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Edited Transcript of BMW.DE earnings conference call or presentation 21-Mar-19 9:00am GMT

Q4 2018 Bayerische Motoren Werke AG Earnings Call

Munich Mar 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Bayerische Motoren Werke AG earnings conference call or presentation Thursday, March 21, 2019 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Harald Krüger

Bayerische Motoren Werke Aktiengesellschaft - Chairman of Management Board & CEO

* Maximilian Schöberl

Bayerische Motoren Werke Aktiengesellschaft - EVP of Corporate & Governmental Affairs

* Nicolas Peter

Bayerische Motoren Werke Aktiengesellschaft - CFO & Member of Management Board

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Conference Call Participants

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* Adam Brian John Hull

MainFirst Bank AG, Research Division - MD

* Angus Vere Tweedie

Citigroup Inc, Research Division - VP & Analyst

* Arndt Alexander Ellinghorst

Evercore ISI Institutional Equities, Research Division - Senior MD & Head of the Global Automotive Research

* Daniel Schwarz

Crédit Suisse AG, Research Division - Research Analyst

* Hanna Dorothee Hellmuth Cresswell

Barclays Bank PLC, Research Division - Research Analyst

* Horst Schneider

HSBC, Research Division - Global Head of Automotive Research and Analyst

* José Maria Asumendi

JP Morgan Chase & Co, Research Division - Head of the European Automotive Team

* Michael Dean

Bloomberg Intelligence - Analyst

* Michael Raab

Kepler Cheuvreux, Research Division - Head of Automobile (Thematic) Research

* Patrick Hummel

UBS Investment Bank, Research Division - Executive Director and Lead Analyst of European Autos

* Stephen Michael Reitman

Societe Generale Cross Asset Research - Equity Analyst

* Tim Rokossa

Deutsche Bank AG, Research Division - Research Analyst

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Presentation

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Maximilian Schöberl, Bayerische Motoren Werke Aktiengesellschaft - EVP of Corporate & Governmental Affairs [1]

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So ladies and gentleman, good morning. Take your seats, please. I think we are on time. I think we wait some 1 or 2 minutes. Good morning, Arndt. Thank you for coming. It's a pleasure for us. So I think we start off. Good morning, everyone. Welcome to our analyst and investor conference. We are delighted that you could join us today, and we hope you all had a pleasant evening yesterday.

Today, we will focus on 2018 as well as on our progress with Strategy NUMBER ONE > NEXT. Today's speeches will be a bit shorter than yesterday at the annual press conference. Therefore, we will have more time afterwards for the Q&A. As always, you can get a hard copy of the annual report, our yearbook and the sustainability factbook at the entrance. Please also take a look at our online version of the annual report.

Ladies and gentlemen, I would like to welcome Harald Krüger, Chairman of the Board of Management on my left side. And I would like also to welcome Nicolas Peter, Board Member for Finance. About today's agenda, we will start with Harald. He will speak about the progress with our Strategy NUMBER ONE > NEXT, then Nicolas will inform you about our financial performance in 2018 and the outlook for 2019. To conclude the outlook, Harald will present you our model offensive. This will be followed by a Q&A.

Before we start, please note that this conference is subject to the disclaimer regarding forward-looking statements. You will find this in the investor presentation material referred to in this conference. Please also refer to the report on risk and opportunities, which you will find in our most recent annual report. The BMW Group does not assume any obligations to update these forward-looking statements or the information.

Thank you very much. Now I would like to hand over to Harald. Please, Harald.

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Harald Krüger, Bayerische Motoren Werke Aktiengesellschaft - Chairman of Management Board & CEO [2]

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Thank you very much. Good morning, and welcome. Today, I would like to show you what sets the BMW Group apart from our competition. Let's take first a look at the recent past and then focus on the future.

The BMW Group is successfully shaping the future of mobility. We are doing so by charting our own course. We are redeveloping our business model. It has to be profitable and successful in the digital age, for example, our new joint venture with Daimler, which combines all our NOW services. We are strengthening our core business and our global presence, for example, in China and the U.S. We deliver. We turn words into action. Our successful transition to the new emissions standard, WLTP, is a good example for this.

In recent years, we have evolved from a manufacturer to a mobility provider. Going forward, we aim to be a leading tech company for premium mobility. For this reason, we are providing our company a new and stronger foundation with regards to technology, in our relationships with customers and in our processes and structures and work environment. This is no easy task, but we are a very strong team.

We continue to make significant progress with our Strategy NUMBER ONE > NEXT. We have been implementing measures for the past 3 years. Our focus is until 2025. We have a clear vision of the future. Our journey has 3 stages with milestones in 2018, 2021 and 2025. The first stage, up to 2018, has already successfully been completed. We are now embarking on the second phase, which will take us to the end of 2021.

What are the challenges for our industry? The business environment remains highly volatile. E-mobility will continue to grow. The development of highly automated vehicles will continue to make advances. What is our approach to master these challenges? We are investing in our range of electrified vehicles for all customer needs. We also will create additional flexible platforms for all type of drivetrains. From 2020, the popular BMW X3 will be our first model that we will offer with all 3 drivetrains.

The customer will continue to have choices in the future. The broad approach allows us to respond flexibly. This is the most efficient solution, a single platform for all. We will keep our foot on the throttle with the new model releases. This year alone, we will launch more than 20 new or updated models. And we are electrifying all our brands and model series. By the end of this year, we will have 500,000 electrified vehicles on the road.

As anyone who's ever driven an electric car will tell you, e-mobility is Sheer Driving Pleasure in its purest form, thanks to the electric engine and battery. Together, they form the heart of every electric vehicle. We produce the electric drive and high-voltage systems ourselves. This keeps essential e-mobility expertise firmly in our own hands.

Regarding battery cells, we will continue to build on our existing expertise. This summer, we will open the new Battery Cell Competence Centre in Munich. This also includes infrastructure. Our CHARGE NOW customers have already today access to more than 100,000 charging points in 25 countries. CHARGE NOW also demonstrates that cooperation between companies is increasingly important.

We always seek out the most suitable partners in different fields. In 2 important areas of future activity, we have embarked on a long-term cooperation with Daimler AG. To provide more services in more cities, we have created 5 joint ventures. More than 60 million people already use the NOW services. Together, we will invest over EUR 1 billion. The benefit for customers is that everything comes from a single source and soon from a single app. And when it comes to autonomous driving, both companies already have extensive know-how. Together, we are developing the next-level technology for autonomous driving for our models from 2024 on.

As a global company, more than ever, we have to satisfy the different demands in different regions. In line with our strategy, we are targeting continued growth in all major regions of the world and aim to expand our market share. To achieve this, we have a specific focus for each region. China is our largest single market and a strong driving force for e-mobility. Our approach is as follows. The new plant in Shenyang will increase our capacity to 650,000 vehicles per year. Our new joint venture with Great Wall will build fully electric MINI vehicles. From 2020, we will produce the first fully electric BMW, the iX3, which we will export from China to the rest of the world.

In the U.S., we continue to invest in expansion of our Spartanburg plant. This year, the plant celebrates its 25th anniversary. The new X7 signals our commitment to the U.S. The U.S. Department of Commerce has once again confirmed that BMW is the leading U.S. automotive exporter by value for the fifth consecutive year. Our new plant in Mexico will expand our share of activity in the Americas. It will open in June. Europe is our largest sales region and home to the most BMW Group plants and employees. The political situation remains tense due to the uncertainty over Brexit. But we are well prepared for all scenarios. The same principle applies to all regions. Our commitment is geared towards the long term. Free access to markets is essential for our success.

Ladies and gentlemen, to become an agile tech company, we also need the right internal organization. Efficient structures have always been part of the BMW Group. Two current examples include our cross-divisional Performance > NEXT program and our new sales and marketing structure. We began implementing Performance > NEXT some time ago. Our goal is to become faster, more profitable and more efficient. We are concentrating on 3 areas: customer and sales, vehicle and organization and structures. Performance > NEXT will permanently change the whole company. We are targeting total savings potential of more than EUR 12 billion by the end of 2022. Performance > NEXT will have an impact well into the next decade.

Let's take a look at my second example. Our relationship with customers is vital to the success of our business. Starting in April, we will have one sales division for BMW, MINI and Rolls-Royce automotive brands. It will be known as the C division. This reflects our clear focus on the customer. This division will be responsible for creating a consistent brand experience across all touch points. And we believe a smaller Board of Management sends the right signal for streamlined structures across the company.

The third stage will take us all the way to 2025. Here, the BMW approach is quite different from that of other companies. Our next innovation and technology flagship, the BMW iNEXT, will take individual mobility to a whole new level. It will enable the entire company and all our brands to face the challenges of the future. The concept car is here onstage with us. And iNEXT combines several future technologies: full connectivity and a futuristic interior; an electric range of up to 600 kilometers for everyday driving for both short and long distances; it's also signals the launch of Level 3 highly automated driving; and at the same time, we will also be testing Level 4 and Level 5 autonomous driving in urban areas with a fleet of iNEXT vehicles.

This opens up a whole new chapter for the BMW Group. Today, more than 80% of accidents are caused by driver error. Autonomous driving can virtually eliminate these accidents. Safety remains our top priority in this area. By the time we launch our Level 3 system in 2021, we will have clocked up more than 240 million test kilometers, around 95% in simulations. Technologies from the iNEXT will be integrated into our entire model lineup. The BMW iNEXT will be released onto the market in 2021. Autonomous driving relies on and generates huge quantities of data. Next week, we will be opening a data center outside of Munich.

Ladies and gentlemen, as you can see, we have a clear roadmap for the future. Later, I will give you an update on upcoming product highlights.

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Maximilian Schöberl, Bayerische Motoren Werke Aktiengesellschaft - EVP of Corporate & Governmental Affairs [3]

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

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Nicolas Peter, Bayerische Motoren Werke Aktiengesellschaft - CFO & Member of Management Board [4]

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Max, thanks a lot for the introduction. Ladies and gentlemen, good morning from me as well, and great to see you all today in Munich.

The year 2018 once again demonstrated the financial and performance strength of the BMW Group. Despite massive headwinds, we reported the second-best result in our company's history. For the past 15 years, we have now been the world's leading premium car company. At 7.2%, our EBIT margin in the Automotive segment remains at a high level compared to competition and in line with our adjusted guidance for the full year. Nevertheless, our performance in 2018 did not meet our usual high standards.

The challenging business environment left its mark on the entire automotive industry last year. To make the company future-proof, we are investing billions in new products, e-mobility, autonomous driving and the next strategic steps for mobility services. We see great potential here. Rapid scalability will be decisive. E-mobility is financially challenging, but we see no alternative. As a premium manufacturer, we clearly possess the best credentials to successfully implement it.

Let's take a look at our financial figures. Due to the additional business pressures I referred to, our sales growth is only partially reflected here. Group revenues were on par with the previous year at EUR 97.48 billion. Adjusted for currency translation effects, revenues increased by 1.2%. The EBT margin remained above our target figure of 10%. As previously announced, group earnings before tax showed a moderate decrease from the previous year at EUR 9.82 billion.

As expected, various factors had an impact here, mainly the development of currency and commodity prices and higher expenses for research and development. Further impacts on earnings came from the challenging pricing situation, especially in Europe due to the WLTP transition, and the additional burden of China's punitive tariffs on U.S. imports. As expected, our financial result decreased, mainly due to valuation effects. However, the earnings contribution of our Chinese joint venture, BBA, rose significantly to nearly EUR 740 million. Net profit for 2018 stood at EUR 7.2 billion.

The fourth quarter of 2018 developed as expected with revenues and pretax earnings at the same level as the previous year. The EBIT margin of 6.3% in the Automotive segment was in line with our expectations. Even under difficult conditions, our sights remain firmly fixed on the future. In line with our strategy, we continue to invest at a high level. Capital expenditure, primarily for property, plant and equipment, rose to EUR 5.03 billion. We strongly believe in the value of flexible plants. This is an advantage during periods of volatility and significantly varying conditions between regions. The CapEx ratio for 2018 was 5.2%. We expect the ratio for the current year to be slightly higher.

As previously announced, our research and development expenditure reached a new all-time high of EUR 6.89 billion in 2018. The R&D ratio was at 7.1%. The ratio will be lower in 2019 but still above 6%. The ratio of capitalized development costs was at 43.3%. The large number of model launches and new architectural modules was reflected in higher capitalized development costs. This year, we expect to see a substantial decrease in the capitalization ratio.

Despite challenging conditions, the BMW Group posted solid results for the financial year 2018. On behalf of the entire Board of Management, I would like to thank our shareholders and investors who have placed their trust in us over the past years. The Board of Management and Supervisory Board will propose a dividend of EUR 3.50 per share of common stock and EUR 3.52 per share of preferred stock for 2018. This is the second-highest dividend we have ever paid with a total payout of EUR 2.3 billion. As a result, 32% of our net profit for the year will be paid out to shareholders, in line with our targeted corridor of between 30% and 40%. As usual, our dividend payout will be completely covered by free cash flow.

Now let's turn to the individual segments, starting with the Automotive segment. Dampened by currency translation effects, segment revenues were on par with last year. Under these conditions, the EBIT margin of 7.2% reached a high level and exceeded our adjusted target of at least 7%. As usual, earnings contribution from our China joint venture is not included in this figure. Moreover, as a matter of principle, we do not adjust our reported figures for one-off effects.

EBIT decreased to EUR 6.18 billion. As expected, we've experienced significant headwinds from currency and commodity prices. The net balance of other operating income and expenses had a positive impact in 2018. High upfront investments and increasing depreciation dampened earnings as expected. Higher tariffs, the challenging pricing situation, especially due to the WLTP transition in Europe as well as warranty and goodwill activities, also had a negative impact.

Ladies and gentlemen, we responded early to the challenges in our environment and launched a company program to boost performance back in 2017. Through Performance > NEXT, we are systematically addressing structural issues across the BMW Group, optimizing processes and improving efficiency. We have already made several important decisions. We are significantly reducing the complexity of our portfolio at all levels. We are eliminating derivatives with low demand as well as reducing our drivetrain portfolio and country variants by up to 50%. This will allow us to offset rising manufacturing costs.

We have shortened the development process by up to 1/3. This will enable us to take advantage of opportunities in the market faster and allow us to be more efficient. We are systematically optimizing structures and processes both at our headquarters, plants and the local subsidiaries as well as pooling resources across all functional areas. With Performance > NEXT, we are continuously changing structures and work methods to become faster and more agile.

I would like to talk now about the segment's free cash flow. Despite higher capital expenditure and lower net profit, free cash flow in the Automotive segment still totaled EUR 2.71 billion. We are aiming for a similar amount for 2019. Our financial independence gives us the freedom to shape our own future. At the end of the year, our liquidity totaled EUR 16.3 billion. This offers us a solid financial footing. It ensures we are able to take action, even though parameters are constantly changing.

Let's move on to the Financial Services segment, which despite rising interest rates in a number of key markets and fierce competition, continued to grow its business in 2018. Pretax earnings reflected the positive business development and reached EUR 2.16 billion. Despite a substantial increase in its equity base, the Financial Services segment achieved a return on equity of 14.8% and exceeded our minimum requirement of at least 14%. Even with growing volatility worldwide, the risk situation in the segment remained stable over the past financial year. The credit loss ratio fell in 2018 and is now at 0.25%. Market price risks for our leasing portfolio also remained stable overall. From today's perspective, we remain well prepared for any business risks we may encounter.

Let's move on to the Motorcycles segment. With our eighth sales record in a row, we are on course to reach our target of 200,000 units in 2020. The decrease in pretax segment earnings was mainly due to model changeovers plus mix effects. The EBIT margin was 8.1% and once again within our target range of 8% to 10%. We expect growth to continue in 2019.

Finally, let's look at intersegment Eliminations. Intersegment Eliminations contributed EUR 553 million compared to negative EUR 534 million in the previous year. As noted in previous quarters, the main reasons for this development are lower elimination of intersegment profits for new leasing contracts due to lower EBIT in the Automotive segment and positive reversal effects resulting from strong growth in the leasing portfolio in previous years.

Ladies and gentlemen, the BMW Group is known for its ability to handle challenging terrain. We like challenges. Despite massive headwinds, we delivered healthy profitability in 2018. This shows just how much operational capacity this company has. We expect to see a positive impetus from our young product portfolio. However, since a lot of the models are still in the launch and ramp-up phase, earnings will not benefit from the full effect in 2019. Due to the model changeovers and the usual buildup of inventories, we expect the first half and especially Q1 to be weaker overall.

We will continue to make substantial investments in new technologies and future topics in 2019. The European Union's extremely ambitious CO2 legislation also requires high additional expenses and will lead to higher manufacturing costs, which will impact earnings. At the same time, we again expect to face significant currency and commodity headwinds in the mid- to high 3-digit million euro range.

Further development in tariffs is another major uncertainty. Our guidance assumes that will be no increase in tariffs between the U.S. and the European Union. The preparations necessary for the U.K.'s withdrawal from the EU will be an additional burden in 2019. Nevertheless, we continue to expect that there will be an orderly Brexit. The competitive environment may also get tougher over the course of the second stage of the WLTP transition.

In the Automotive segment, we expect deliveries to be slightly higher year-on-year. A range of 8% to 10% for our EBIT margin is our clear target in a stable business environment. But there are many parameters over which we have only limited influence. Due to the negative impact of the factors I mentioned, we expect an EBIT margin between 6% and 8% in 2019. The high level of volatility makes it difficult to provide a clear forecast. However, we will continue to use all internal levers in working back towards our strategic profitability target.

In the Motorcycles segment, strengthened by our renewed model lineup, we are planning for a solid increase in deliveries with an EBIT margin within our target range of 8% to 10%. In the Financial Services segment, we expect return on equity to be on par with last year and above our target figure of 14%.

Let's take a look at the group figures. In addition to the headwinds I referred to, the absence of a number of positive valuation effects from 2018 will lead to a significant decrease in the financial result this year. As a result, group earnings before tax are expected to be significantly lower than the previous year. For 2019, we will not increase the overall size of the workforce. The total number of employees will remain at around the same level as in 2018. If conditions deteriorate further, effects on our guidance cannot be ruled out.

Ladies and gentlemen, we have already made a number of clear decisions as part of our program Performance > NEXT. We will continue systematically implementing the measures needed for growth, further increased performance and efficiency. Thanks to our operational and financial strength, we are capable of steering this company successfully through the industry's transformation. Creating sustainable value for our shareholders remains our goal, not only today but in the future. Thank you.

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Maximilian Schöberl, Bayerische Motoren Werke Aktiengesellschaft - EVP of Corporate & Governmental Affairs [5]

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Thank you very much, Nicolas. And now again, Harald with a brief outlook on our model offensive.

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Harald Krüger, Bayerische Motoren Werke Aktiengesellschaft - Chairman of Management Board & CEO [6]

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Ladies and gentlemen, the BMW Group has been #1 in premium segment sales for the past 15 years. Despite the uncertainties we are facing across the globe, we aim to continue this successful development. Our goal is to outperform the premium segment. One example, our February sales in China, we outperformed the competition.

To achieve this, we will continue our model offensive driving full speed ahead. 2019 will be our year of the plug-in hybrid. BMW will release the 3 Series, X5 and 7 Series all as plug-in hybrids. The X3 will also be available for the first time as a plug-in hybrid. All these models come with the fourth generation of our battery and electric drivetrain technology. This enables an electric range of up to 80 kilometers. The 2 Series and 5 Series models will also get a battery update in the summer.

BMW and MINI will also release fully electric models. The emotional MINI Electric will be launched this year. And the response from the first journalists is very positive. This will be followed by the 2020 by the iX3. 2021, we will be then in the year of the BMW i4 and the iNEXT. By the end of 2020, we will have launched more than 10 new or updated models with electrified drivetrains.

For me, this is a clear statement. We will not only boost sales of electrified vehicles. We also aim to increase sales and revenues significantly in the upper segments in particular. The new X5 is now fully available for the whole year. The new 7 Series will be released onto the market later this month. The new X7 will follow mid-year. And the 8 Series Coupé will be joined by the Convertible and then the fabulous Gran Coupé, as well as the corresponding M models.

In the mid-size segment, our top-selling model, the new BMW 3 Series, has been in showrooms early March. The new 3 Series has been well received by customers, particularly due to the extensive connectivity features. We also have attractive new models in the compact class. The new BMW 1 Series will be available by the end of this year. I would also like to announce a completely new model today, the BMW 2 Series Gran Coupé. It will celebrate its world premiere in November at the L.A. Auto Show and is scheduled for release in early '20.

And as you can see, we are in attack mode. Customers, with all the their wishes and mobility needs, remain our clear focus. Ladies and gentlemen, the BMW Group remains today among the most profitable automotive companies in the world. For our shareholders, we aim to continue to be a reliable and profitable investment moving forward. And we have a clear objective for the future: to remain a leader in everything we do. Thank you.

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Maximilian Schöberl, Bayerische Motoren Werke Aktiengesellschaft - EVP of Corporate & Governmental Affairs [7]

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So thank you very much, Harald. Thank you very much, Nicolas. Now we start with our Q&A session.

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Questions and Answers

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Maximilian Schöberl, Bayerische Motoren Werke Aktiengesellschaft - EVP of Corporate & Governmental Affairs [1]

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And the first question comes from Arndt Ellinghorst.

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Arndt Alexander Ellinghorst, Evercore ISI Institutional Equities, Research Division - Senior MD & Head of the Global Automotive Research [2]

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I have two questions, please, one for Nicolas Peter, please, and one for Harald Krüger. The first one on the medium-term or longer-term financial outlook really, you've now left the 8% to 10% margin corridor similar to your peers. Is it reasonable for us to assume that the first year you will be back on track will most likely be 2022? The way we look at the world, I mean, you see it now, we just discussed it before the meeting, markets are slowing down. I would say most cycles are slowing down. CO2 is kicking in, so you're forced to sell less-profitable cars in Europe at least. So when I add all the headwinds together and if I have a bridge in my head, I would say there's no chance you can get back to 8% to 10% until 2022, when the full savings are really kicking in.

And the second one for Harald Krüger, please. I think it's very interesting that the collaboration on the more legacy or traditional parts of the auto business between BMW and Mercedes seem to be starting. There's at least a lot of talk in the press. Are there any red lines, any areas where you would say, "We could categorically rule that out"? Could you imagine sharing platforms? Could you imagine producing engines together, especially for the more compact vehicles in the future? We know that Mercedes is quite unhappy with their partner, Renault and Nissan. So could that be an area of much broader industrial cooperation between the 2 companies, which I think personally is needed?

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Maximilian Schöberl, Bayerische Motoren Werke Aktiengesellschaft - EVP of Corporate & Governmental Affairs [3]

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Okay, thank you very much, Arndt. We start, Harald, yes?

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Harald Krüger, Bayerische Motoren Werke Aktiengesellschaft - Chairman of Management Board & CEO [4]

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Yes. First of all, I think I would like to start that Mercedes-Benz and BMW will still remain competitors, which is good for the industry, because we are driving the products forward, they are driving us, we are challenging us. But I think we started with 2 good cooperations, which I believe is the right foundation as the beginning. The one is the mobility services, because mobility services is a scalable business. It's something where you need to grow. And I think with our mobility solutions, our NOW services, we can make a difference in Europe definitely. With all the 5 verticals, there's a good chance, and we are now in the first phase of it and we are now planning on what business model might be the right for the future, how can we continue the growth and things like that.

The second one is on autonomous driving for the generation 2. An autonomous driving, as you know, is an expensive stuff. It's something where we would like to develop a standard. We are also having a cooperation for the generation 1. And I think we can combine our know-how and expertise for generation 2 with Daimler-Benz. But where do we make a difference where I wouldn't share anything? Everything which is clear must be brand-authentic. You must protect the brand. BMW needs to drive like a BMW or a MINI like a MINI. So everything which includes that you are risking any brand authenticity, that is definitely never ever something we would do. And finally, I mean, we have started with 2 cooperations. And I believe in these 2 things with Daimler that we can definitely make a difference together. But first of all, we need to prove it together. So we are in the starting phase of that.

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Nicolas Peter, Bayerische Motoren Werke Aktiengesellschaft - CFO & Member of Management Board [5]

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Arndt, before coming to your question, maybe one additional comment to what Harald said from a more finance perspective. Regarding the 2 cooperations we have set up with -- or we are setting up with Daimler, we increased the likelihood to set standards. And this has a positive effect also on cost-related, too. And just to give you an idea, the day we've announced that we are planning to join forces for autonomous driving, we already got many, many, many phone calls from suppliers asking, "Well, can we join this cooperation?" which is a strong indicator that if 2 strong companies join forces in an area, which eventually will become a commodity, makes a lot of sense.

Now coming to your question regarding EBIT margin, the clear strategic target is 8% to 10%. But just to remind us in which environment we are operating today -- and I think we have to differentiate between what I would call external factors on one hand side and transition-related topics of our industry on the other hand side. Still, we have trade dispute going on between U.S., China, not fixed yet. We have Brexit. We have progressively more strict regulatory requirements in many parts of the world. We've mentioned raw material and foreign exchange. And we've been one of the few manufacturers prepared for WLTP transition. There is another step of the WLTP transition in 2019. I hope the others are ready, because this definitely -- we will be ready, but this impacted in a negative way our market.

And the second element is the transition of our industry, the transformation of our industry. And we will continue, as I've said, to invest in electrification of our portfolio to have by '25, electrified cars on the road. We will continue to invest together with Daimler in mobility services. And we will develop and launch our autonomous driving systems. So this is impacting our industry. So I would not say, "Well, this will happen in this or that year." We have a clear strategic target. But we have headwinds, which put us in a situation, where today, we say, "Well, in 2019, it is between 6% and 8%."

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Harald Krüger, Bayerische Motoren Werke Aktiengesellschaft - Chairman of Management Board & CEO [6]

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And Arndt, to add one more thing on the engine side, we are open, and we did that already, that we are selling engines to others. And I think secondly, the technology war we are in will bring -- come to this conclusion a situation that not everyone will make everything possible. So that there's an opportunity for the BMW Group also to sell things to other companies in the future and in case, in sharing the non -- burden on software stacks as well. So if you are a technology leader like us, there's opportunities to sell things.

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Maximilian Schöberl, Bayerische Motoren Werke Aktiengesellschaft - EVP of Corporate & Governmental Affairs [7]

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Okay, the next questions are coming from Tim Rokossa and then Michael Raab. Tim?

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Tim Rokossa, Deutsche Bank AG, Research Division - Research Analyst [8]

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Tim Rokossa, Deutsche Bank. I have two questions, please. The first one is on, we live in a very uncertain world, right? There's Brexit, WLTP, Trump, whatever. So scenario planning is absolutely key. I can therefore understand why you want to be as flexible as possible. That seems very intuitive. However, I think at least in China and also in Europe with the 2030 CO2 emissions, they are basically taking the flexibility out of your hand. They tell you have to sell fully electric cars to a sizable degree, even if you may not want to because, as Arndt said, they are probably less profitable at least for now. Why is flexibility really still the right answer in that kind of scenario? Why can you not at least focus on your 2 major regions on a certain drivetrain technology?

And when you think about a cooperation like with Daimler, would you trust your partner enough to really let them do one thing and you do something very different? Or would it still be something jointly? Secondly, when we think about the product momentum, at least to the capital markets, I think it's fair to say that BMW has been a product offensive story for now probably 2 years. And we did indeed expect that probably in 2019, the earnings would benefit from this, Dr. Peter. Was that a misinterpretation by the capital markets? Did we all underestimate the incremental costs that you have to carry over the next 2 years? Or will maybe 2020 be the year where you actually see the earnings benefiting from this?

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Harald Krüger, Bayerische Motoren Werke Aktiengesellschaft - Chairman of Management Board & CEO [9]

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The first question was on the flexibility of the platform and the drivetrains as far as I understood it. Why do we believe this is still the right approach? Because if you look at customer behavior, you'll find certain things in European, for example, mobility behavior. People are still -- love driving long distances. You will have a situation where the infrastructure is not everywhere perfect. A city like Amsterdam, for example, has a great infrastructure for e-mobility. If you drive cross-country in France, for example, it's completely different. That's why, for example, the plug-in hybrid can be a solution for those customers. Same story in the United States, there you will have big cities like Boston or Los Angeles, where we will offer pure electric vehicles, like the i4, like the MINI Electric, where there will be a majority of customers having maybe a pure electric drivetrain.

But even in the United States, take the 5 Series, 1/3 to 40% of our 5 Series sales in California is our current 5 Series hybrid model, plug-in hybrid. So we can see that. And in [Belgium], it was 50% of the X5 sales. So if you drive long distances with European mobility behavior, going from here to the nice country of Italy, for example, you maybe arrive at the city of Siena or whatever, pure electric, but you have to drive long distance in engine-wise. That's why we believe plug-in hybrid is part of the solution. And same story in the United States, because the country is very different.

So our flexibility approach gives us the right thing for the right time. But if the customer would like to have a pure electric vehicle, he or she can have it, the i4, and we will have other models to come where it's pure electric drivetrain. But if you think about a country like Russia, how many electric vehicles will I sell in 2023? I don't know. The answer is flexibility. And the main point why we believe first in the flexibility approach is that infrastructure is not developing as fast as it should. And infrastructure is different across Europe, it's different across the countries and the cities. Even within one country, it's different.

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Tim Rokossa, Deutsche Bank AG, Research Division - Research Analyst [10]

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So that would then bring us to the situation where you say you still have to do everything at once, and therefore, you do the partnerships. Would you trust your partners enough to really say, "We do one thing and they do the something different"? Or does it always have to be this, "We want to keep the knowledge in-house as well and we want to share everything and do everything jointly"?

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Harald Krüger, Bayerische Motoren Werke Aktiengesellschaft - Chairman of Management Board & CEO [11]

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Take one example, we definitely have a lot of competence for battery cell production, for battery cell development. That is something, for example, for the future, which we definitely will keep in-house as a red line. Because I mean, that is critical to future costs, to future product profitability. Things like this one, I would not share, because that is the most critical -- or autonomous driving, you would keep the IP, but maybe you can think about somebody, a partner, where you would sell the IP or have a fee for it. But all critical product and technology issues, you would keep in the company.

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Nicolas Peter, Bayerische Motoren Werke Aktiengesellschaft - CFO & Member of Management Board [12]

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Tim, you're absolutely right. We have a very strong product momentum. Take full availability of X3 now in all markets, including China for the first time in 2019, X5 full year availability. We are launching the X7, a great feedback from press and media and first customers. 8 Series to be followed, extremely important as well as the renewal of the 3 Series, which is one of the cornerstones of our portfolio, so yes, strong product momentum. And this strong product momentum, by the way, helped us to post, compared to the rest of the Automotive segment, good results in 2018. And as I said, we believe we will be again definitely in the top group in 2019.

Having said this, and I don't think the capital markets underestimated something, a lot of additional events kicked in. Take the reduction of 37.5% CO2 reduction, which was decided a couple of months ago, or take the trade dispute between China and U.S., the punitive tariffs were not in our plans and probably not in your calculations neither. So we have all the WLTP events. So this is, I think, what came unexpected, but we have to face it. And this is exactly why we have -- we've already started back in 2017, a couple of months after I took the role, our Performance > NEXT program. And we have decided to significantly increase this program, because those additional elements kicked in. So that's how I would put the different events, which are impacting the industry in a couple of sentences.

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Harald Krüger, Bayerische Motoren Werke Aktiengesellschaft - Chairman of Management Board & CEO [13]

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And to add to this one, three examples. One is, if you look at the U.S. markets, we were growing last year, some competitors were negative. There was only one other big company, one company with electric vehicle, which was growing as well. So if the markets is under pressure, but winning market share is a positive signal. If I look into the face of my responsible manager for China, they are smiling about the X5. If I talk with the dealers in the U.S., they are smiling about the new X5, so the X7 will be.

But we have gained market share also in Europe but in a very tough situation with WLTP and whatever. So the momentum is also driven -- the momentum is coming, but the momentum is also driven for sure by all the uncertainty in the market. But if you see it in a relative performance through the competition, you can see it. We haven't been in China #1 in absolute sales for many, many months. And February was the case. And the X3, the new one, locally is now available. So we have both sides of the momentum, the product momentum and the market situation, which is under pressure.

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Maximilian Schöberl, Bayerische Motoren Werke Aktiengesellschaft - EVP of Corporate & Governmental Affairs [14]

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Thank you very much. Next are Michael Raab and then Adam Hull. Yes?

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Michael Raab, Kepler Cheuvreux, Research Division - Head of Automobile (Thematic) Research [15]

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Yes, right over here. I'm Mike Raab, Kepler Cheuvreux. Got one question for each of you. First of all, as for the new facility of yours in Mexico, could you just give us a rough feeling for when you expect this facility to reach full utilization levels? Is it going to be 3, 4 quarters? And then secondly, as concerns the EUR 12 billion savings program for the next couple of years, could you just briefly run me through the genesis of this one, please, i.e., has it been sort of a bottom-up approach in a sense that at some stage realize, "Okay, if we continue in the same fashion, in a few years down the road, our margins going to be significantly short of the target corridor and hence we have to save x, y, z billion to get back into it comfortably"? Or was is a top-down approach that you simply decided to account for additional eventualities, there's probably additional savings potential, you identified sources and then came up with EUR 12 billion? Or was -- which way did it work?

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Maximilian Schöberl, Bayerische Motoren Werke Aktiengesellschaft - EVP of Corporate & Governmental Affairs [16]

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

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Harald Krüger, Bayerische Motoren Werke Aktiengesellschaft - Chairman of Management Board & CEO [17]

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Mexico, first of all, we will start the production in June this year. June, we'll be also having the official opening of the factory. So you will have a ramp-up in the second half of 2019. And then it will take another year, probably likely, until you're at full production step-by-step with the volumes and markets. Because that's also a very fast ramp-up and -- which we planned for. But step-by-step, also the supplier network has to develop. So probably start of production June 2019 and then it will take time, yes? But it's a great operation. And we will have a new sustainable concept there as well for reducing water consumption, reducing other things. So there's also a new approach of sustainability we included in that plant. And things are quite positive. I'm looking forward to the opening.

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Nicolas Peter, Bayerische Motoren Werke Aktiengesellschaft - CFO & Member of Management Board [18]

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So EUR 12 billion until 2022. And it's always a combination of top-down and bottom-up. But maybe to give you some more details regarding this program. This program consists of more than 10 different initiatives. And they focus on our core business, on our value chain in the Automotive segment. So of course, on sales, on the reduction and optimization of production and material costs, the indirect procurement sector is -- which is in our company, a little bit more than EUR 20 billion per year. And you can imagine that in those areas, there might be potentials for some savings as well. We are -- this is one of the -- from my perspective, of the top issues we have to even be more challenging within our organization, that's a reduction of complexity.

We've already achieved some major improvements. But if I compare some of the new entrants in our industry and just look at the website they have and the way they offer the product and the complexity of our product, comparing product, and the complexity of our peers, I think there is some room in between. Cooperations in the area, as Harald described, play an important role as well. We are addressing HR topics and the reduction of the development process. To give you a more precise idea, for example, the next generation, I've mentioned a couple of times in our different meetings, that we are going to reduce by 1/3 the development time of the new model. So the new 5 Series will be one of the first that will entirely fit to -- stick to this target, minus 30% on the sedan and approximately minus 25% on the Touring.

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Maximilian Schöberl, Bayerische Motoren Werke Aktiengesellschaft - EVP of Corporate & Governmental Affairs [19]

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Thank you very much. Next one is Patrick and then Adam Hull. Patrick, please start.

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Patrick Hummel, UBS Investment Bank, Research Division - Executive Director and Lead Analyst of European Autos [20]

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Two questions, please. The first one regarding the cost of CO2 compliance in Europe. Can you help us understand to which degree the EBIT guidance for 2019 already includes what you need to deliver in 2020 and 2021 in terms of CO2 reduction? Or how much of an additional EBIT burden that would bring in the years 2020 and 2021? Or in other words, if we're thinking about the EBIT bridge starting with the result of 2018, how much in total EBIT terms would be the headwind in the bridge between '18 and 2021 coming from CO2 compliance in Europe?

And secondly, related to that, if you can help us a little bit in terms of your technology choices. Clearly, you're saying PHEV will play a very important role for you also in the years ahead. Last week at the Volkswagen Capital Markets Day, they have shown an interesting slide looking at the different powertrain types and the profitability behind, including the cost of CO2 compliance. And for the BW, the BEV was scoring the best with the lowest cost of CO2 compliance. And basically with the profitability that's including CO2 cost, not at all bad compared to an ICE car. I'm just interested, would you say that for you a plug-in hybrid, including the CO2 benefit, is still the better choice purely financially speaking than a BEV? Where is that break-even point? When will you be there?

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Maximilian Schöberl, Bayerische Motoren Werke Aktiengesellschaft - EVP of Corporate & Governmental Affairs [21]

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So Harald. We'll start with Harald.

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Harald Krüger, Bayerische Motoren Werke Aktiengesellschaft - Chairman of Management Board & CEO [22]

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Okay, Patrick, we start with the CO2. First of all, you should know that we are, on CO2 average emission in the [EU fleet] better than the competition. If you look into our annual report and from some other companies, there is a deviation, which is already significant by today. So we are already, by today, better, because we have more electrified vehicles in the fleet than the others. The 140,000 vehicles last year in the road, we are #1 in selling electrified vehicles, plug-in hybrid and battery electric vehicles in Europe, #1, ahead of even bigger companies. That's why we are -- you can see the benefit from that one. Secondly, on the technology side, both the PHEV and the BEV have clearly an impact on the significant reduction of the CO2. Because if it's 60 miles or 60 kilometers, the electric range for the plug-in hybrid is nearly the same from the experience like a battery electric vehicle. But it depends on also on the volume of the platform, so how competitive can you make the car, the overall costs.

Because for a pure electric vehicle, you need a certain size in terms of volume for the platform that is worthwhile, yes? And as Europe is not one situation, both will benefit and both will contribute. But the question was how do we move forward? We move forward with definitely -- there's a MINI Electric coming, for example, pure electric, to help us on the CO2. There's the iX3 coming, the i4. So with the pure electric vehicle and the plug-in hybrids -- and the plug-in hybrids are selling off by today and in the next years as well. So both technology will contribute. As well as you still have the cars with petrol engines and diesel engines. So for 2021, you have all 3, all 4 technologies contributing, otherwise you don't make it. Pure electric only will not make it either. Because the diesel, for example, is definitely a huge contribution for the CO2 reduction in Europe in 2021, still with lower numbers.

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Patrick Hummel, UBS Investment Bank, Research Division - Executive Director and Lead Analyst of European Autos [23]

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And from a purely financial standpoint, what -- the BEV or the PF were your either preferred option to meet your targets, purely looking at contribution margins.

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Nicolas Peter, Bayerische Motoren Werke Aktiengesellschaft - CFO & Member of Management Board [24]

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Patrick, I'm coming to this topic. Maybe just to remind us, the penalty if we -- let's take Europe, if we do not meet our CO2 targets in the next decade is EUR 95 per car per gram, so it's significant. And if we look at 2019, we already have a burden in the high 3-digit million euro amount related to our plans to achieve the CO2 target. So if you compare an old 3 Series to the new model, on one hand side, we have reduced production and manufacturing costs in many, many areas. But there is an overall increase, slight increase. Why? Because we have to integrate technology, which is going to help us to meet the CO2 targets. So it's already -- we have already high 3-digit million euro amount in 2019. And this is why we are investing so much on further developing our battery and cell competence. The share of electrified cars will definitely grow. We've been the leader in -- as Harald has already mentioned, we've been the leader in Europe. We are opening a new battery center in a couple of weeks from now here nearby Munich. And the aim is very simple, to reduce the costs. And this is what we believe is possible in the next 5 to 10 years, difficult to forecast precisely, by 50% between generation 3, which is in our cars today, and generation 5, which will be on the market in '21. The last point, it's extremely difficult to answer precisely why, because there are so many variants in this calculation, which depend not on what we are doing, but what the regulator is doing. Is the regulator what we believe is absolutely key not only for the industry, but for mobility, in particular, in Europe and in the U.S. that we have the right balance between full electric cars on the other hand side and plug-in hybrids on the other hand side. Because we do not assume that across the world, there will be enough willingness to invest in infrastructure in any part of -- in all parts of the world. So this is why we believe this flexibility between 48-volt plug-in hybrids and full electric cars is so important. There is not one solution for the world.

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Harald Krüger, Bayerische Motoren Werke Aktiengesellschaft - Chairman of Management Board & CEO [25]

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And Patrick, to reiterate, this 30% to 50%, first, 30%, then 50% reduction from the third to the fifth generation, which we will have with the iNEXT, it's huge. And this is coming from, because we have such a depth and in-house competence in cell production and cell development, and all this what I mentioned in my speech, yes. This is the critical in [RSU], and this is the critical know-how. You need to have the critical know-how on these things, sourcing the chemicals, the recycling of these things, because that is critical to the cost of the future drivetrains and your future competitiveness. Independently, if you have a pure electric vehicle or a plug-in hybrid or what else, that know-how and this manufacturing knowledge is absolutely critical from the whole process from the beginning of the development until the recycling, and that's why we are spending so much money and that's why we are opening up the battery cell competence center for that, because that will definitely be the lever in the game, who is winning the game.

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Maximilian Schöberl, Bayerische Motoren Werke Aktiengesellschaft - EVP of Corporate & Governmental Affairs [26]

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So Adam, it's your choice and then Angus Tweedie. Adam.

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Adam Brian John Hull, MainFirst Bank AG, Research Division - MD [27]

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Adam Hall, MainFirst. Three questions. Firstly, you haven't given any firm guidance on group EBIT. Will it be significantly down or not? And maybe you can help us a little bit as to what the scale of those one-off items or one-off positives in essence were between EBIT and PBT, EUR 300 million, EUR 400 million, just give us some feel for that. And then secondly, on your free cash flow comment, I think you're saying you're aiming for the same level at EUR 2.7 billion. Is that sort of the upper end of your hopes? That's the sort of upper end of your target? And maybe within that, have you paid the cash element of all those warranties? The EUR 800 million, I think, you took. And then finally, on suppliers. Clearly, the suppliers are really struggling. There's been a dramatic change in the last 12 months, 18 months in their profitability and in terms -- even more so in terms of their cash flow. Are you now able to squeeze them as much as you used to? Or is there a bit of a change in that situation? You can always get less complexity. But just help us, is that dynamic really changing as you talk to them now?

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Maximilian Schöberl, Bayerische Motoren Werke Aktiengesellschaft - EVP of Corporate & Governmental Affairs [28]

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Thank you very much. I think the right question for the CFO.

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Nicolas Peter, Bayerische Motoren Werke Aktiengesellschaft - CFO & Member of Management Board [29]

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Let's start with the suppliers. We have a very -- we have developed a very systematic approach to address in the actual situation. The reduction of manufacturing costs together with our suppliers, we have invited with a clear message to the suppliers, the most important suppliers for workshops. And during those workshops, we will together develop ideas, measures in order to improve together our overall business case. We have and we will, of course, not only address our top suppliers, we have a program, which is covering all suppliers but with a different methodology. Free cash flow warranty will be a burden in 2019 as well, not -- definitely not to the magnitude we've experienced in 2018. This was approximately EUR 800 million. So part of the EUR 800 million will reverse, I would guess at this point in time, probably 50%. And EBT outlook for 2018. We are anticipating, as I said, a significant reduction of our EBT on group level. And this is mainly related to the fact I've described, meaning onetime effects, which were positive in 2018 not occurring again in 2019. Just to give one example, we had, in 2018, a positive effect of our DriveNow acquisition of approximately EUR 209 million or EUR 210 million. This is something, which will not occur again in 2019.

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Maximilian Schöberl, Bayerische Motoren Werke Aktiengesellschaft - EVP of Corporate & Governmental Affairs [30]

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Thank you, Nicolas. The next is Angus Tweedie and then Dorothee Cresswell. Angus.

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Angus Vere Tweedie, Citigroup Inc, Research Division - VP & Analyst [31]

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Firstly, can I ask on tariffs? Just sort of update on -- thinking on those. I mean, in terms of U.S., China, it looks like there's a bit of a sort of pause on that, perhaps through until June. Could you give us an idea in -- with the new guidance, what you're thinking there? And on Brexit, I think you said before, you were probably assuming a deal, I guess, around the 29th of March. How are you thinking about that if there is a delay? And then secondly, on EVs, perhaps asking the question the other way, next year, what sort of penetration in Europe are you targeting in terms of plug-in hybrids from what you're selling? And then thirdly, could you just discuss a bit more how you're shortening the production cycle on new products, your 30% reduction in the time-to-market for new products?

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Maximilian Schöberl, Bayerische Motoren Werke Aktiengesellschaft - EVP of Corporate & Governmental Affairs [32]

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I think we'll start with the Brexit discussion with the CEO. Yes.

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Harald Krüger, Bayerische Motoren Werke Aktiengesellschaft - Chairman of Management Board & CEO [33]

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I haven't expected this question really on the Brexit. On the Brexit, it's quite clear. The company is in preparation since 2 years for all type of scenarios. We will have the shut down in our Oxford plant in April, and we will keep it, because in production, you have to steer clearly, you have to have a planned shutdown, and then you can ramp up afterwards. We also have a small shutdown in Goodwood for the Rolls-Royce brand. We will see what the outcome will be and what the European consolidation will give us as an output, but we are prepared for every scenario for the chaotic, for orderly Brexit, whatever will come. We can adjust and have already adjusted our supply chain that you have a little bit more stock. And we have prepared and adjusted for logistics capacity in case there's something, parts to be flown or whatever. So we are well prepared, and we can adjust these planning to different weeks or months if it's to come, but we will have the shutdown in Oxford in April. So we are prepared. And that's the advantage of the BMW, we are very flexible. So in production, we can react again. We will see what the outcome is on Brexit. But IT systems are prepared for Brexit. Logistics is prepared, parts planning is prepared, shutdowns are planned. So there's a huge amount of work done and spent already last year on the preparation for these things. So that is possible, and we are well prepared for really what comes. If you ask me what will be the outcome, I don't know. Then the tariffs discussion with the U.S., China, secondly, we have one advantage, again, that we have, on the one side, the biggest plant in the South Carolina. So we can -- if there's anything coming or whatever, we can adjust more production to the U.S. for the U.S. market. And we are now in the situation that the X3 is manufactured in 3 locations: in South Africa, in China and the U.S. So we are not exporting the X3 from the U.S. to China. It's a local product, very successful. It was started -- start of production was in June last year. And that gives us enough flexibility, again, also for the future, because many of the products are localized in China already. So that's a protection there. And again, tariffs are not good for the business. I mean, I'm in clear favor of free trade, because that has created wealth everywhere.

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Nicolas Peter, Bayerische Motoren Werke Aktiengesellschaft - CFO & Member of Management Board [34]

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And maybe to put some numbers behind. U.S., China in 2018 had a negative impact of approximately EUR 270 million only related directly to tariffs. However, I think one has to take into account that this has also an impact on market behavior. All those trade challenges in the world, it's not increasing consumer confidence. We assume for 2019 in our guidance that we stick to the 15% between U.S. and China, and we have made in our 2019 guidance for Brexit. And what I would call a reserve of approximately in the low- to mid-3-digit million euro area in order to cover eventual burden related to a complicated Brexit.

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Harald Krüger, Bayerische Motoren Werke Aktiengesellschaft - Chairman of Management Board & CEO [35]

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In China, for example, we will localize the X2 in China this year. So there's another product, for example, which is coming from Europe, which is now then localized in China as the seventh model. So that's the protection for trade issues as well.

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Nicolas Peter, Bayerische Motoren Werke Aktiengesellschaft - CFO & Member of Management Board [36]

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Now plug-in hybrids was another question you've asked. We have the situation that we are in a ramp-up with 2 of our products, which have highest demand on the plug-in hybrid side. The 3 Series plug-in hybrid will be launched in the second half of this year and the X5 plug-in hybrid at the end of the year. So this will impact our sales, our growth potential in 2019. We will grow overall with electrified cars, but we definitely have more potential, and we expect more in 2020. Having said this, what is extremely important, this new generation of plug-in hybrids have a range, an electric range of between 70 and 80 kilometers, which is substantially more compared to the previous generation. And we've made some research with the Fraunhofer institute, a very well-known research institute in -- well, not only in Germany but in the world. And with this type of electric range, those cars will drive as much electric in the city situations as a full electric car. And last topic you've raised was, well, what about the minus 30% in the development process. Those minus 30% will help us to reduce costs. So the idea is not to shorten the life cycle of the product, but the idea is to be able to reduce costs when developing a new product. To be -- to give you one idea, the way we manage data today, data management gives us the opportunity to reduce in a significant way the number -- more than 2,500 prototypes we will not need in our engineering -- research and engineering process.

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Maximilian Schöberl, Bayerische Motoren Werke Aktiengesellschaft - EVP of Corporate & Governmental Affairs [37]

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Thank you very much. Now we are coming to our first lady, Dorothee Cresswell and then Horst Schneider. Dorothee.

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Hanna Dorothee Hellmuth Cresswell, Barclays Bank PLC, Research Division - Research Analyst [38]

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The first question is, again, around that EUR 12 billion cost-cutting target. Could you just give us a little bit more granularity in terms of the timing? How quickly do we begin to see that as a tailwind come through? And then, is it a linear development? Or is it something that accelerates very strongly as we head to 2022? And then my other question is around tariffs again. You've touched on it briefly in the U.S. I'm sure you have plans in place if it does happen in terms of how you adjust your production footprint or your sales strategy or your supplier sourcing strategy. Could you give us an idea of how you then roll out those plans and how quickly you can deal with that challenge if it arises?

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Harald Krüger, Bayerische Motoren Werke Aktiengesellschaft - Chairman of Management Board & CEO [39]

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I'll start with the U.S., European situation. I mean, first of all, I think we are in a better situation than many other companies, because we have such a big plant in South Carolina. We are looking in the future sourcing plans of -- when we're sourcing more locally in the United States. One opportunity or one option we are currently investigating is the transmissions. Do we, in the future, source transmission in the United States, which would be of value for the companies? So with our plans, we were looking for more sourcing in the United States, which would make us even more independent. But on the other side, we could allocate more production to the United States with X3. Now having 3 manufacturing locations in the past, we had Spartanburg only, and the U.S. supply for the X3 was limited due to the high demand in China or the high demand in Europe. Now we are delivering X3s from South Africa to Europe. We have X3 in China for China, and we can allocate more X3 production for the United States. So that gives us the flexibility in case there are tariffs to react in that way with that flexibility. And finally, you would also look at that it's clear that the business model is based on definitely free trade, and this is something we fight for. But with our flexible production and supplier network, we can balance as much as possible in that framework, yes? But local sourcing, improving local sourcing in the United States is one option. And the other one, we are localizing more in China, for example, like the X2 will be now localized in China and no longer exported from Europe. But BMW overall is in a better situation than many other companies, which have no plant at all for sometimes in the United States. And then you will be hit by the tariffs completely. And luckily, we have all the SUV products, which we planned strategically in the United States, allocated. So the new X7, the new X6, the new X5, the X4. So if you look at the U.S. market, 70% already is now a sport utility vehicles. So the majority of the products we anyway produce and manufacture in the United States, which the demand -- the market requires.

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Nicolas Peter, Bayerische Motoren Werke Aktiengesellschaft - CFO & Member of Management Board [40]

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Dorothee, we have both, of course. We have initiatives, which are delivering an immediate impact, and I will give some examples. And we have initiative, which will ramp up over time. So just take one example, indirect procurement area has an immediate impact. You negotiate a new contract with your supplier, and you have a different cost level. Our part of the initiatives and the actions we are taking to reduce our production and material costs, not all part of it will be -- already have an impact in 2019. Cooperation, so on -- in the mobility services area, we have now the joint venture with Daimler, so this has an immediate impact. Others definitely take more time. If you look, just to give you a few ideas in which areas and on which topics we are focusing, and a broad offer of different paint colors is something you might say, well, easy, but it's extremely expensive. It's extremely expensive in our plants. So we are planning to reduce by a little bit more than 40% the numbers -- the number of colors we are offering. So this only makes sense in the next phase. Why? Because we have invested in today's structure. This is something which will kick in step-by-step. Or if you take our drivetrain variance, yes, more than 90% of our sales are generated with 50% of drivetrain variance. So there is -- and of course, you have -- despite the effect on some drivetrain variance, we have a very low number. You will keep it, why? Because it's important to have an M4 in every single market, and this is a variant. But of course, there are many, many areas which you can optimize in being extremely precise in eliminating those which are not generating additional value. And this is something, again, which is happening over time. Why? Because now we have developed all those drivetrain variants. Once they are developed, yes, let's sell them. But for the next generation, significant reduction.

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Maximilian Schöberl, Bayerische Motoren Werke Aktiengesellschaft - EVP of Corporate & Governmental Affairs [41]

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Thank you, Nicolas. Next is Horst Schneider and then José Asumendi. Horst.

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Horst Schneider, HSBC, Research Division - Global Head of Automotive Research and Analyst [42]

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I've got a few questions. First of all, on your statements regarding weak Q1, could you be a little more precise what you understand? And weak Q1, is it more EBIT margin in Automotive toward the lower end of your target range for 2019? And then what is a seasonal pass? I mean, the pass going forward then, it gets gradually better quarter-to-quarter so that H2 is stronger than H1. Then the second question that I have relates on pricing. You have been the most vocal about negative pricing in the WLTP context, how has that developed? So pricing still weak? How do you see this as a trend by region? And then the last one that I have is on employment. We talked about that already in the break, Mr. Krüger. I'm surprised that you are the only German carmaker not saying you have to reduce workforce. So I just want to understand why not? Can't you do that? Also, can you rule that out for the next few years that you have to reduce workforce actually?

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Maximilian Schöberl, Bayerische Motoren Werke Aktiengesellschaft - EVP of Corporate & Governmental Affairs [43]

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Who wants to start? Nicolas, yes, okay.

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Nicolas Peter, Bayerische Motoren Werke Aktiengesellschaft - CFO & Member of Management Board [44]

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So to start with Q1. Regarding Q1, we had some -- we have some issues we definitely planned for. And we are ramping up the 3 Series, as I said, important model, so it's very logic that due to the fact that we are in phaseout and ramp-up of 3 Series, Q1 is a bit weaker than the other quarters. But if you reflect on what's going on in the various markets around the world, and you look behind the global number -- if you look at our global number, we are performing against our peers very well, very well. However, in the first 2 months, the whole sector is in negative terrain. So we anticipate that we will gain again, because we have a great product portfolio. We will gain segment share. But the start in most of the sales region, excluding China, that's really the big exception, is more complicated, I think, than anyone anticipated. And this has to do with market behavior. So this is -- we are gaining segment share, we have a strong product portfolio, but we will not overpush in such a market environment, because this doesn't make any sense from medium and long-term perspective and neither from profitability, because we still feel that some of our competitors have challenges related to WLTP from September. So this is why we are careful on Q1 development, despite the fact that we are optimistic that we will gain segment share. And on top, you have the usual buildup of inventory you have always in Q1.

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Horst Schneider, HSBC, Research Division - Global Head of Automotive Research and Analyst [45]

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But it doesn't mean that margin is at the low end of the range. You said you don't want to make this statement, right?

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Nicolas Peter, Bayerische Motoren Werke Aktiengesellschaft - CFO & Member of Management Board [46]

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No, but we are not guiding EBIT margin quarter-by-quarter. But we anticipate, based on what I've just said that, of course, the -- in particular due to our model lineup, 3 Series kicking in, 3 Series being launched in China later in the year. X7 very -- really extremely good feedback from -- and order bank from customers, not only U.S. customers but really around the world. So this was definitely a product many, many of our customers were expecting from BMW. So there will be a positive -- from our today's perspective, there will be a positive momentum in 2019.

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Harald Krüger, Bayerische Motoren Werke Aktiengesellschaft - Chairman of Management Board & CEO [47]

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On the HR side, I will start at the top. We are streamlining the board to 7 board members. As I mentioned, we will have 1 sales division customer, [ROCE], starting on April 1 for all brands. The main reason is the effectiveness in the digital channels, but we will definitely also look into synergies and efficiencies for the new organization, just as 1 example how we explore and reduce headcount. And secondly, we mentioned it yesterday, we have natural levers and we have also some quite strong people who were going on retirement, because -- due to the age profile, and this gives us headroom up to 4,000 people who will leave as natural levers and early retirements. And if you look at this one, if we recruit people in Mexico, we might not replace a person in Germany, yes? So we are looking -- if we recruit people in Mexico for the new plant, this job cut may be coming from a job cut in Germany. That's the way we do it. And secondly, I mean, we always look at headcount every year quite tough that we are not moving too fast and too much forward, because that's an ongoing job, it's not a one-off job.

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Maximilian Schöberl, Bayerische Motoren Werke Aktiengesellschaft - EVP of Corporate & Governmental Affairs [48]

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And now José Asumendi and then Daniel Schwarz. José, please.

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José Maria Asumendi, JP Morgan Chase & Co, Research Division - Head of the European Automotive Team [49]

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José, JPMorgan. Just 2 items. First one for Nicolas. I'm trying to focus on the positives and trying to understand your logic on the 6% to 8% margin guidance. So what are the positive drivers or what has not to happen in order to go from the 6% to the 8%. Can you confirm that you have reversed the 50% of the provision for quality or the hit you took on quality last year across both ends of the range between the 6% and the 8%? So the positive drivers, and two that you have factored in the same reversal of the provision within the 6% and the 8%. And then for Harald, it sounds -- looks to me like there's a -- you're creating a sense of urgency within the group, the company needs to react, you need to cut the cost base, you need to get the company back to this 8% to 10% margin range. You mentioned a few actions like derivatives, the powertrains and the third was development processes. So within those 3 categories, which one has, do you think, the biggest impact financially? You mentioned a lot -- you have given us a lot of examples. I think those 3 are probably the biggest. Which one do you think of those 3 has the biggest financial impact? And then I wonder like you're hitting 6% margins now, why are you not making a call to freeze CapEx? Why are you not being more cautious with CapEx expenditure on an absolute level, not on a percentage to sales?

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Nicolas Peter, Bayerische Motoren Werke Aktiengesellschaft - CFO & Member of Management Board [50]

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So José, maybe to start with the positive drivers. I've already mentioned a couple of the positive drivers. Definitely product momentum. We are, despite the fact that we are discussing since 1-hour modern challenges in our industry and our environment, we are planning to grow. We are planning to grow, and we are planning to grow in every major sales region. There's probably more growth potential in China, but the plan is to grow in Europe, the plan is to grow in the U.S. So we are on a growth path, number one. Number two, definitely the quality of our products is -- so mix is something which is positive. Why? X7, of course, you can imagine is delivering across the world above-average margins, a brand new X5 here as well, strong customer demand, X3 doing extremely well. So the whole X model portfolio is doing very well. We are launching additional 8 Series, a variance 8 Series Coupé was launched at the end of 2018. A 4-door Coupé is following now a car, which is very important for all 3 regions, but in particular for U.S. and Europe. So from this perspective, positive. We -- as I said, we assume there will be no tariff increase between U.S. and China, so we stick to the 15%. And we have not integrated additional tariffs between U.S. and Europe. We have planned, to some extent, for a hard Brexit in our financial planning, so we honestly hope there will be a smarter solution, and this might be a positive lever. And of course, on top of all, the topics I've mentioned just when answering Dorothee's question related to more short-term impacts of Performance > NEXT. The partly reversal of the provision of the quality issue, I've already answered this. This is integrated in our planning. And on the CapEx side, this is definitely an issue we have on our agenda to further optimize CapEx. This is something which we are further developing, and in particular, optimizing our production footprint. Having said this, this is one of the strengths of our company to have a flexible and global production footprint, in particular, in this complex environment.

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Maximilian Schöberl, Bayerische Motoren Werke Aktiengesellschaft - EVP of Corporate & Governmental Affairs [51]

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Okay. Then Daniel Schwarz and then Michael Dean.

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Daniel Schwarz, Crédit Suisse AG, Research Division - Research Analyst [52]

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Daniel Schwarz from Crédit Suisse. I have 1 question regarding the ROCE. You decided that this remains a KPI for the management. 2018, the capital employed increased 20%, and the return declined 20% in the Automobile's business. Where do you see the bigger challenge, the asset base or the profitability in Automobiles going forward? And in that context, in 2019, you expect the ROCE in Automobiles to be significantly above the long-term target and the EBIT margin significantly below. In order to make that an effective KPI, should you adjust these long-term targets so that they fit together? And the second question would be, the ratio of net cash position relative to market cap is at on peak level? Interest rates are low, you're expecting a positive free cash flow. Is the share buyback something you are discussing at all internally or not right now?

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Nicolas Peter, Bayerische Motoren Werke Aktiengesellschaft - CFO & Member of Management Board [53]

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Okay. No, we are not discussing a share buyback. This is not on the agenda. Why is it not on the agenda? Because we believe that, in particular, in today's environment with our plans moving forward, our strong cash position is something which is supporting our business case, in particular with penetration rate of our Financial Services between 54 -- 45%, sorry, and 50%, 45% and 50% in the major markets. And definitely, this business unit is supported by the very good rating we have in -- from our rating agencies, and this is supported by our strong cash position. Profit -- and of course, I would not say the one or the other is more challenging, coming to your first question. We have to address both. We have to address both, and both are addressed in a very significant way. And in particular, our -- this is one of -- Harald developed a little bit earlier on our flexible architecture strategy. And this is definitely something which is compared to other strategies, supporting to keep some pressure on our CapEx ratio.

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Daniel Schwarz, Crédit Suisse AG, Research Division - Research Analyst [54]

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Would you be adjusting the ROCE target so that they fit together with the EBIT targets?

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Nicolas Peter, Bayerische Motoren Werke Aktiengesellschaft - CFO & Member of Management Board [55]

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No, we are not planning to adjust the ROCE targets.

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Maximilian Schöberl, Bayerische Motoren Werke Aktiengesellschaft - EVP of Corporate & Governmental Affairs [56]

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Thank you, Nicolas. The next questions are coming from Michael Dean and then [Lucas]. Michael, please.

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Michael Dean, Bloomberg Intelligence - Analyst [57]

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Mike Dean from Bloomberg Intelligence. Just I had a question on the free cash flow. The EUR 2.7 billion for Automotive last year included EUR 1.2 billion from the disposal of investment assets and other, of which 1/3 is the China dividend. I just wonder if you could clarify what the balance relates to and its operational nature. And should we expect this line to be of a similar magnitude this year?

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Nicolas Peter, Bayerische Motoren Werke Aktiengesellschaft - CFO & Member of Management Board [58]

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The China dividend is a major -- one of the major issues in this position. We can -- at this point in time, it's too early to go into every single details of the free cash flow bridge from '18 to '19. And what I would recommend maybe my colleague [Jon Townend] is ready to give you even more details -- Head of Accounting, to give you more details how -- what is exactly in this area.

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Maximilian Schöberl, Bayerische Motoren Werke Aktiengesellschaft - EVP of Corporate & Governmental Affairs [59]

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Okay, [Lucas].

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Unidentified Analyst, [60]

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I would like to know, which service is more important from -- for BMW in the future, autonomous driving or car sharing? And where do you see a higher growth potential?

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Harald Krüger, Bayerische Motoren Werke Aktiengesellschaft - Chairman of Management Board & CEO [61]

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From today's perspective, it's clear that both are important. The reason why, autonomous driving can change the industry as well. If you don't have that offer, customers expecting things like Level 3, Level 4 or Level 5 in the future and you don't have that in your technology portfolio, you might be lost or you might be a loser. So that is -- secondly, why is the mobility services important? Because if people don't want to own a car maybe but would like to be very mobile, and you don't offer those fleets, you don't offer those type of services, you can see maybe a negative impact on your sales side if you are not in that business. So strategically, both are important. One, technology-wise, and the other one -- and if you look at this one, this goes a little bit hand-in-hand as well, because in the mobility services, you will see Level 4 or Level 5 cars in the future maybe as well. So that's why it makes sense to have, with Daimler AG, that cooperation on those topics. They are not completely independent.

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Maximilian Schöberl, Bayerische Motoren Werke Aktiengesellschaft - EVP of Corporate & Governmental Affairs [62]

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Thank you very much, [Lucas]. And the last question is coming from Stephen Reitman. Stephen?

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Stephen Michael Reitman, Societe Generale Cross Asset Research - Equity Analyst [63]

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Stephen Reitman with Societe Generale in London. I have 2 questions. First of all, you've made 2 clearly welcome decisions about cooperations with Daimler in mobility services and in autonomous driving. Is it possible to get some quantification of the potential saving that you can get from cooperating on autonomous driving? Because clearly, as you said, you are trying to eliminate duplication of work, and this is obviously a very expensive topic, which has been a burden on the industry and have already been reflected in, for example, your R&D guidance in terms of expenses. My second question is about residual value risks. And I think BMW is rather different from some other companies in the sense that the residual value risk is shared with the Financial Services business in the case of BMW, whereas in a lot of other companies, a lot of it stays in the industrial business. Could you give some indication of what the impact has been on the margin of the Automotive business, say, for 2018 and maybe for 2017 if residual values have actually been improving presumably then that has had -- that's been and had a negative impact on the Automotive margin?

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Nicolas Peter, Bayerische Motoren Werke Aktiengesellschaft - CFO & Member of Management Board [64]

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So maybe to start with the residual value topic. Residual values developed stable across the world. Now if we go in details, we have seen a slight improvement of ROEs in the U.S., and we have seen a slight negative impact of ROE in some European markets, which are related to the diesel topic, but nothing -- really nothing dramatic at all. And we've seen the diesel sales share even coming back in the last couple of months. I would suppose that the RV issue was also maybe -- in Europe, which was not -- really not a big issue, but probably also impacted by the WLTP topic. And the Financial Services earnings are very -- as you can see, if you look across many years, are extremely resilient. And this stably -- stability is also related to a very precise and careful RV management.

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Harald Krüger, Bayerische Motoren Werke Aktiengesellschaft - Chairman of Management Board & CEO [65]

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And on the autonomous driving, let's assume, for example, that you need to spend EUR 3 billion to EUR 5 billion in the next years, you can calculate that you would only spend 50% of that one by a cooperation. So that's why I said, even in 2016, strategic cooperations in our business, even for big companies, are important. And that magnitude, as an example, is not too wrong. That if you're investing -- if you just see what the data center have shown you, which we opened up and things like this one, and you need data center in different countries for autonomous driving, you can save a lot of money together. And there's one more opportunity and -- because you can also -- maybe if you sell the IP or the stack to some third-party, if you have created together the industry standard, there's also a cash coming in maybe. But it was a good question, and thank you very much for coming.

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Maximilian Schöberl, Bayerische Motoren Werke Aktiengesellschaft - EVP of Corporate & Governmental Affairs [66]

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Yes, ladies and gentlemen, thank you very much. It was a pleasure. And now we take lunch together. Thank you.

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Harald Krüger, Bayerische Motoren Werke Aktiengesellschaft - Chairman of Management Board & CEO [67]

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Thank you.