BMWYY - Bayerische Motoren Werke Aktiengesellschaft (BMWYY) Q1 2023 Earnings Call Transcript
2023-05-04 15:28:01 ET
Bayerische Motoren Werke Aktiengesellschaft (BMWYY)
Q1 2023 Earnings Conference Call
May 04, 2023 08:00 AM ET
Company Participants
Max Schöberl - Investor Relations
Nicolas Peter - Chief Financial Officer
Oliver Zipse - Chairman & Chief Executive Officer
Conference Call Participants
Dorothee Cresswell - Exane
George Galliers - Goldman Sachs
Jose Asumendi - JPMorgan
Horst Schneider - Bank of America
Tim Rokossa - Deutsche Bank
Patrick Hummel - UBS
Henning Cosman - Barclays
Presentation
Max Schöberl
Good afternoon, ladies and gentlemen. I would like to welcome you all to our Telephone Conference for the First Quarter Results. With us today are Oliver Zipse, Chairman of the Board of Management; and Nicolas Peter, our CFO. First, Nicolas Peter will take you through our financial results. Oliver Zipse will give then a general business update for the BMW Group. Afterwards, we will have time for a Q&A session.
Nicolas, it's your turn. Please go ahead.
Nicolas Peter
Thanks a lot, Max. Good afternoon, ladies and gentlemen. As expected, the BMW Group started 2023 with a solid performance. Group earnings came in at around €5.1 billion with a group EBITDA margin of 13.9%. After the first three months of the year, the Automotive segment delivered an EBIT margin of 12.1%. We achieved this in the face of persistently volatile conditions. The geopolitical and macroeconomic situation remained tense. Inflation and interest rates remain at a high level in many markets. The same applies to material and commodity prices.
Sales of our all electric vehicles increased dynamically in the first three months of the year. Just under 65,000 units were sold, an increase of over 83% compared to the same quarter of the previous year. BEV sale at the BMW brand saw growth of 112%. Overall, all electric vehicles accounted for 11% of customer deliveries. ales momentum also came from the market launch of vehicles in the upper price segment including, for example, the BMW i7.
The BMW Group's total vehicle sales for the first quarter were down slightly on the previous year with just over 588,000 vehicles sold. While the US market posted significant growth, we saw a moderate decrease in deliveries in China, where the after effects of the corona virus wave at the beginning of the year were being felt. Europe remains stable overall.
In the first quarter of 2023, the operating result of our Chinese joint venture, BBA was integrated fully into the Automotive segments income statement. In the previous year, BBA was only fully consolidated from 11 February. The Automotive segment EBIT for 2022 and 2023, therefore, include consolidation effects of differing amounts. The previous year's financial results also reflected the high one-time effect from the full consolidation of BBA. The quarterly results are therefore not directly comparable.
Ladies and gentlemen, let's start with a look at the Group's earnings performance. Revenues with just over €36.9 billion, with a cost of sales of around €29.1 billion. A key factor in this year-on-year increases of 18.3% and 13.5%, respectively, is the full integration of BBA's operating business in 2023.
The Automotive segment also benefited from positive pricing and mix effects. The group financial results for the first three months was slightly negative at minus €246 million, this represents a significant decrease of just over €9.1 billion compared to the previous year. The main factor here is the onetime revaluation effect of around €7.7 billion from the fair market valuation of BBA equity interest in 2022.
In the first six weeks of last year, BBA also still contributed approximately €300 million to the equity result. In 2023, earnings were no longer included in the equity result. In the other entity segment, the fair market value of interest rate hedging transactions declined slightly in the first quarter of 2023.
In the prior year quarter, interest rate hedges had developed positively due to the sharp increase in interest rates. The difference in earnings from the previous year was about €700 million. At the end of the first quarter, group earnings totaled just over €5.1 billion. The group EBIT margin of 13.9% was significantly above our strategic target of at least 10%.
Ladies and gentlemen, our strong financial position lays the foundation for the transformation of the BMW Group. We continue to invest in new models and structures with a clear focus on topics for the future: electrification, digitalization and automated driving.
Research and development expenditure was significantly higher than the previous year at just under €1.6 billion. Our R&D ratio of 4.2% according to the German Commercial Code, was within our long-term profit range of 4% to 5%.
We are funding investments from our operational cash flow. Capital expenditure was about €200 million higher than the comparable figure for 2022 at just under €1.3 billion. Due to higher revenues, the CapEx ratio was on par with the previous year at 3.6%. We expect the ratio for the full year to be around 6%.
Let's move on to the Automotive segment. EBIT margin for the first quarter came in at 12.1%. Earnings before financial results exceeded the previous year's EBIT by around 60% at just under €3.8 billion. Full integration of BBA's operating results increased both the segment's first quarter revenues and its cost of sales.
With regard to BBA, segment earnings for the first quarter of 2022 were impacted by depreciation and amortization from the purchase price allocation and the elimination of interim profits in connection with intra group deliveries totaling around €1.2 billion.
In the first quarter of this year, depreciation and amortization from the purchase price allocation resulted in an expense of around €400 million. Excluding the BBA consolidation effects, the EBIT margin would be 13.2%.
In the first three months of the year, we continued to see robust pricing for our products. The product mix also developed positively, especially in the other segments with products such as the new 7 Series, we updated X7, the XM and of course, the Rolls-Royce heavily.
Higher material and commodity prices and increase in research and development spending and a higher percentage of all electric vehicles also pushed up the cost of sales. In the first quarter, we were able to compensate for these cost increases with strong pricing and an improved product mix.
Free cash flow in the Automotive segment for the year to the end of March, totaled just under €2 billion despite the seasonal increase of inventory levels. We are, therefore, on track to achieve our targeted free cash flow of around €7 billion for the full year.
By mid-2023, the BMW AG will finalize its current share buyback program of €2 billion, which was launched in July 2022. The company's strong operating performance is the basis for continuing our share buyback activities.
As announced yesterday, the Board of Management has, therefore, decided on a second share buyback program as part of the authorization granted by the 2022 Annual General Meeting. This program amounts to another €2 billion, it will start after the end of the first program and will be completed by December 31, 2025 at the latest.
Let's turn now to the Financial Services segment. In the financing and leasing business with retail customers, the volume of new business decreased by 14%. This was mainly due to price increases stemming from higher interest rates and intense competition in the financial services sector. However, price development and an improved product mix in the Automotive business had a positive impact resulting in an higher average financing volume per date.
Segment earnings before tax totaled €945 million. This moderate year-on-year decrease of 6.2% is mainly due to higher refinancing costs. Income from the resale of end-of-lease vehicles remains consistently high and the risk situation is stable. The credit loss ratio is still at a very low rate of 10.13%.
The Motorcycle segment also got off to a successful start in 2023. In the first three months of its centenary year, the BMW Motorrad brand grew its sales by 1.1% year-on-year, delivering its best-ever first quarter sales result with around 48,000 units sold. This impressive performance is underpinned by an attractive product lineup. At the end of the first quarter, the segment's operating earnings totaled €154 million with an EBIT margin, up 16.5%.
Ladies and gentlemen, in the first quarter of 2023, the BMW Group's business developed positively despite the volatile business environment. We continue to benefit from stable pricing in new and pre-owned car markets. However, we do expect the competitive environment and pre-owned car market to gradually normalize through 2023. There is still some uncertainty around stabilization in the Chinese market, which is an underlying assumption for our outlook.
After a good start to 2023, as forecast, we expect the full year to progress in line with our outlook. Therefore, our guidance remains unchanged. This assumes that geopolitical and economic conditions do not deteriorate significantly. Group earnings before tax will decrease significantly without a tailwind from the revaluation of previously held equity interest in BBA.
In the Automotive segment, we are planning for a slight increase in deliveries overall. The all-electric share of total vehicle deliveries is projected to increase significantly. The EBIT margin in the Automotive segment should be within the range of 8% to 10%, with a segment ROCE of between 15% and 20%. In the Motorcycles segment, we anticipate a slight increase in deliveries with an EBIT margin of 8% to 10% and the ROCE of 21% to 26%. In the Financial Services segment, return on equity should be between 14% and 17%.
The size of the workforce and the share of women in management positions are forecast to increase slightly. Once again, this year, we are targeting a slight reduction in CO2 emissions in the new vehicle fleet as well as in CO2 emissions currently produced. The macroeconomic situation remains difficult and the geopolitical environment is volatile. Our guidance does not factor in the possibility of a deep recession in key sales markets or further escalation of the war between Russia and Ukraine.
Ladies and gentlemen, the BMW Group strategy remains robust, even in highly volatile times. It is well balanced and focused on the long-term. With the positive effects of a strong operating performance, we continue to make targeted investments in the future competitiveness of our company.
Even during the transition to emission-free mobility, the BMW Group will continue on its road to success. We are determined to stay the course, proceeding at the same time with prudence and flexibility, knowing that we can rely on our attractive product portfolio. We remain on track to meet our goals for the year in a volatile business environment and are looking forward to the rest of 2023 with confidence. Thank you.
Max Schöberl
Thank you very much, Nicolas. And now our CEO, Oliver Zipse. Oliver, go ahead.
Oliver Zipse
Ladies and gentlemen, the BMW Group has a strong global footprint. It serves as a local partner in individual regions of the world, contributing positively to industrial economic value in all. We currently have production sites at 31 locations on five continents.
We also have research and development centers in 17 countries, not to mention 41 sales and marketing and financing services locations across the globe. This is how we make sure specific trends, technological innovations and the different needs of customers in the regions are incorporated in our products and their development. To achieve this, we enter into targeted strategic collaborations with strong and innovative local tech partners.
Our environment remains highly volatile and will likely continue to be shaped by unforeseeable circumstances. Many experts assume that the major economic areas are likely to drift further apart, both from a political and technological perspective, and also with regard to regulations.
That is why it is so important for us to seize opportunities that will always present themselves as short notice in markets around the world. And at the same time, our strategic thinking, our actions and our decision-making are always looking forward with a clear long-term focus.
Our goal is for the BMW Group to maintain its profitable growth and always be in a position to make appropriate investments in our future.
In keeping with this logic, we are charting our own course for the future Sybase with our rolling strategic approach and long-range corporate planning. And on the other hand, our strength lies in consistently with which we foresee pursue our strategy.
On the other hand, it comes from the flexibility and speed with which we tackle sudden changes. Once again, we have ambitious plans for the current financial year. After the first three months, we are on track to meet our goals for the full year, and that holds true, by the way, also for the first four months.
As Nicolas Peter explained, the financial results for the first quarter of 2022, and the first quarter of 2023 are not directly comparable, due to the one-time effect from the full consolidation of our BBA joint venture in 2022.
At the same time, our product line of this younger broader and more attractive than ever, because all brands, all segments and all drive technologies with outstanding vehicles that we have recently launched or will be released onto the market in the very near future. We are exploiting potential everywhere and experiencing a noticeable tailwind.
As you know, we expect group deliveries to be slightly higher than this year compared to 2022 as we continue to build on our solid incoming orders. This applies equally, and that is a particular quality to our all-electric models and to our conventionally powered vehicles. This proves once again that our long-term product strategy, including ramping-up our best in the line with demand is delivering results. Through our balanced positioning in the world regions, we can compensate for regional market fluctuations, just as, for example, a certain market weakness in China can currently be offset by a stronger performance in the United States of America.
The same is true of our broad technology -- this enables us to meet different demands in markets while accounting for the varying speeds at which they are creating the necessary infrastructure for e-mobility. We have remained true to our conviction that all types of drivetrain must make a positive contribution to reducing CO2 emissions. This is particularly relevant in the short and medium term.
Our best deliveries grew strongly in Q1 across all four major regions, Europe, Asia, the Americas and the rest of the world. Web sales for the BMW brand alone grew about 112% on average. All regions contributed to this development. In April, the BMW brand continued this trend by doubling best sales yet again.
Our global balance in BEV growth fits perfectly with our local-for-local approach to our worldwide manufacturing activities R&D and our BEV production. Together, all of these factors increased our resilience as a global company. Now we are expanding this even more by adding an additional component local manufacturing of high-voltage batteries. This has already been established for current electric models at our facilities in Germany and China. In the next step, we are adding further capacity with sixth generation of our battery technology, for example, in Woodruff for our United States plant in Spartanburg and deplete for our future plant in Hungary as well as in San Luis Potosi in Mexico.
Now what will be the key success factors for us this year? First, our diverse range of products with a clear focus on ramping up e-mobility. Second, digitalization of our brands and of the company. And third, on-point preparation for the Noe class. Let's first start with the first point. Regional differences in demand for alternative drug technologies are becoming increasingly evident. I experienced this for myself just recently. In April, Illicit the Japanese market and the Shanghai Auto Show.
In Japan, for example, hybrids and efficient combustion engine basis are especially popular with customers. There is also a lot of interest in hydrogen as an alternative method of propulsion. It was, therefore, not surprising that the BMW iX5 hydrogen from our global pilot fleet was welcome to the open arms. Demand for pure battery elected basis, on the other hand, is developing steadily but slowly in Japan and remains at a low level.
On the other hand, you have China, where best demand is growing rapidly. Today, China is already the biggest growth driver for e-mobility. For the first time, BMW presented only electrified models at the Auto Shanghai Motor Show. These included the i7 M70 xDrive, the XM label red as a blocking hybrid and the iX1-long-wheelbase version, which we build in China for China. It is no secret that China's best market is highly competitive and equally among both established and new players.
Several manufacturers are currently [Technical Difficulty] substantially to gain market share. At the BMW Group, we have a strong position in China. In the first quarter of 2023, we sold significantly more bets there than our established competitors and also more than many new manufacturers. By the end already offer 11 electric models in China across all our brands. And with our best, we are exclusively targeting the upper premium and luxury segments.
Also in China and in the current context, we benefit from our growth technological approach. The comparison of the car market in Japan and China illustrates clearly, the extent to which automotive manufacturers face very market requirements during their transformation. We are targeting profitable growth with all drive technologies and in all segments and therefore, leveraging earnings potential.
The upper premium and left free segment are a good example of this. And growth in this segment, we get a major boost this year from new BMW models, the 7 Series in the XM as well as the X7 model update, not even to mention the Rolls-Royce, MINI family. We're currently releasing X5 and X6 updates on the markets, including the particularly successful long-version of the X5 in China. And let's not forget the popular and in-demand models from BMW M.
Over the coming months, we will release the model update for the X5 and the X6 M. Many fans are also looking forward to the M3 Touring that was just released onto the market. It was recently named Green Car of 2023 by Autocar Awards. And that's not the end, the M2 Coupe is already ready to hit the road.
With our strong portfolio, we are targeting growth in the mid double-digit percentage trend in the upper premium and luxury segments this year. And we are aiming even higher with our fully electric vehicles and planning for high double-digit growth. Over the year, the BEVs are expected to account for 15% of our global deliveries. This will be another big leap and the highest absolute increase we have targeted so far. Key models, in particular, will drive our sales, including BMW i4 Sport, Coupe, the iX, the iX3 and the new i7 and the new iX1, and the MINI Cooper SE, and we will keep up the pace with additional new products, the new BMW 5 Series and new BMW X2 will be released onto the market towards the end of the year, including the i5 and the iX2 best variance.
The BMW approval then have at least on all electric model in all its main model ranges on the roads. We recently conducted intensive testing of the i5 are most difficult conditions, including extremely low temperatures. It also is impressed media representatives and our recent pre-launch test ride events as a very positive coverage demonstrates. And the bottom line is the BMW 5 Series is the top business sedan with all price ranges, conventional, just as well as fully electric.
Our BEV road map is precise is precisely defined by 2024, at least one in five of the BMW Coupe’s new vehicles should be best. By 2025, it will be one in four, and in 2026, one in three. This is another reason why we are in a better position with our targeted BEV ramp-up and our key competitors.
As a company, we remain innovative. In the field, for example, of battery technology we are in the top three for patent applications in Germany. There are only two battery specialists from Korea and China ahead of us last year. And with that, let's move on to the second topic.
Digitalization is the most dynamic field in the mobility of tomorrow. That is why we are making BMW digital, because digital products and features can only be created in an organization that use digitalization holistically as an opportunity. The know-how we have in our team is crucial in this respect. That is why we have launched the biggest individual training program in the history of our company for key areas of digitalization.
The digital boost, as we call it, will create the knowledge and tools we need to identify and implement digital potential in every area of responsibility. Let me give you three examples to show how we are implementing this knowledge to create a seamless digital experience of mobility that benefits our customers.
First, in the new BMW 5 Series, customer will experience automated driving in a new dimension. It is equipped with the highway assistant, which continuously performs distance control and steering tasks. For the first time, the vehicle changes lanes using eye activation, an absolute worlds’ first. Customers will not find such comparable overall package anywhere else.
Second, our Digital Key Plus. The digital vehicle key is no longer just available for Apple devices. Customers can now also use their Android smartphone to unlock and start their BMW. This is made possible by ultra wide band technology that guarantees maximum security. You don't even have to take your phone out of the pocket.
And third, our multimedia offering in the new BMW 7 is. Earlier this year, we launched a pilot program that makes selected live Bundesliga games available in certain models. We are now expanding this option. In the new 7 Series, the theater screen transforms the rear compartment into an exclusive speed in the stadium.
And this brings me to my third and final point. Alongside our current product line, we are also gearing up for the next big breakthrough in innovation. 2023 and 2024 will be the decisive phase of our preparations for the Neue Klasse. It will bring added momentum to our sales of all electric vehicles from 2025 onwards.
We plan to release at least six models in this entirely new BMW model generation onto the market in the first 24 months after the start of production. We are deliberately starting out in high-volume segments with the sports activity vehicle and a sedan in the 3 Series segment.
The Neue cut [ph] embodies all three pillars of future mobility. It is entirely geared on digitalization and sustainability and also fully electric. Our BMW i Vision Circular from 2021 and this year's BWI i Vision Dee show the direction of our thinking. In just a few months, at the IAA Mobility we will be sharing the topics of digital, circular and electric complement each other to form a totally new and coherent overall concept.
Ladies and gentlemen, as you can see during the current financial year, we are once again taking a two-pronged approach. Internally, we are focusing on our operational excellence. Across all brands and all segments we are offering our customers a new modern technologically diverse and innovative range of products. At the same time, we are systematically investing in our future and aligning the entire company for the launch of the Neue Klasse.
The BMW Group remains focused on delivering its profitable growth and holding its successful course. For us, that means an EBIT margin in the automotive segment with our target range of 8% to 10% and even during the transformation towards the mobility. Thank you very much.
Max Schöberl
Thank you very much, Oliver Zipse. Ladies and gentlemen, now the line will shortly be open for questions. Please wait for some technical advice.
Question-and-Answer Session
Operator
SLadies and gentlemen, we will now begin our Q&A session. [Operator Instructions] Our first question will come from Dorothee Cresswell from Exane. Please unmute your line.
Dorothee Cresswell
Okay. I hope you can hear me. Can you hear you all right?
Oliver Zipse
Yes, we can hear you.
Nicolas Peter
Yes.
Dorothee Cresswell
Yes. Okay. Thank you. Perfect. Thank you. And thank you for taking my questions. I have two, if I may. One around the upper end vehicle sales and the second around China. So I wondered whether, just speaking about fiscal year 2023, you could tell us whether the tailwind from new product momentum and growth in that upper end of the range will more than offset the headwind from a rising BEV mix?
And then, looking a little bit further out, is there a mid-term plan to grow the sales contribution of the upper-end vehicles to a certain proportion of the overall volume. And then turning to China, you outlined that it's noticeable that you're managing to take BEV share in China to a greater extent than your incumbent peers.
But can I just ask, at stage you think that your BEV market share in China can draw a level with your ice market share? And is that something that you think can happen perhaps by the middle of the decade, because obviously, you still have a fair amount of BEV products in the pipeline.
And then just to finish, of course, I should say, Dr. Peter, thank you so much for our very many insightful discussions over the last few years. And my very best wishes for your next chapter. Thank you.
Max Schöberl
Thank you, Dorothee. We start with our Chairman, Oliver Zipse and then Nicolas. Okay, Oliver, please.
Oliver Zipse
Dorothee, thank you for your question. Best regards from Munich. Let me start with your China question first. The best market, of course, in relative terms is having this growth market momentum. This is market driven, but this is also by offer driven.
By the end of this year, we will have 11 fully electrified products from the BMW Group in the Chinese market. So we believe in a strong market push. And by the way, whilst we were still down from the previous after March, after April, we are already up 4% in the Chinese market. So we are regaining momentum with a strong push from the product side.
So with that said, when exactly is the best share of our market offerings at exactly the same volume as the ICE model? I don't know. I cannot tell you, but it will be, first of all, sooner than later. And of course, it will be in this decade and the rest of the market will show.
We will have BEV models in every segment, from MINI all the way up to Rolls-Royce and in every segment of BMW. And then we will see what the market is there. We are ready to follow the market wherever it moves.
And, of course, as we always said, the market conditions will depend on infrastructure, on the availability of raw materials and at the end, most importantly, to final customer base. But, again, we started very successful in this year and the rest we will see.
Max Schöberl
Thank you, Oliver. Nicola?
Nicolas Peter
Dorothee, really good to hear, and thank you for your very kind personal remark. Maybe let's start with all-electric sale, because we can look from two perspectives. One is to say, well, that's a margin dilution, and I would come to it. But we have to say we are very pleased that our all-electric cars are performing extremely well in all three major regions.
We are very confident from the level we've seen last year, close to 10% penetration of all electric sales in 2022 to grow our all-electric business to 15% in the course of the year. And this is backed by really good strong incoming orders also in particular, for the very recently launched iX1 and i7 and you might have that the first feedback from the media, from journalists regarding the i5 was really extremely positive. So we are confident to achieve this target.
Second comment is contribution is better for the all-electric cars than we anticipated two to three years ago. So, I would say the glasses have emptied. And we are very, very confident to be definitely also after the first strong quarter this year to be on track to achieve our guidance of 8% to 10%. And this is, of course, backed by the strong performance in the upper part of the segment.
We will plus/minus double our 7 series sales in '23 compared to '22, even before having the full year effect of a volume model in China on the 7 Series, the X7, which got a face lift a couple of months ago, is performing very well. XM just launched, Rolls-Royce well on track and not to talk about the M model. So, we are based on this, we are really confident to deliver in line with our guidance. And to be very, very clear, I would -- it's too early because we are only four months into the year, but I would not be surprised if we would be end up in the other part of our guidance corridor.
Max Schöberl
Thank you very much, Dorothee. Next question, please.
Operator
Our next question will come from George Galliers from Goldman Sachs. Please unmute your line.
George Galliers
Yes. Good afternoon and thank you for taking my questions. And similarly, I pass on my very best wishes to Dr. Peter and do you hope we can remain in touch. I actually wanted to talk about two similar areas to Dorothee, but actually slightly different questions. Obviously, in the interim report, you talk about competition in the Chinese auto market becoming more intense. When we consider BMW's portfolio, are you seeing the competition across your portfolio or only on certain vehicles such as compact cars? And how larger risks do you see from Chinese competition come in more prevalent in other regions such as Europe.
The second question I had was also on the upper-end vehicles. I believe it's more than 12 months now since you purchased ALPINA, a brand with enormous appeal to car and driving enthusiasts, arguably the ultimate Q-car. But there's no mention of the brand on your product, slide 8. And to date, I think the communication around the intent that ALPINA has been limited. Maybe this call isn't the right forum, but does ALPINA play any role in the double-digit percent growth do you expect for the upper segment this year? And can you give us any insight into when we might get to hear more about your plans for ALPINA and its future role within the BMW Greece? Thank you.
Max Schöberl
Thank you very much, George. Please, Oliver.
Oliver Zipse
Sure. Thank you for your questions. What we see in China is -- and I think that is very important to discover, market segments are more alive than ever. Now I'm talking about car sizes, UKL segment, MKL segment, GKL segment and the premium segment. The fastest growth in the Chinese market is in the base segment. Unlike here in the Western world, it's exactly the other way around. The biggest growth here starts from the base segment.
And of course, through that development, there's a lot of competition underway. That does not mean that the premium segment is the segment which is attack first. And in our case, we are a strong premium segment player with most of the cars more expensive than RMB350,000 in the Chinese one, going well over RMB1 million. That is very solid.
And in that segment where -- which is still very much alive and very solid, the competition is not as challenged than in the base segment. I think that's very important to know.
You're -- with the competencies which are built up in that market, of course, there will be a global footprint -- increasing global footprint of Chinese manufacturers. And that is at a starting point. And I cannot tell you what the development will be. conquering new markets is always a difficult task, and it takes not years, it takes decades.
As you can see with us in the American market that should that take more than 25 years with local manufacturing footprint and so on and we took more than 20 years to develop our market position in the Chinese market. And the same holds true for any new competitor trying to hold foot in the European market. So that is to see. And of course, we see what is going on in the world, and we are not ignoring it. And the rest, we will see how at the end of the day, customers will be.
To your second question, Alpina, Alpina has a 50-year old tradition and a super strong market value. And after making that acquisition we, of course, set down closely how do we preserve that market. And that, of course, will never be a high-volume segment. And in 2026, we will offer products branded Alpina.
And that, of course, will build on at manufacturing and product competence brand history that banner. And we just look to get this -- just this week, we looked at the cars and I can only say I'm very excited and I'm very happy how our plans to further develop the Alpina brand further. And the rest, we will -- you have to be surprised then when it comes to the market.
Max Schöberl
Thank you very much, George. Next question, please.
Operator
Our next question comes from Jose Asumendi from JPMorgan. Please unmute your line.
Jose Asumendi
Thank you very much. Jose from JPMorgan. And Nicolas also thank you for all the great dialogue over the past years and the strong collaboration. We already had the opportunity to exchange a few weeks ago, but I guess thank you from my side.
Maybe a few topics just on CapEx. If you can maybe provide a bit more context about the CapEx ratio in 2023, especially in the first quarter, we're starting to see a substantial increase on a year-on-year basis. Can you maybe provide additional color with regards to the proportion that goes into BEV or into ICE? And how much of the increase we're seeing now, which is actually -- is substantial, is related to China, very well balanced by the way on a flow with depreciation, but a bit more color as to where the absolute CapEx is going in 2023?
Second, if you could please provide a little bit more maybe guidance in regards to the work you're doing to improve the cost competitiveness of the OpEx and achieve this Battery between ICE and BEV in the coming years will be appreciated.
And for Oliver, I would love to hear a bit more around the Battery Technology you mentioned in your remarks that you are top three in terms of patents for Battery registrations in Germany, I believe.
Can you provide a bit more color, what do you mean with these statements? How far -- how competitive is BMW on Battery Technology? And what do this Battery Applications mean at the end of the day? Thank you.
Max Schöberl
Okay. Thank you very much, José. We start with Nicolas and then Oliver. Nicolas, please.
Nicolas Peter
Yeah. José, maybe to start with the topic of CapEx in 2023, we are mainly investing on one hand side, in battery module production, you might have read that we are kicking off also here in Bavaria between our plans of Regensburg, Dingolfing and Munich and new production site.
We are investing in the ramp-up of our plant in ongoing in Debrecen. This is a plant where we will kick off NEUE KLASSE of the all-electric platforms from 2025 onwards.
And at the same time, we've announced a couple of months ago that we will -- we are investing in particular in the U.S. environment in order to prepare Spartanburg, from all-electric cars with on one hand side, an investment of US$1.7 billion in the plant itself and in battery module production as well as like a little bit outside of the plant.
At the same time, we are ramping up with a partner and begin in South Carolina and battery module products. So it's definitely very, very much focused on EV ramp up. And this is, of course, back again, as I've mentioned already, by the strong demand we see for our all-electric task.
Cost competitiveness, I rather would talk about contribution at parity. And contribution parity is definitely the ambitions of goal we have set ourselves for NEUE KLASSE. So by 2025, 2026, we want to be on contribution parity. And of course, costs playing important role.
And this is exactly one of the reasons, why we invest in the sixth generation of battery cells. The objective is to have a significant around 50% cost reduction with the sixth generation, which, of course, will contribute to contribution parity.
Max Schöberl
Oliver?
Oliver Zipse
Well, let me talk a little about wider what the electric drivetrain does for us. When we look at the electric drivetrain, we, of course, look at the cell and now we'll come to your question in a minute. But we also have to look at the high-voltage batteries, which is so the assembly of all the cells into one large battery. We have to look at the drivetrain technology during the transmission. And then, of course, most importantly, how is all that integrated into a fully functioned vehicle.
Besides the cell, we're manufacturing all the other steps by ourselves. So we have a very, very high vertical integration of all elements of the drivetrain. Now you might ask the rest, why don't you do the cell all by yourself? And as we have announced already, we are in the development of the sixth generation of our battery cells. That's also why we have that very high amount of cell patterns. So the next cell technology will be cylindrical and has a diameter of 46 millimeters. And that will be at the point of market entry, the benchmark of that technology. Do we need to have a very high manufacturing footprint to do that?
No, you don't, because there is ample global competition with that technology. There are a multitude of local players, and we will distribute this with our R&D developed cells around the globe with different suppliers. To do that all by yourself would mean you would, at the same time, you would have to start up factories in at least four regions in the world at the same time -- and that is, I think, a task which you should thoroughly think whether that is possible.
So with our technology, with our know-how, we look for various partners to ramp up quickly and I underline quickly in various regions, our new cell technology will then with the other components I talked about to ramp up the NOAC Class A quickly. It's not only about the manufacturing to sum it up. Almost the R&D technology and the R&D knowledge is even more important for the ramp-up of the NOAC Class A.
Jose Asumendi
Thank you. Thank you very much.
Nicolas Peter
Thank you. The next question please
Operator
Our next question comes from Horst Schneider from Bank of America.
Horst Schneider
Yes. Hello. Thanks for taking my questions. You can hear me?
Nicolas Peter
Yes. Perfect. Perfect.
Horst Schneider
Okay. Excellent
Nicolas Peter
Go ahead.
Horst Schneider
The first question that I have that is relating to other cost changes. If I get it right, you are saying that basically other cost changes getting a bigger headwind in the next few quarters. Volkswagen said today that they expect cost tailwinds in H2, just want to understand what's your view on costs. And I know you have got other items also included in that line. So it's not comparable maybe also might be due to lower capitalization, but maybe you can elaborate a little bit what's driving your view on other cost changes and what's the path in terms of quarterly progression that we can expect from here?
Then the other question that I have that relates a little bit to financial services because you were stressing that the competition is increasing and you're not willing to follow that trend in all regions. I just want to understand where you see particularly these competitive trends the most, so whereas the competition the highest? Is it more an issue for particular regions or it's all over the place or it's just in certain vehicle segments? Thank you.
Oliver Zipse
Thank you very much, Horst. Nicolas, please.
A – Nicolas Peter
Horst, maybe let's start with Financial Services. First of all, what I believe is extremely relevant mentioned from a residual value perspective and risk management perspective, credit risk management perspective, financial services is in good shape. So we are very, very confident. We see residual values still trending in positive territory. In particular, in the US environment, well, in the four-digit area per car. So that's a really positive situation.
Increasing competition is in particular China a topic and is related to the non-automotive financial market participants and is in particular related to the way provisions are paid to the network to dealers. And this is definitely something we are not following because we believe it doesn't make any plan, in particular, in an environment, and you have seen this looking at the numbers where we despite the drop in financial services, we grow our market share with the automotive business.
So this means we don't see any reason to accelerate in this area, but I'm very confident we have seen this in the US market. If you look to the US market, you've seen a drop in particular, at the end of the third quarter, or beginning of the fourth quarter in 2022. And now we are back to penetration levels of close to 70% in the US environment.
Now if you look at the auto which is I believe the background of your better enough, cost can’t, can't comment both numbers. So we are focusing on our numbers. If you look what we anticipate for the full year, you will see in particular positive development with a slight volume increase, which is planned, and we are already four months into the year -- slightly ahead of the previous year from a global perspective.
We expect on the other hand side, very solid product mix development for the reasons I've outlined, in particular, with on one hand side, flows in the high-end segments -- and some headwinds coming from the higher debt share and also a stable situation with regard to pricing, which is underlined also by the situation in China despite what we've seen in China in the non-premium market. Our pricing position remains remains very, very stable.
On the other -- in other cost changes, we have -- we anticipate and slightly positive effect coming from a base effect from BBA cost inflation. So inflation impacts will have, in particular, higher material costs and component costs, cost of logistics will have a negative impact. The same goes for personnel costs. This has to do with the collective wage agreement in Germany. And we expect also some cost headwinds in connection with lower capitalization ratio in the R&D area and with residual values; we anticipate a slight gradual normal -- what I would call normalization.
Horst Schneider
The material cost is going to be a tail in H2, right, as well as…?
Oliver Zipse
Materials costs are going to be a headwind in for the full year, have been headwind for the Q1 as well. If you look at raw material and FX, we've guided for both combined between mid-three digit to high three digit. Today, I would rather say it's probably in the lower part of the more positive part of this corridor, which means mid three digits, but of course, this can develop.
Horst Schneider
Okay. Good. Thank you very much.
Oliver Zipse
Thank you.
Max Schöberl
Thank you. Next question please.
Operator
Our next question will come from Tim Rokossa from Deutsche Bank.
Tim Rokossa
Yeah, thank you very much. I have two questions, please. Oliver, the first one for you. Over the last years, you made a pretty tireless effort to tell everyone about the need for flexibility of dry frames. And it's fair to say that that didn't resonate very well with the capital market and a lot of other stakeholders.
Now all by at least a lot of potential savings in the market, I certainly changed my view on that a bit with everything going on globally last year, and I think others will follow. Now you see the German press being more positive on it this morning. Do you feel like your message resonates with an emphasis on BEV, but other options, better with regulators and other stakeholders as well? Are we further away from banning eye in Europe, other OEMs perhaps coming to you asking for more entrant corporations?
And then secondly, Nicolas, we touched on this already with full year results, but I try it again. Now you announced the next [Indiscernible] program. I think it's fair to say that everyone really likes this from a capital market perspective, why don't you institutionalize this and just say that from now on, what, excess cash will return to shareholders in the form of these buyback programs whenever it's available? Thank you.
Max Schöberl
Thank you very much, Tim. We start with Oliver.
Oliver Zipse
Well, Tim, it didn't resonate well, not because it was wrong, it was despite the fact that it was corrected and resonated one, because apparently, you didn't want to list, but it's okay. I think if you look at markets, they are so diverse, and I was talking about our visits to Japan and China this year. They're so diverse. And if you look at electromobility ramping up, depends on raw materials, depends on capacity and infrastructure in Japan on market taste, on customer taste is not even about regulation alone.
And so many -- if you make so many ticks in the boxes and if you see, the few as we saw last week and saw this week, the few on electric mobility is very positive. But if you see the development, the risks of that 100% only approach has become very apparent to everyone involved.
Raw materials, the infrastructure where I remain saying it's almost impossible to build 100% charging infrastructure in Europe in 12 years' time. And if you look at the development, that remains true. And that underlines the necessity to have the ability, first of all, to be able to respond should be able to be -- to build products, which are independent on drivetrains. And that is what we have done for the last five years. And if you see the first messages from the i5 see the test ride from the i7 against the competition is not compromised products, and I was trying to convey that to the public. But of course, I see that you need to see the products and drive the products to believe it, and they are now in the market. And I think it underlines the strategy that that we are in a very volatile world. You have to have a product strategy, which is resilient and not pinpointed toward one solution this brings you in a big dependency on outside circumstance. But as you rightfully said, the world is turning quickly. And I think I'm very happy that the world is finally understanding, what BMW does. And with that to Nicolas
Nicolas Peter
Yes, Tim, maybe to start with, BMW has definitely one of the strongest balance sheets in the industry. And this is reflected also in our rating, which is the second best in the global industry and still the best amongst all European OEMs. So we are definitely in a strong position and this is exactly why after having probably completed a program on in the next couple of weeks. We will immediately continue with the next phase, which was announced yesterday. And this also gives you an indication that we are very confident that we are able to generate the cash flows we anticipate €7 billion for this year, and we well, if you take into account the results of the first quarter is, I believe, should make the market confident that we are well on track.
On the other hand side, we've experienced a lot of volatility in our business, if you reflect on the last two or three years. And this is why we believe it makes on the one hand side, a lot of sense to implement and to run in a very systematic consistent manner our share buyback program. Without saying, it will go for the next decade exactly in this way. So I believe, it's the right combination we are implementing right now, we have executed that Program 1 faster than we initially anticipated. We continue now with Program 2. And when we will come to the end of we will decide what's next, but we still have now some way to go.
Oliver Zipse
So thank you very much, Nicolas. So we come to our last two questions, and then we close our Q&A session. Next question, please.
Operator
Our next question will come from Patrick Hummel from UBS.
Patrick Hummel
Yeah. Thank you, good morning and Nicolas also from my side, many thanks for the great partnership and all the open dialogue we had over the years and all the best future. First question right away to you, as far as your comment about pricing is concerned, I think you emphasized that a little bit more as a risk for the remainder of the year. And I'm just wondering, if you can share a little bit more of your thoughts, which segments, which regions you're cautious is about or coming from just to better understand to which extent there's been usual conservatism built in that kind of wording or whether there's any specific reason be more cautious on the pricing side?
And the second one, just following up on the capital allocation question. It's great you continue with the share buyback of the €2 billion, and that's despite a significantly higher share price and you keep paying a regular dividend. But on top of that, because you have a €7 billion per year free cash flow, you're sitting on a big cash pile that doesn't seem to be needed for anything CapEx-wise in the next few years. Is that what you really need to stay a top-rated automotive company, or is there anything you are potentially considering the cash pile you currently have? Thank you.
Max Schöberl
Good. Thank you very much, Patrik. Nicola, please.
Nicolas Peter
Maybe, Patrick, to start with pricing. And maybe it's worthwhile to go through the major three markets a little bit more in detail to start with the US market. You follow as we do follow US auto data you see that overall, there is a slight increase in discount levels, but really a slight increase in the first three months and amongst all the premium manufacturers, we are definitely the most positive one with the fewest -- lowest discount levels. And if you compare those to historic levels, they are very low.
And what makes us confident for the US environment on top is that from a product allocation due to the fact that we have now a full year availability of after the China localization of the X5, we definitely have the right product mix on the US market. And the third element, if you look at inventory level, we are still trading below 20 days. And that's a really low level, and we are gaining segment share at the same time. So that's a really good strong combination of the different KPIs in the US environment.
If we look at China, China, we've seen in particular in the other part of our business, very good pricing, very good pricing also in terms of -- if you look back in history, we've been able over the last two years to grow prices in line with inflation and elevated cost material costs. So we are on a really good level in in the China and environment. We have not adjusted prices for bets in China. We've seen business in the last -- in particular, in March, April developing well. So we are confident for the Chinese -- for the Chinese environment.
In Europe, as we've already said, the situation is different market by market. But if you look in particular at the number one market, Germany, yeah, there is some more market pressure in the market. But on the other hand side, we sit on a very strong order book. And our order book in Germany and in the other European market brings us still beginning of the first quarter of this year. Now with production being available on a much better level and in line with customer orders, we are confident to manage this period in a very, very good manner. And we have, in particular, on Europe, but very strong demand for all electric for all electric cars.
Now Patrick, capital allocation. As we've already discussed in several meetings, we are planning and I've outlined the reasons to invest, in particular, in the ramp-up of e-mobility investing in Europe, in U.S., €1.7 billion. And on the other hand side, as I said, the environment is volatile, and therefore, it makes a lot of sense to remain flexible. And on one hand side, to continue programs like the share buyback program, whenever the situation is as it is right now, so solid, and we are confident to on one hand side, deliver strong cash flows. But on the other hand side, we have enough room to maneuver if needed to act. And if we would have something in mind, Patrick, I would not announce it now in the Q1, but we would have the flexibility of costs. Thanks to our strong liquidity and cash flow.
Patrick Hummel
Good. Thank you very much.
Nicolas Peter
Want to leave a big savings accounts to your…
Patrick Hummel
Thank you.
Oliver Zipse
Thank you. Last question, please.
Operator
And our last question will come from Henning Cosman from Barclays. Star 6 will allow you to unmute, Henning.
Henning Cosman
Hi. Thank you. Good afternoon. Nicolas, thank you very much for the very comprehensive pricing comments. I wanted to come back maybe in that context, I found very interesting what you said on contribution margin once in to discuss contribution margin for the best parity rather than cost currency parity. So can you just confirm that the difference is price with respect to contribution margin and how you see that developing? My understanding is you want to keep pricing perhaps higher than internal combustion engine costs to help achieve that contribution parity, maybe you could just talk about this a little bit more, not least in the context of, of course, the price pressure that Tesla has brought into that market segment.
And sort of on the same topic with the prices, while I really appreciate the detailed comments, you've also confused me a little bit because that sounded all really, really constructive. But at the same time, I understand that you're also seeing potential pressure from the new car pricing in the further course of the year, which is part of the reason for your still more conservative guidance adjusting back into the range. So if you could clarify that?
And then if I can squeeze in one last one. Just on the headwind bucket, of supplier costs specifically. Can you give us any kind of magnitude? I mean, I appreciate that perhaps again something that you don't want to discuss in a public earnings call. But just a sort of rough magnitude as that's one of the larger buckets, or if you think you end up with a relatively minor headwind that would be really helpful. Thank you.
Oliver Zipse
Yes. Thank you very much, Henning. , Nicolas, please?
Nicolas Peter
Henning, maybe start with number one. Contribution parity doesn't -- it's not only a focus, of course, on drivetrain. That drivetrain plays an important role, but the ambition with Neue Klasse is to be if we compare products to each other to be on contribution parity.
So when we say, well, Neue Klasse will significantly contribute to achieve this target, it's not only related to the sixth generation of battery cells, but its also to the -- impacted in a positive way. By the way, Neue Klasse is designed, produced and so on.
So we are confident to change. And, of course, pricing plays an important role, a potential pressure. So what I've described is what we experienced today -- what we experienced today. But this is, of course, no guarantee for the quarters to come. And this is exactly one of the reasons why we are -- while we are on one hand side, confident from the quarters to come. We remain very careful and we observe exactly what's going on in the various markets.
Headwind from supplier, of course, plays an important -- is a relevant headwind. And this is why we have set up together with our colleagues from procurement, from purchasing divisions an initiative where we discuss in detail with our top 100 suppliers what can be done in order to mitigate to reduce those headwinds.
And I'm confident that, despite those headwinds, we have a very, very -- we are well on track to achieve our EBIT margin corridor of 8% to 10%. And as I said, based on our today's situation, we are confident to end up in the other parts that are included in this guidance.
Henning Cosman
Okay. Thank you very much.
Nicolas Peter
Thank you very much.
Henning Cosman
All the best.
Max Schöberl
Yes. Thank you very much, Henning. And ladies and gentlemen, before we conclude, I would also like to sincerely thank Nicolas Peter. Nicolas, you have been with the BMW Group for 32 years and our CFO since 2017. Next week, you will hand over your position to Walter Mertl.
This conference call was your last of a total of 19 quarterly conferences. In addition, you lead seven annual conferences. You are not only an absolute finance expert, but a true strategist. And you have always guaranteed the BMW Group's profitability, even in volatile times.
So, Nicolas, it was an honor and a pleasure to work with you. I would like to thank you personally as well as on behalf of all our employees at the BMW Group. Thanks. By the way, ladies and gentlemen, I think we have another guest on the line who would also like to say a few words. Jim [ph], please go ahead. The line is open for you.
Unidentified Company Representative
Yes. Thank you, Max. And, Nicolas, I can -- well, few of us discuss about it, and I was quick to summarize this, but I know that I speak on behalf of all of us on the call today. But as you prepare to embark on your next chapter, we really also wanted to take that moment to express our sincere gratitude for the many years for the great insights that you shared with us.
I can tell you, it's going to be really hard to imagine the BMW call an event without you. Your leadership and the ability in particular to express numbers to us has been instrumental now. The capital market sees BMW, and our understanding of the business.
And many of us have been very fortunate to have the opportunity to work closely with you over many years, in many different settings and countries. And we've always been not just surprised by your dedication, but what made it really special, and this is something that Max also already said with the full year results is that on a personal level, your sense of humor and your kindness have made our interactions that we enjoy and I'm very grateful for the personal impression that we built over the years.
And now, to let everyone else in on a little secret, you always say, you have a very strong cost focus, but clearly, you missed out of one very big opportunity. You've been publicly placed just by Max again for our very strategic thinking of being a CFO, but you've also been very passionate for marketing.
I remember, you're literally putting shares and tables and causing nightmares for all us when you start to rearrange the furniture for the fire sessions that we had. So the background actually looked a little bit nicer. And I'd say you could have probably easily taken over that responsibility on the Board level as well. And save a position for brand and sales, obviously, just a bit of process.
But once again, that is proof for your professionalism and passion. And I can tell you there was never as much demand for a farewell dinner with my fellow analyst as high as it is for you. We clearly all hope to stay attached. We look forward to seeing the next step. So thank you very much, Nicolas, for being a great discussion partner, over so many years from all of us.
Nicolas Peter
Thanks. Jim, big, big thank you for your really very, very kind words and your colleagues, well, as you know, I really appreciate the dialogue with all of you, independent by the way, how our results were.
Independent because, for us to develop our strategy and as you know, with the BMW Group and we are in that when we spend a lot of time to think about our strategy to develop our long-term plan. And outside view is extremely relevant.
Outside view is extremely relevant. And this is where you definitely support the development of our strategy, because in our discussions, and I know you not only talk to us, you talk to all the other OEMs, you talk to the suppliers, you talk to the industry, and this is giving us a much broader perspective in which direction, industry, suppliers and other OEMs are heading. And this is why I always personally also appreciated the dialogue with all of you.
I hope to see the one or the other out of this group at other occasions. So stay healthy. Follow the BMW Group with a positive attitude. And I'm very convinced that the group is extremely well on track. Thanks a lot.
Max Schöberl
Thanks a lot. Nicolas. It was a pleasure. And now we clap all your hands together, all the best. Thank you very much for your attention. And we see each other. Bye.
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Bayerische Motoren Werke Aktiengesellschaft (BMWYY) Q1 2023 Earnings Call Transcript