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Bayerische Motoren Werke AG (OTC:BAMXF)
Q1 2019 Earnings Call
May. 7, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Maximilian Schoberl -- Executive Vice President of Corporate & Governmental Affairs

So, ladies and gentleman, we are on time. Good afternoon. I would like to welcome you all to our telephone conference for the first quarter results.

With us today is Harald Kruger, Chairman of the Board of Management; and Nicolas Peter, our CFO. First, Mr. Kruger will give you an update on the business performance during the first quarter of 2019. Mr. Peter will then take you through our financial results. Afterwards, we will have time for a Q&A session.

Harald, please go ahead.

Harald Kruger -- Chairman of Management Board

Good afternoon, ladies and gentlemen. At the BMW Group, we are always moving forward with out sights set on the future. Our actions are geared toward the long term. We continue to resolutely chart our own course. Two areas will be crucial for us, strengthening our core business and moving forward with important future projects. I would like to say a few words about each.

First, on our core business. We are currently focusing on three key areas, our model and technology Offensive 2.0, targeted expansion of our market presence and our internal program Performance NEXT. In 2019, we aim to lead the global premium segment once again, with our three brands BMW, MINI and Rolls-Royce. We also want to increase our market share, and we certainly did that in the first quarter. We delivered more than 605,000 vehicles to customers. This is our ninth consecutive best start in two years. We are also doing well compared with our competitors.

In March, we beat the trend recording sales growth in several key markets, including the US and China. We also posted the most dynamic first quarter growth of any premium car company in China, our largest single market. In Europe, we maintain the same level as last year, and in the US, we were number one in the premium segment in the first quarter. Our core BMW brand Rolls-Royce and BMW Motorrad all reported their best ever first quarter. The BMW X models and new 8 series as well as the Rolls-Royce Cullinan proved especially popular.

Product momentum remains extremely strong. At BMW alone, customers can look forward to 21 new or updated models this year. There will also be new models from MINI and BMW Motorrad. Fresh on the market are the BMW 3 series, the set 4 and X5, the X7 and the 8-Series Coupe. The new 7 Series with its new design language and highly innovative entertainment and driver assistance system is already a hit with customers. It'll be followed later this year by the new 1 Series in the compact class.

In the luxury segment, we are gradually realizing our strategic goal of significantly increasing sales and revenues. The 8 Series convertible and Gran Coupe are ready for market launch. Many customers are eagerly ordering the new X7. The incoming orders both for markets overseas as well as Europe are exceeding all of our expectations. As part of our model offensive, we will continue to introduce sustainable drive technologies across the fleet as said out in our Strategy Number ONE > NEXT.

In the first quarter alone, we sold more than 27,000 electrified vehicles and by the end of this year, we will have 0.5 million electrified vehicles on the roads. In Europe, our percentage of electrified vehicles delivered is 3 times the industry average. In 2018, we were the market leader for electrification in both Europe and Germany, not just in the premium segment but in the market as a whole. We plan to maintain a leading position going forward both in Europe and worldwide. To do so, we will continue to introduce more electrified models across all brands and model series. This also includes Rolls Royce and BMW M. Plug-in hybrid technology will be a focus for us in 2019. The 3 Series, X3, X5, and the 7 Series all come with the fourth generation of our electric drivetrain technology. This gives these vehicles an increased electric range of up to 80 kilometers. Our fully electric BMW i3 has been on the market for about six years now. During this time, its range has doubled. This is one of the reason it continues to post such strong growth. MINI fans will also be soon able to go fully electric. Production will begin this year for the MINI electric. Preproduction test trials have been very well received by the media. As you know, the MINI electric will be built in Oxford. This also underlines our continued commitment to the UK.

On the BMW side, we are expanding our fully electric range with the addition of the iX3 from 2020 and the BMW i4 and iNEXT from 2021. By 2025, we will have at least 25 electrified vehicles in our line-up; 12 of them pure electric. As you can see, we are clearly not betting on any single technology. From my perspective, that would be the wrong approach. We are relying on a broad portfolio of technologies with flexible platforms for combustion engines, plug-in hybrids, and electric drivetrains. We are also conducting further research into fuel cells with our partner Toyota. Over the long term drivetrains with hydrogen fuel cells will offer greater local emission-free range with a very short refueling time. This will complement our battery electric vehicles.

Every customer has different needs in every market and different business conditions. We can only achieve the flexibility needed for fully sustainable mobility around the world by staying open to different technologies. We are fully committed to this approach. We expect various drive forms to continue to exist alongside one another. Our customers appreciate the wide range of models and drivetrains we offer.This year, we will again be targeting new all-time highs with slight growth on the automotive side and solid growth at BMW Motorrad. More attractive models will be released over the next few months in all segments. We therefore expect to see stronger sales in the second half of the year.

The BMW Group is global in every respect. In 2019, we will be targeting growth in all major regions. To achieve this, we are strengthening our presence in the markets and expanding capacity where needed. Our goal remains the same, balanced global production between Europe, Asia and the Americas.

In the Americas region, we will open our Mexico plant in June. This production facility will set new standards for productivity and sustainability. Most of the plant's power will come from a solar system on the ground and is 100% CO2-free.The vehicle painting process does not produce any wastewater. Waters used is processed and recycled. We are creating more than 1,000 skilled jobs in San Luis Potosi. In 2015, we launched our successful dual training model at the plant. Since then, we have trained nearly 250 young Mexicans for their future careers.

Ladies and gentlemen, our core business is also about looking inwards. We are constantly optimizing our processes and structures so that we can align ourselves for the diverse tasks of the future. In 2017, we launched our companywide Performance NEXT program. We are working hard to become more efficient, more profitable and much faster. Nothing is off limits. We are also leaving no stone unturned. Our goal is to make structural efficiency improvements throughout the entire value chain.

We are already implementing many of our decisions and now stepping up our efforts in all areas. By the end of 2022, these improvements will save us more than EUR12 billion. That may give you a few concrete examples. We are leveraging significant synergies and efficiency in indirect purchasing and material and production costs. We're reducing complexity in our vehicles wherever it makes sense to do so. We are shortening the development process for new models by up to a third by using digital simulations on a much wider scale. By 2024, as many as 2,500 costly prototype vehicles will no longer be needed.

On the product side, up to 50% of our accounted drivetrain variance will be discontinued as we transition to flexible vehicle architectures from 2021 on. We will focus on what customers want the most. There will be no successor to the BMW 3 Series Gran Turismo, and at our Annual Accounts press conference, we announced that the size of our workforce will remain about the same as last year. We met this goal in the first quarter. All these measures will have a positive impact extending well into the next decade.

That brings me to my second part, Future Projects. We are a driving force for sustainable connected and autonomous mobility. Step-by-step, we are gradually creating the necessary conditions for highly automated and fully autonomous driving. In March, we opened our data center with the high-performance D3Q platform. With an initial storage of around about 240 petabytes, it eclipses anything we have had in this area in the past.

On the product side, the iNEXT is scheduled for launch in 2021. For the first time, we are combining electric and Level 3 highly automated driving with high-end connectivity and a digitalized interior, all in one vehicle. What this means for customers is a completely new experience of mobility and everyday driving qualities with an electric range of more than 600 kilometers. In 2021, we will put a pilot fleet of 500 BMW iNEXT vehicles will Level 4 and Level 5 functionality on the roads. The necessary technical requirements and changes to international regulations and liability laws are currently in progress. One thing will not change. Customer safety remains our absolute priority.

We do not use any technology in serious production vehicles until we have completely mastered it. Together with Daimler we want to develop next level technology for autonomous driving. This should be available in our models from 2024 on. We are also already working with Daimler to expand our mobility services because future mobility will not be possible without corresponding services. Customers expect to see a 360-degree approach to all their individual needs. This is the starting point for our YOUR NOW family. On mobility power house, YOUR NOW, we provide customer solutions for all their mobility needs from individually owned cars, to ride-hailing, to car sharing and a wide range of other services.

Our joint ventures can (ph) be made up of five vertical business entities with a solid base of 60 million customers. Ladies and gentlemen, 2019 will be another challenging year. Our environment remains volatile and dominated by uncertainty. Nevertheless, we will continue our positive business development as we systematically prepare for the technological challenges of the future. We clearly see ourselves as one of the driving forces. With our Strategy NUMBER ONE > NEXT, we will continue to set the course for long-term profitable growth as a technology leader in our industry and beyond. Thank you.

Operator -- Chairman of Management Board

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

Nicolas Peter -- Chief Financial Officer

Thanks, Max. Ladies and gentlemen, good afternoon. On the operational side, the BMW Group started the year as expected in a business environment that remains challenging and volatile. Our first quarter financials were heavily impacted by the provision of around EUR1.4 billion we made in connection with antitrust allegations by the European Commission. The Statement of Objections leads us to believe that it is probable that the Commission will issue a fine. This led us to recognize a provision in the first quarter in line with the International Financial Reporting Standards.

Ladies and gentlemen, we are firmly convinced and would like to underline that the allegations made by the EU Commission are unwarranted. We regard these proceedings as an attempt to equate the permissible coordination of industry positions regarding the regulatory framework with unlawful cartel agreements. The BMW Group will contest the EU Commission's allegations with all the legal means at its disposal if necessary. The EU Commission also clearly stated that the ongoing investigation is not related to the use of illegal defeat devices.

Regarding the diesel discussions, which are completely separate, I would like to emphasize again, a deliberate and systematic illegal manipulation of exhaust emissions is, for us, not acceptable. The provision in connection with the antitrust allegations alone reduced the EBIT margin in the Automotive segment for the period under review by around 7 percentage points to minus 1.6%. As previously announced, we have adjusted our guidance for the year to reflect this effect.

Before we look at the quarter in more detail, there is one new development I would like to draw your attention to. Changes in the legal framework allow for a condensed quarterly reporting for the first and third quarter of the financial year. Starting with Q1 of 2019, we will utilize this option. As a result, our future reporting for those periods will be more concise, without significantly reducing the information content.

But now, let's look at the details for the first three months. We continue implementing our strategy and investing in the future. Our young product portfolio, which we strengthened again last year is doing very well both in comparative tests and with Allison. In the first quarter, contrary to the market trend, we gained segment share, despite several model changeovers, the key regions developed as follows. The sustained market turbulence in Europe resulting from the transition to WLTP as well as uncertainty over Brexit and how the economy will further develop continue to have a dampening effect. We are seeing robust development in the United States, thanks in part to our new SAV models. We expect the new X5 and the new X7 which have been well received by dealers and customers to provide further impetus over the course of the year.

China continues to develop positively for us. The premium segment and the BMW Group in particular outperformed the weaker Chinese car market in the first quarter. The locally built X3 is now fully available and proving especially popular.

Ladies and gentlemen, let's take a look at our financial figures for the Group. Group revenues for the first quarter totaled EUR22.46 billion, we were therefore on path with the previous year. The financial result decreased to EUR173 million. This was partly due to changes in interest rates that had a negative effect on market valuation of related derivatives. Pre-tax earnings amounted to EUR762 million. The main factor here was a provision I already mentioned .

The EBT margin for the first quarter stood at 3.4%. Without the provision, the figure was 9.6% and therefore remains at a high level. As previously announced, due to model changeovers for some of our major model series, we expect the first half year to be slightly weaker overall.

Ladies and gentlemen, long-term profitable business development remains our top priority. The upfront investments we are making to date to further develop electromobility and autonomous driving are the foundation for our future business success. By the end of the year, for example, we will have 10 plug-in hybrid models on the roads as planned. First quarter research and development expenditure was around EUR100 million higher than the same period of last year. The R&D ratio was at 6% and is likely to stay between 6% and 6.5% for the full year. In a volatile environment, flexibility is more important than ever. This principle is reflected in our investment strategy. All our larger plants will soon be able to build all types of vehicles within the same production structure, both combustion engine, plug-in hybrid, to battery electrical vehicles. Electrified models are already integrated into production at nearly all our locations. In the first quarter, we invested a total of almost EUR1 billion that is over a third more than in the same period of last year, mainly for modernization and increased flexibility in our plant structures and for construction of our new facility in Mexico. Upfront investments were also needed for production ramp-up and market launch of the 3 Series and the new 1 Series. The CapEx ratio reached 4.4% percent. We expect the ratio for the full year to be only slightly higher than in 2018 despite the introduction of IFRS 16.

Let's move on to the individual segments. in the Automotive segment, deliveries to customers remained stable in a declining overall market as expected. Due to the model changeovers I mentioned and the highly competitive environment, particularly in Europe, segment revenues remained on par with last year at EUR19.21 billion. The segment's operating earnings of minus EUR310 million were impacted by the provision of nearly EUR1.4 billion, which I have already mentioned. The EBIT margin was minus 1.6%. Without the provision, the figure was 5.6% as planned. First quarter sales were largely driven by strong growth in China, but since our business in China is only partly included in our operating income, this positive effect is not fully reflected in the EBIT margin. As previously announced, higher manufacturing costs mainly for fulfillment of regulatory requirements impacted earnings.

The pricing situation remains challenging especially in Europe. We faced headwinds from currency and commodity prices as expected. In addition to other factors, the collective agreement pay increase in April 2018 also contributed to higher personnel costs. The financial result decreased to EUR283 million mainly due to positive revaluation effects in the previous year's quarter.

I would like to say a few words about this segment's free cash flow. On the one hand, as it is usual at this time of the year, we have built up inventory, in particular for upcoming model launches. On the other hand, both the lower net profit and higher capital expenditure are reflected here. As a result, free cash flow for the first quarter totaled minus EUR559 million. Based on current assessments, we are aiming for a similar free cash flow for 2019 as last year. A possible future payment related to the antitrust allegations has not been factored into this assessment.

Ladies and gentlemen, let's move on to the Financial Services segment, which is off to a good start this year. The total portfolio grew to nearly 5.74 million contracts. In the year to the end of March, almost 470,000 new contracts were concluded with retail customers, an increase of 3.9% over the previous year. Segment earnings increased significantly to EUR627 million. In addition to portfolio growth, the Financial Services segment also benefited from a generally stable risk situation which was reflected in lower risk provisioning expenses for residual values in a number of markets.

Let's look next at the Motorcycles segment. After a challenging 2018, BMW Motorrad made a good start to 2019. Deliveries to customers increased to around 38,600 motorcycles. This positive business development was also reflected in the operating result which at EUR87 million climbed 11.5% from the previous year. EBIT margin of 15.2% was also higher than for the same quarter of last year. With attractive new models, we are looking forward to dynamic growth for BMW Motorrad over the next few months.

Ladies and gentlemen, the BMW Group is in a very robust position in these challenging times. Our financial strength enabled us to continue investing in the future even in a difficult external business environment. As long as conditions do not deteriorate significantly, we expect that the full financial year 2019 will develop in line with our guidance. In the Automotive segment, we expect a slight increase in deliveries, barring the effect of the provision for the antitrust allegations, the target range for our EBIT margin of between 6% and 8% remains unchanged. We are on course to reach this goal. Since the provision however has a negative impact of 1.5 percentage points on the EBIT margin, we are expecting a margin in the Automotive segment for 2019 between 4.5% and 6.5%. Our clear strategic target in a stable business environment remains in the range of 8% to 10%. In the Motorcycles segment, we are planning for a solid increase in deliveries. The EBIT margin should remain within our target range of 8% to 10%. In the Financial Services segment, we expect return on equity to be on par with last year and above our target figure of 14%.

Group earnings before tax will be significantly lower than the previous year, also as a result of the announced decrease in the financial result. Our guidance assumes that political and economic conditions will not change significantly. We expect the second half year to benefit from the strong product momentum generated by the many new and updated models currently ramping up and ready for launch. However, conditions will remain volatile for one thing that is an lingering uncertainty over the future course of trade policy and the UK's withdrawal from the European Union. We will also continue to monitor economic developments worldwide very closely.

Weaker development in Southern Europe, in particular, could affect our business in the coming months. Thanks to our high degree of flexibility, we are capable of responding quickly to new developments and can steer production as needed. We will continue to work on all factors we can actively influence. This includes reducing complexity, improving efficiency, and continuing to optimize processes and structures. Through Performance NEXT, we are using key levers to systematically realign the Company.

Ladies and gentlemen, the BMW Group has a solid foundation to build on. Sustainable profitable growth remains our goal. Innovation leadership and profitability are key to maintaining our position at the forefront of our industry. Every single BMW employee is committed to this objective. This commitment is what distinguished us as a Company. I firmly believe that with our clear strategy and it's systematic implementation by all of our associates, we can continue to lead the BMW Group into a successful future. Thank you.

Maximilian Schoberl -- Executive Vice President of Corporate & Governmental Affairs

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

Questions and Answers:

Operator

Thank you. (Operator instructions) Our first question comes from the line of Arndt Ellinghorst of Evercore. Please go ahead. Your line is open.

Arndt Ellinghorst -- Evercore ISI -- Analyst

Yes, Thanks and good afternoon to Munich, it's Arndt Ellinghorst from Evercore. My first question is for Nicolas, please. Looking at your cash flow, you basically stick to your EUR2.7 billion free cash flow guide for the year. And how do you -- what do you embed in terms of working capital effect in that working capital where you burned roughly EUR2.2 billion of working capital in the first quarter, which is quite seasonal, we understand that. But how much working capital relief is included in the EUR2.7 billion for the year?

And also Nicolas, please, in terms of net efficiency gains for this year, how much are you targeting for the full year and how much have you realized in the first quarter?

And then the second question is for Harald, please. Volkswagen last year moved its battery electric target to a huge number of about 500,000 battery electric vehicles in 2020. BMW i sold about 40,000 units last year. How do you think the competitive landscape will change, if Volkswagen is really launching these huge volumes in battery electric vehicles, and compared to that I think what you can physically sell will be just so much smaller in the coming year? Thank you.

Maximilian Schoberl -- Executive Vice President of Corporate & Governmental Affairs

Thank you very much. Arndt, we start with Nicolas and then Harald. Nicolas?

Nicolas Peter -- Chief Financial Officer

So, Arndt, maybe starting with your question related to free cash flow. You're absolutely right. As the free cash flow in Q1 was mainly impacted by the ramp-up of 3 Series, X5 and X7. However, working capital impact was more positive or better than in Q1 2018. For the second quarter, we already expect a much more balanced production and wholesale position with BMW and MINI, and are therefore confident that we will see a quarter-by-quarter free cash flow in the direction of last year's level.

Second question related to efficiency gains, maybe worthwhile to mention, which are the key areas where we target for efficiency gains. Harald already mentioned, indirect material cost, you have to bear in mind that we have a base of more than EUR20 billion per year on -- in the area of indirect material costs. So if we target single-digit efficiency gain, so this is -- although the course of this will be over the course of the next two, three years a significant number. Second element, which is very relevant is, as we've already talked a couple of times about complexity reduction. This is something which will kick in with every additional new models on top of selective cooperation agreements are extremely important in the areas to become more efficient. I think we can mention one or two of those cooperations. Number one what we do in the area of autonomous driving with Intel and Mobileye and FCA are what we will do, what we are aiming for in the future for the next generation with Daimler, will not only be the smart way of gaining speed in implementing the technology but also will be more efficient.

And final comment to this area is in particular that in the area of our supplier management, we are in very constructive discussions with all our suppliers and they will contribute in a smart way to our efficiency gains. For 2019, we expect something in the mid 3-digit area coming from all those different elements.

Arndt Ellinghorst -- Evercore ISI -- Analyst

That's clear. Thank you.

Harald Kruger -- Chairman of Management Board

Okay. On concerning your question of the VW target for battery electric vehicles and how does the growth look like in the next years maybe for BMW? First of all, there is a difference. At BMW, we believe in plug-in hybrids and pure electric vehicles. To underline this one, for example, 30% of our 5 Series sales in California are plug-in hybrids. So we are selling already a majority in the United States and even in other parts. In Europe, we were selling also a lot of plug-in hybrids. So our strategy is clearly built on plug-in hybrids, on pure battery electric vehicles as well as combustion engines as well as maybe in the future fuel cells. The growth we have seen with the plug-in hybrids is significant and we have a great offer on the market. Secondly, the growth will be very heavily depending on the market offer and the infrastructure. If you look by today's figures, Arndt, with three out of four vehicles sold in Norway from BMW are electrified vehicles. If I look into Romania and Europe, it's less than 1%. The infrastructure and subsidies are driving definitely also the race of the growth of the electrified vehicles. We clearly believe and I personally believe in electromobility, that's why we're pushing the i3. The i3 had a 16% volume growth in the first quarter, it is the best quarter ever in the beginning of the year. Secondly, we will launch the BMW MINI electric this year. So we will offer a small car in an attractive segment with a very attractive combination as a pure electric vehicle by the end of this year.

In 2020, we have the iX3 and then in 2021 we have the iNEXT and i4. So with those products we will see a steep ramp-up of volume in purely electrified vehicles also at the BMW Group. And I can tell you we have more in the rare compartment and more and the mindset already decided but it's too early to communicate. So, but if you look at it, the infrastructure and the subsidies are still the main driver for that one, customers are worried if there is no infrastructure not to buy an electric vehicle. So we need a push on the infrastructure and we need to see that mobility around the world is different. If you're living in the countryside in the United States you will not have a huge infrastructure network for-- intercharging, so you need a plug-in hybrid, maybe that's the best opportunity between both worlds.

So we believe in both three, four pillars of our strategy, the ramp-up has shown and we are targeting steep and ramp-up goes in the future, but believing only on one technology with high volume is a high risk option.

Arndt Ellinghorst -- Evercore ISI -- Analyst

Thank you.

Maximilian Schoberl -- Executive Vice President of Corporate & Governmental Affairs

Thank you, Arndt. All the best. Next question please.

Operator

Thank you. That comes from the line of Tim Rokossa of Deutsche Bank. Please go ahead. Your line is open.

Tim Rokossa -- Deutsche Bank -- Analyst

Yes. Good afternoon everyone. Thanks for taking my questions. I'd like to follow up on the one from Arndt about the net efficiency savings. The auto industry is always great at announcing gross savings and then in the end there's very little sticking to the bottom line typically. This EUR12 billion that you have announced, are you willing to commit to some sort of net savings number out of that? For example, you are basically saying you want to come back to 8% to 10% margin, that would effectively mean we're talking about $1 billion to $2 billion net savings. Is that the way to think about this? And then just secondly, Nicolas, you just said that H2 will be slightly better than H1. Q1 was actually probably strongly worse than last year. Is it therefore fair to assume that you already see Q2 improving somewhat or is this a very, very H2 loaded story? Thank you.

Maximilian Schoberl -- Executive Vice President of Corporate & Governmental Affairs

Okay. Nicolas, please --

Nicolas Peter -- Chief Financial Officer

All right, Tim, maybe to start with your second question regarding Q2. We expect already an improvement in Q2. Why? Because we have availability of X5 kicking in, of the X7, 8 Series will be launched with some addition -- with an additional model in Q2. And of course, the 3 Series, so from the product side, good strong momentum. We continue with our -- the implementation of our efficiency measures. So we are confident that quarter-by-quarter, we will see an improvement and we stick to the corridor of 6% to 8% EBIT margin ahead of -- excluding the cartel provision, so that's the first topic, Second topic, you're absolutely right. The $12 billion is a gross number and to be honest it only makes sense to look at a gross number because we have so many influences and impacts which year by year change in our P&L that it's key to look at some specific areas, and I have mentioned some of those specific areas and to follow with clear KPIs, this is the implementation of improvement measures in those areas, and this is exactly what we are doing be it on the in the area of HK, be it in the area of material costs, be it in the area of personnel costs and and so on.

Maximilian Schoberl -- Executive Vice President of Corporate & Governmental Affairs

Thank you very much. Tim, next question please.

Operator

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

Dorothee Cresswell -- Barclays -- Analyst

Yeah. Hi there, it's Dorothee from Barclays. I have two questions if I may. The first one is around pricing and you mentioned a very challenging environment there and particularly in Europe. And I'm just wondering whether that's still related to some of your competitors, WLTP struggles or perhaps you could give us a little more color and tell us how big that burden was in Q1 for you? And then perhaps give us some guidance on how you expect that to play out going forward given that I'm guessing these WLTP-related pressures should now begin to ease off with those competitive brands. And then my second question is regarding Brexit. I wondered how much you think that cost you year to date and what additional charges you'd expect for the rest of the year under both the soft and hard Brexit scenario? I'm going into the EU obviously planned for the UK's exit at the end of March and things have shifted there now. Thank you very much.

Maximilian Schoberl -- Executive Vice President of Corporate & Governmental Affairs

Thank you very much Dorothee, concerning your question about Brexit, Harald will start. Harald, please

Harald Kruger -- Chairman of Management Board

Dorothee, concerning I mean, first of all, the UK is an important market to us, for us the fourth biggest market in the world and is still the biggest market for the MINI brand in the world. And we are launching the MINI electric in the UK at Plant Oxford quite quickly in a couple of months' time. So first of all, I hope that there will be a compromise outcoming out of the discussions from the Prime Minister together with the Coalition leader from the opposition and Mr. Corbyn that there might be an outcome on maybe compromise on customs union or things like that one.

What I would highly appreciate if there is a pragmatic solution for the next years. Secondly, if this is not going to happen, we are definitely prepared also for a hard Brexit so we can work with scenarios. We also extended our logistics processes. We worked on the value change. We have provisions for hard Brexit as well included in the budget. So we are continuing planning for the worse, but definitely I highly appreciate if there is a pragmatic solution. But in these times, there is one main message which is flexibility and volatility, and volatility requires flexibility, and we are very flexible on the production side, on the supply chain side. So if there's going -- something going to happen in the UK.

Maximilian Schoberl -- Executive Vice President of Corporate & Governmental Affairs

Thank you very much, Harald. Concerning your question about pricing, challenging environment in Europe, Nicolas?

Nicolas Peter -- Chief Financial Officer

Dorothee, maybe a couple of more general comments and then we should go region by -- region by region. First of all, if we look at the macro economic conditions, definitely they do not support the development in most of the markets and in particular in some European markets and I will come to it. Nevertheless, I believe the fact that we have a strong product momentum and probably the best model line-up we've ever had, this will definitely help us and create opportunities. I've already mentioned some of the models in particular, the SAV models, X3 fully available now in China, selling very well in all markets around the world, X5 very successful launch and strong momentum as we got incoming orders for the X7. So from this perspective, positive momentum. If we look market or region by region, we believe despite the fact that the US is a very competitive and transparent market environment, in particular, the SAV portfolio, will help us to further improve our contribution. In China -- in China, we have been able to develop against the market trend, we've gained segment our share, total market slightly down. We are, after three months or even after four months, double-digit up. So this is underlying our positive development. And in Europe, clearly, profitability is more important than the last unit. And this is something as a general guidance for our business because we believe that the key is in order to be in a position to invest in future technologies, we have to further improve profitability.

Maximilian Schoberl -- Executive Vice President of Corporate & Governmental Affairs

Thank you very much, Nicolas. Thank you very much, Dorothee. Next question please.

Operator

Thank you. Our next question comes from the line of Daniel Schwartz of Suisse. Please go ahead. Your line is open.

Daniel Schwartz -- Credit Suisse -- Analyst

Yes, hello. Thank you very much. My first question is regarding the dividend. How is the negative one-off going to impact the payout range? Is 40% your absolute upper limit or could the payout range be above the 40%?

And then secondly, regarding the free cash flow guidance, as I understand, IFRS 16 had a positive impact of EUR100 million in Q1. Should we assume about EUR400 million for the full year? And is the guidance -- is that compared of that free cash flow -- is that compared to the EUR2.7 billion or is that relative to a higher restated basis after IFRS 16?

And my last question would be on Financial Services. You say in the outlook for the Group that you see growing economic uncertainty and WLTP is impacting pricing in some markets, at the same time, you're prudently provisioning for residual value risk in Financial Services. And I wonder how conservative is your accounting for this used car price risk in Financial Services?

Maximilian Schoberl -- Executive Vice President of Corporate & Governmental Affairs

Yes. Thank you very much, Daniel. These three will be answered by Nicolas.

Nicolas Peter -- Chief Financial Officer

And maybe Daniel, to start with the dividend, it's a little bit early, we are mid of May, and nevertheless, there is no reason to move away from our 30% to 40% range, and we focus on further improving our operational business in -- on implementing our strategy, there's no reason at this point in time to discussing dividend payout ratio.

You're absolutely right regarding free cash flow. I think you can assume something between positive EUR300 million to EUR400 million. And Financial Services, we have a very robust and I would even call it conservative way of accounting. So, we are confident that the way we steer, in particular, our B provisions is in line with market development. I think what has been extremely helpful is that we have in particular seen also in Europe, which is the values for diesel, definitely, definitely stabilizing.

Daniel Schwartz -- Credit Suisse -- Analyst

If I may follow up the guidance for free cash flow, is that EUR2.7 billion or is that from a higher range basically?

Nicolas Peter -- Chief Financial Officer

Yeah, it's EUR2.7 billion. So in line with the previous year, so in this area, the guidance is correct.

Maximilian Schoberl -- Executive Vice President of Corporate & Governmental Affairs

So, thank you very much, Daniel. Next question please.

Operator

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

Patrick Hummel -- UBS -- Analyst

Thanks. Good afternoon. Patrick from UBS. Two questions remaining from me. I'd like to come back again to working capital and more specifically to inventory. Would you say that, the higher inventory right now is all related to the product cadence or is there some need for adjustment of production for some models in the quarters ahead to maybe manage inventory in a more cautious manner? As you just pointed out you are not after selling the one additional unit if it undermines your profitability, so just interested in your thoughts. And are you running actually right now extra inventory in the US for the imported vehicles just in case something happens on the tariffs side?

And my second question to Harald, you have now merged the mobility business with Daimler, you have signed the collaboration agreement for Level 4, Level 5 autonomous driving. It seemed out of media reports that the talks or at least the speculation about talks for sharing platforms did not yield any results. So, can we assume that the collaboration with Daimler will be further intensified? Are there additional projects on the agenda for the quarters ahead? Or is that basically it for the time being? Thank you.

Maximilian Schoberl -- Executive Vice President of Corporate & Governmental Affairs

Thank you very much, Patrick. Your questions will be answered by Harald and Nicolas together. So we start with Nicolas or Harald -- with the CEO. We'll start with the CEO, yes.

Harald Kruger -- Chairman of Management Board

Okay. Maybe we start with the working capital stuff first, then small outlook. And you were discussing also the potential issues with trade conflicts within the US and the US inventories.

So we haven't increased US inventories, we're managing working capital very carefully and straight on forward in the US, for example, we don't have big dealer stocks so far. You will see more products coming like the new X7 to the United States. We're managing it carefully and we are strategically in a better position than the competition, for example, the increase in the first quarter 2019 our production in Spartanburg on X3 for the United States for the US market by 20%.

So those three locations now, X3 in China, X3 in South Africa and then Spartanburg ,South Carolina. We can allocate more US production in plant Spartanburg for the US market.

And that is going to continue with X7 in the next weeks and X5.

So our strategic advantage of having a huge plant in the South Carolina gives us an opportunity to be less sensitive compared to other companies if there trade conflicts will appear because we can allocate more production in the United States for the US market as we did.

And overall working capital, we are managing carefully a worldwide inventory and maybe Nicolas --

Nicolas Peter -- Chief Financial Officer

Yeah and maybe more related to, Patrick, what you asked for Q -- in particular Q2. So we have -- as I said already, we have a very balanced position between production and wholesale in Q2 from today's perspective and we are already beginning of -- beginning of May, no need to adjust production, in Q2, we have the ramp-up of the important volume models. And this should definitely help to further as I said improve quarter by quarter free cash flow over 2019 and to end up in the area of last year.

Harald Kruger -- Chairman of Management Board

And on the collaboration with Daimler, we have two currently -- two big projects going on, the mobility service and the ADAS and that's what we clearly focus on. These are big projects, we believe in the collaboration and the relationship is good and we need to get these both projects done and they are getting into a more intensive phase now on the ADAS for Generation 2, which is a huge project, important for both companies and mobility services and that's the clear focus of both companies to work on these two projects and nothing more.

Patrick Hummel -- UBS -- Analyst

Okay. Thank you.

Maximilian Schoberl -- Executive Vice President of Corporate & Governmental Affairs

Okay. Thank you very much, Patrick. Next question, please.

Operator

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

Horst Schneider -- HSBC -- Analyst

Yeah. Thanks for taking those of my questions. First of all, again, on this cartel fine provision, I have missed the statement, when do you expect the payout to happen. Is that still this year or just then -- also your objection is rejected and it's fine or that you have to pay something? And you mentioned in one of your comments in the Q&A that you have reserved some provision also regarding Brexit in your budget. I would be interested to know how high this budget is basically that you reserved?

And last but not least, regarding the other cost changes, when you talk about all these efficiency improvements that you are doing now and figuring out, are we going to see a net impact of that already in H2 or is it more an impact you sort of expect as of 2020? Because it seems to me at the moment, I mean your guide for high 3 single digits EBIT impact here from other cost changes. You had roughly EUR200 million probably in Q1, said it's more evenly split as other costs change development over the next three quarters as well. So that's the main impact is going to happen just 2020. Just want to know if that conclusion is right? Thank you.

Okay. Thank you very much, Horst. This will be answered by Nicolas.

Nicolas Peter -- Chief Financial Officer

Horst, as I already said in my speech, too early to say at what point in time we might have an payout related to cartel fine. We are at the beginning of the process and this is definitely a process, which will take some time. But we cannot comment on any specific date. Provisions for Brexit in the low to mid 3-digit million area. How likely is it today that we need on those provisions, difficult to judge, will definitely depend on the further development of Brexit. And then --

Horst Schneider -- HSBC -- Analyst

Sorry, is that included in the other cost change guidance, this Brexit budget, or is that a separate part?

Nicolas Peter -- Chief Financial Officer

Yes, yes, Horst, yes.

Horst Schneider -- HSBC -- Analyst

Yeah, means what? Sorry.

Nicolas Peter -- Chief Financial Officer

It's included.

Horst Schneider -- HSBC -- Analyst

It's included in other cost changes. All right. Okay. Thank you.

Nicolas Peter -- Chief Financial Officer

Yes. Yeah. And third topic, were the other cost changes, we expect on one hand side as I already mentioned efficiencies in the mid 3-digit million area. We have the Brexit issue. We see an increase of personnel costs related to the topics I've referred to and definitely R&D will also be an headwind in particular due to the effect that we have lower capitalization ratio.

Horst Schneider -- HSBC -- Analyst

Okay. Thank you.

Maximilian Schoberl -- Executive Vice President of Corporate & Governmental Affairs

Okay, thank you very much. Thank you very much, Horst. I think it is four minutes to 3, we have time for one more question, please.

Operator

Thank you. And then our final question comes from the line of Stephen Reitman of Societe Generale. Please go ahead. Your line is open.

Stephen Reitman -- Societe Generale -- Analyst

Yes, good afternoon. I have a couple of questions please. On China, it looks like the JV result was broadly similar to last year or there was a very substantial increase in production, I think about 29% in the quarter year-on-year. So if you could comment on what's been happening there? And also, are you making any -- taking any steps as well regarding uncertainty of the US-China trade relationship as well? And second, electrification, maybe you don't talk about iX3 yet, but on the MINI, can you give us some idea on the electrified MINI. What kind of pricing you could be looking at in terms of compared to the current models? I notice on your hybrids -- on your plug-in hybrids you've been offering them at broadly similar prices to the petrol equivalent which I think has obviously helped with market success so far. Thank you.

Maximilian Schoberl -- Executive Vice President of Corporate & Governmental Affairs

Thank you very much, Stephen, we start with Harald.

Harald Kruger -- Chairman of Management Board

The question was on the MINI electric pricing. We haven't fixed it so far and it will be always a balance between an attractive pricing for the customer and our profitability targets. But it's too early to fix it as it's not fixed so far, it would come by the end of the year, but I'm sure this product will be attractive as it is available then on the market. And MINI in the past was always successful in finding a good balance or attractive prices for customers and the Company.

Nicolas Peter -- Chief Financial Officer

And Stephen, the two other questions, maybe starting with the JV result, absolutely right, what you've mentioned on one hand side very positive development in China in the first even four months of the year, we are optimistic for the remaining part of the year to see a growth between 5% and 10% for the full year in China. Financial result was a little bit impacted in Q1 in order to prepare the plant for the launch of the 3 Series which is an very important moment for the Chinese market. Second topic, US-China trade relationship, when we've -- you've seen last year in the second half of 2018, that the increase in tariffs impacted us in the lower 3-digit million area for the second half of the year and if something similar would be implemented again, most likely the result would be pretty much the same. We have in the meantime localized the X3 on one hand, but on the other hand, the first feedback we are getting from the Chinese market, the X7 is proving to be very attractive model for China as well. So in this area, we would be impacted, so lower 3-digit million area impact. Having said this, this would not impact our guidance for the full year.

Stephen Reitman -- Societe Generale -- Analyst

Thank you.

Maximilian Schoberl -- Executive Vice President of Corporate & Governmental Affairs

Okay, Stephen thank you very much for your final questions. Ladies and gentlemen, thank you for joining us today. We wish you a pleasant day and look forward to seeing you next time. Thank you very much, and bye-bye.

Nicolas Peter -- Chief Financial Officer

Thanks.

Harald Kruger -- Chairman of Management Board

Thanks. Bye-bye.

Duration: 60 minutes

Call participants:

Maximilian Schoberl -- Executive Vice President of Corporate & Governmental Affairs

Harald Kruger -- Chairman of Management Board

Nicolas Peter -- Chief Financial Officer

Arndt Ellinghorst -- Evercore ISI -- Analyst

Tim Rokossa -- Deutsche Bank -- Analyst

Dorothee Cresswell -- Barclays -- Analyst

Daniel Schwartz -- Credit Suisse -- Analyst

Patrick Hummel -- UBS -- Analyst

Horst Schneider -- HSBC -- Analyst

Stephen Reitman -- Societe Generale -- Analyst

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