market for electric cars grew by 60%, 70% over the past 18 months worldwide. So, your growth doesn't look that impressive if you look at the overall market. And especially, I think if you look at products below €50,000, your i3, I think, has lost market share even after the facelift. So, is that of any importance for you? Do you look at this relative performance or don't you care in the end and say, okay, 30%, 40% growth even, let's say, for the next two years is just good enough and we simply don't care and don't look at market shares in that situation?

Maximilian Schöberl

Nicolas?

Nicolas Peter

Jürgen, starting with FX and raw materials, approximately two-third of the impact, I've mentioned is raw material – sorry, is FX and one-third is raw material. Still, we see some negative impact, in particular, from renminbi and Russian ruble. And this is why we believe, coming from today's perspective, that it is right to adjust our forecast in a way we had around €500 million a couple of weeks ago and now it's between €500 million and a higher three digit number. Can this improve in the weeks and the months to come? It can, but this is based on our actual analysis.

Second, Harald please.

Harald Krüger

Jürgen, concerning your question about the electric cars, we had last year the clear target of 100,000 electrified cars being sold. We delivered that one. And there was, in our premium, only one other – another company who was on that level. We were last year, clearly, the market leader in Europe if you look at the plug-in hybrid, combined with the battery electric vehicles. We look carefully at those figures because we would like to ramp up e-mobility not just with very good product offers, like the iX3 which are presented in China. Next year, the MINI electric will come on the market because we need these cars, on the one side, for the transformation into sustainable mobility and achieving our CO2 targets in 2021.

And as I mentioned before, this is a long-term journey, but we enjoyed the growth figures mentioned in my speech that it was 87% in the US the first quarter 2018 compared to first quarter 2017.

Just one example, for example, in California, to close off, every third 5 Series currently being sold is a 5 Series plug-in hybrid. So, you can see that the strategy is working.

Maximilian Schöberl

Thank you very much, Harald. Thank you very much, Nicolas. Ladies and gentlemen, we are on time. Thank you for joining us today. And we wish you a nice weekend. Bye-bye.