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Bayerische Motoren Werke (OTC:BAMX.F)
Q2 2020 Earnings Call
Aug 5, 2020, 3:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Maximilian Schoeberl -- BMW Group, Director Corporate Affairs

Good afternoon, ladies and gentlemen. I would like to welcome you all to our Telephone Conference for the Second Quarter Results. With us today is, Oliver Zipse, Chairman of the Board of Management of BMW AG; and Nicolas Peter, our Chief Financial Officer. First, Oliver Zipse will give you an update on the business performance during the quarter. Nicolas Peter will then take you through our financial results. Afterwards, we will have time for a Q&A session.

Oliver, it's your time now. Please go ahead.

Oliver Zipse -- Chairman of the Board of Management of BMW AG

Good afternoon ladies and gentlemen. Recent months have been marked by the massive impact of global measures to contain COVID-19. At the BMW Group, we still achieved positive group earnings before taxes in the first half of the year. And we've always kept the company running and all vehicle projects are coming to market as planned. And it's also clear there remains great uncertainty. Nobody knows how the situation in the individual countries and world regions will develop in the phase of the corona pandemic, but you all know BMW. We are meeting responsibly the current challenges. We make realistic plans based on solid data and pursue our long-term goals with determination. This approach has always made the BMW Group reliable.

Let me give you three examples. First, the most important trait of our global production network is flexibility. I can't emphasize this enough. We swiftly shut down production in the lockdown and restarted it just as quickly. We continue to align our production strictly to demand and are preparing our sales for different scenarios. Secondly, we have agreed on a package of measures with the Work Council in Germany that will reduce our personnel costs. Our tradition of constructive cooperation has once again proved extremely valuable. We are taking advantage of natural attrition and are also making compensation offers on a voluntary basis.

For young apprentices, this year nothing will change. We are hiring again at the same high level as in 2019. Parallel to these measures we have fundamentally sharpened our performance program and extended it until the end of 2021. Absolute cost discipline is a top priority for all divisions. And we are also boosting the company's performance by fully capitalizing on market potential, optimizing product design and creating much more efficient processes and structures. New initiatives for strategic modules and efficiency in IT have also been added.

And thirdly, we issued guidance in the early days of the global pandemic back in March when we then adjusted in early May in line with global developments. After the first six months of the year, our outlook remains stable. We can confirm our targets for the financial year 2020, although, this does not factor in a second wave of infection or more sustained or deeper recession in key markets. As expected, our business felt the full effects of global efforts to contain the pandemic in the second quarter. Our sales fell by a quarter from the previous year. The markets are now recovering, but at varying speeds and different levels of intensity.

In China, we were once again able to deliver more vehicles to customers in the second quarter than in the same period last year with growth of almost 17%. In Europe and the Americas on the other hand, second quarter deliveries were significantly lower. What matters now is how robust this upward trend is and when individual markets will follow suit. In July, sales were moving in the right direction. At group level, our automotive sales posted a significant year-on-year increase for the month. However, in the comparative months of 2019, there was a model changeover for the three Series in China. And in Germany, there are currently positive effects from the reduction of the value-added tax.

At this point, we are cautiously optimistic about the second half of the year. The new BMW two Series Gran Coupe, four Series Coupe, the five Series, the six Series Gran Turismo and the iX3 along with plug-in hybrids like the X2 three Series Touring and five Series will all create fresh momentum. The backbone of the BMW Group has always been based on our strong cost consciousness and financial strength. We reported a profit for 44 consecutive quarters and that is why we are able to make targeted investments in our future even during the conditions and uncertainties resulting from COVID-19. In September, for example, we will mark the first milestone in our major project FIZ Future. Research and development activities at our Munich location will be substantially expanded up to 2050. And, of course, we are making good progress with electrification.

Even with the restrictions from the coronavirus pandemic we sold more electrified vehicles in the first six months of 2020 than in the same period last year. More than 61,600 vehicles is an increase of 3.4%. In July, there was a real push. Sales of our electrified BMWs and MINI models were up more than 50% year-on-year. For the whole year, we are moving toward a total of 200,000 electrified vehicles. The plug-in hybrid models BMW offers in all segments are especially popular. This shows we are on the right track. And we can already say with confidence that we will meet -- we will fully meet and even outperform the European Union CO2 target for this year by lowering our fleet emissions by more than 20%.

Incentives in individual EU countries are also having a positive effect. And we continue to start by our plans all plug-in hybrids and all-electric models will be launched as planned. The popularity of the MINI electric has well exceeded our expectations. The BMW iX3 will follow later this year initially for our customers in China. Our first fully electric Sports Activity Vehicle is impressive in many respects. It boasts an electric range of over 500 kilometers according to NEDC and 460 kilometers according to WLTP. A drivetrain, we developed and produced in-house including an electric engine with rare earth and the latest version of the BMW Operating System seven, including over-the-air updates.

Currently we are hosting our Electric Days in Munich. Media representatives will have the chance to drive and experience our full range of electrified vehicles for themselves including the new BMW 545e that will be available starting in autumn. And they can also experience our eDrive sales. As you know we're actively helping our customers use their plug-in hybrids in a way that is best for the environment. Our electro-offensive is also part of our company's new strategic direction.

For me, premium and sustainability are inseparable. Our mobility like everything else is only justified if it is not in the opposition to an intact planet as the basis of life and humanity. Exceptional products are specialty desirable if they are sustainable and we can use and consume them with a clear conscious. For these reasons, we have the BMW Group will focus even more beyond our products and their attributes. That is why we're expanding the dimensions of our corporate responsibility to a full scope of sustainability. How sustainable are our vehicles produced? Which raw materials do they contain and how are those materially extracted? What's the environmental impact of our vehicles while customers are using them? And what happens afterwards when their service life is over? All these aspects are essentials of -- to commercial success in the future.

Therefore, we are designing solutions to reduce our environmental footprint in a substantial way. And let's be clear this is a mammoth challenge that will require efforts from all of us. However, we don't want to wait until the distant future to make a difference. It is important to everyone at the BMW Group that we will take action here and now. We're setting ourselves highly efficient goals for the current decade. This is a time line we can oversee ourselves and directly taking responsibility for. Sustainability and resource efficiency are anchored throughout the company with corresponding targets. This applies to all divisions, from purchasing to development and production all the way to sales and administration. It also applies to our top executives.

Going forward, our compensation will be tied to what we actually will achieve in this area. In this way, we can take sustainability to a whole new level and make it part of the BMW mindset. We are substantially reducing CO2 throughout the entire value chain. My team on the Board and I have a clear direction for. We're using 2019 as the starting point for our time line up to 2030. Our ambitious targets up to 2030 are as follows: in the use phase minus 40% CO2 per vehicle; in production minus 80% CO2 per vehicle; and in the supply chain minus 20% CO2 per vehicle, reversing the trend by which CO2 would actually rise as a result of increasing e-mobility.

The aim is to reduce total carbon emissions per vehicle by at least one-third across all these phases with around 2.5 million new vehicles per year that adds up to over 40 million tonnes less CO2 worldwide. This makes us a first in our industry to set ourselves concrete targets for CO2 reduction throughout the entire life cycle from the supply chain through production to the end of the use phase and beyond. We will do all of these things in accordance with the guidelines of the globally recognized science-based targets initiative. The initiative's overall aim is that science-based target setting becomes standard business practice and corporations will play a major role in driving down greenhouse gas emissions.

Let's swiftly begin with our vehicle fleet. We will continue to expand e-mobility on a large scale. In 10 years, we aim to have delivered more than 7 million electrified vehicles to customers in total two-thirds of them will be fully electric. By 2023, we will have 25 electrified models in our lineup. This will include fully electric variants of the next-generation BMW seven Series the X1 and five Series. Customers will also be able to choose either a plug-in hybrid or an efficient diesel or petrol engine with 48-volt technology. The power of choice will continue to be an important part of our drive toward sustainable mobility. We will win customers over by offering options to suit their individual needs and preferences.

Next to our locations and facilities worldwide. What you need to know here is that we've already lowered emissions per vehicle produced by more than 70% since 2006. We are the clear industry leader in this area and we will now take it one step further. Our new goal for our own locations goes even further than limiting the increase in the global temperature to 1.5 degrees. How do we achieve this? Starting this year all BMW sites worldwide will resource only green power. We are systematically applying data analytics in production. We are expanding renewable energy sources at all our locations. This also includes green hydrogen for logistical purposes. And we will fully offset the remaining CO2 emissions from 2021 on with the appropriate certificates.

And also take a look at the supply chain. What you need to know is that more e-mobility will automatically lead to higher CO2 emissions per vehicle in the supply chain because producing high-voltage batteries is very energy intensive. An increase of around 40% in CO2 in the supply chain by 2030 is inherent to the system. We don't just want to stop this. We intend to reverse this trend and reduce our supply chain's carbon footprint by 20%. In this way, we can create the most sustainable supply chain in our industry. We are also making CO2 a criterion for awarding contracts from our EUR60 billion purchasing volume.

And of course, we will continue working together with our suppliers as partners in the future. Our suppliers will only source green power to produce battery cells for us and we have agreed upon that in our contracts. This measure alone will save around 10 million tonnes of CO2 over the next 10 years. And we will gradually expand the use of green power to our components and raw material supplies throughout the entire supply chain. In addition to these three elements of sustainability -- of sustainability use phase, production and the supply chain we will also be adding another component. How do we basically deal with resources and valuable raw materials? Natural resources are finite.

That is why we have to use them sparingly. When we use them, we should use them at least more than once and make sure we recycle them. This requires redirecting the underlying flow of resources and closing the materials loop, raw materials can be used much more efficiently in this way. And of course in this context, recycling takes on a whole new relevance. On top of that we already today able to recycle our vehicles by 95%. As you can see with this new strategic direction, the BMW Group is systemically developing its business model toward a circular economy and thereby staying efficient. Our efforts are focused on making our vehicles and our entire value chain the most sustainable in our industry. The road ahead will be long and challenging but we are convinced it will be worth it. Our holistic approach is right on track to achieve significantly more than the two-degree goal for limiting CO2 emissions worldwide.

Ladies and gentlemen, in the last few months we have proven once again. That even in challenging times we are thinking well ahead to the future, a future in which individual mobility remains a crucial element in society. To this end we continue to make targeted investments in relevant future fields and technology. We will invest EUR30 billion in research and development, up to 2025. The BMW Group currently has a high level of liquidity and good access to the capital markets and manages its costs very stringently. In this way even under the conditions of a continuing corona pandemic, we assume overall responsibility and are reliable partner for all our stakeholders. Thank you very much.

Maximilian Schoeberl -- BMW Group, Director Corporate Affairs

Thank you very much. Oliver. Please, Nicolas go ahead.

Dr. Nicolas Peter -- Finance

Ladies and gentlemen, good afternoon. In the second quarter, as expected the corona crisis had a strong impact on our business. However, because we consequently took action to secure our liquidity, apply strict cost discipline and leveraged opportunities for example in China and Korea, we were able to limit the effects of the pandemic on the BMW Group. Our flexibility in all areas of the company has been particularly valuable enabling us to continue steering the company according to demand. As previously announced, we significantly reduced inventory in the second quarter to bolster our free cash flow. As measures to contain the virus have gradually been relaxed after almost complete lockdown business has now stabilized somewhat as expected.

The sustainability of the current recovery will depend on how infection rates continue to develop, the political response and the resulting economic impact. Development in the markets around the world varies greatly. In China, the market has been developing better than expected. And we are benefiting from our strong market presence in China and good local supply situation. The same applies to Korea. We are now also seeing a slight recovery in Germany. We are therefore on track to meet our targets for the year as planned. Against this backdrop, we are cautiously optimistic about the second half of the year. However, we will continue to monitor the situation very closely so we can respond quickly and flexibly if needed to what remains a highly volatile situation. Our outlook does not currently factor in any renewed deterioration of the situation or a possible second wave on infection and containment measures.

Ladies and gentlemen, let's now turn to the financial figures for the group. After starting out in January with strong product and market momentum, first quarter earnings were dampened by the situation emerging in China. In the second quarter, business in China bounced back. But by then, the global spread of the pandemic brought wide-ranging sales restrictions in almost all other markets. As a result, revenues for the first half year fell to EUR43.23 billion. Thanks to swift and systematic corrective action group earnings before tax for the first half year, reached almost EUR500 million, despite the challenging conditions.

With sales suspended for nearly two months in many key markets, the total for the quarter was minus EUR300 million. The group EBT margin was 1.2% for the first half of the year and minus 1.5%, for the second quarter. As I already mentioned, the main influencing factor was a temporary closure of retail outlets and the resulting loss of vehicles and after sales business. Provisions for residual value and credit risks were also adjusted to reflect the current volatility. Also affecting group EBT are the high expenses for our successful electro-offensive. On the other hand a strong product mix and better pricing from our young model line-up produced a positive effect.

We were also able to lower personnel costs as well as expenses from marketing and communications. Our performance program plays an important part in managing, this unprecedented situation. We are benefiting now, from the important work done over the past three years, which allows us to act effectively and efficiently. The performance program also gives us the leeway to continue systematically investing in the future, during these challenging times. Our focus is clearly on the topics that are important to us, like emission-free drive trains, sustainable mobility and autonomous driving. We are mainly concentrating on market launch for full electric models like the BMW iX3, in 2020 and the i4 and iNEXT in 2021. We are also launching new plug-in hybrid models such as, the three Series and the five Series Touring. Furthermore, we are continuing to make upfront investments for our next generation of electric modules.

The BMW Group's R&D ratio for the first half year was 6.6%. This slight increase from last year reflects lower revenues, due to corona. In view of the current situation we have adjusted, prioritized and focused our investment activities. We will continue to pursue future projects to leverage and expand our competitive edge. Capital expenditure for the first half year totaled around EUR1.48 billion. The ratio therefore decreased to 3.4%. Capital expenditure for property, plant and equipment for the full year will be below EUR4 billion. The financial result for the second quarter increased to EUR366 million, mainly thanks to a strong performance by our Chinese joint venture BBA, on both volume and pricing.

The sale of shares in HERE to the Mitsubishi Corporation and NTTC also had a positive effect. The financial result for the year to the end of June was minus EUR211 million. The positive appreciation effect from pooling our mobility services with Daimler in 2019, negatively impacted, the year-on-year comparison. Tailwinds from fair value gains recognized on marketable securities, in the second quarter could not fully offset the headwinds from lower interest rates, in the U.S. in the first quarter, in particular, a word about, intersegment eliminations, which at EUR1.3 billion were significantly higher in the first six months, than last year. In intersegment eliminations, profit earned in the Automotive segment from leased vehicles are taken back at the time of sales and prorated over the term of the leasing contract. The decline in new leasing business caused by the corona crisis had a positive effect in the intersegment elimination since margin realization from previous year exceeds margin eliminations from new business in 2020.

Ladies and gentlemen, let's move on to the individual segments. In the Automotive segment vehicle sales for the first half year decreased by 23% overall to just under 963,000 units. At the same time, we are seeing a positive development in China where our second quarter sales were already higher year-on-year. We also saw the first signs of recovery worldwide in June and July. With restrictions on sales during the first six months, revenues in the Automotive segment totaled EUR32.87 billion. The figure for the second quarter was EUR14.88 billion.

Thanks to the strong model mix and better pricing, revenues decreased at a lower rate than sales. As expected, the operating result totaled minus EUR1.33 billion for the year to the end of June and minus EUR1.55 billion for the second quarter. This mainly reflects the volume lost through the temporary closure of many retail outlets, especially between March and May. Additionally, provisions for residual value risks in a three-digit million amount had an impact on earnings. However, tailwinds from lower personnel costs and selling expenses as well as ongoing efficiency programs helped stabilize earnings.

Despite an EBIT margin of minus 4% for the first half of the year, we are on course to meet our guidance of 0% to 3% for the full year as planned. Compared with the previous year the financial result benefited from two effects in the second quarter. On the one hand, BBA contributed EUR176 million more to earnings than in the same quarter of last year. Additionally, the sale of shares in the mapping service here to Mitsubishi and NTT also had a positive valuation effect.

Ladies and gentlemen, let's now take a look at free cash flow in the Automotive segment. This stood at almost minus EUR0.3 billion in the second quarter, mainly due to the decrease in pre-tax earnings. We were able to bolster free cash flow in the second quarter by consistently managing working capital and specifically by significantly reducing inventory. We expect to report positive numbers again in the third and fourth quarters and to continue steadily improving. We have already taken effective measures to achieve this. Over the coming months, we will set all levers in motion to get our free cash flow for the full year back to positive territory despite other challenges. Not included in the free cash flow of possible payments related to the antitrust provision.

Overall, our liquidity position remains excellent. By the end of June, group liquidity had increased to EUR21.7 billion. This gives us the liquidity reserves we need to remain flexible and able to take action at all times if the situation should deteriorate. If the situation continues to stabilize, group liquidity will return to pre-crisis levels by the end of the year. Compared with our competitors, we continue to benefit from attractive refinancing conditions thanks to our good credit ratings even in these highly volatile times and we retain the confidence of the capital markets.

Ladies and gentlemen, now let's move on to the Financial Services segment which was also impacted by the COVID-19 pandemic in the second quarter. A total of around 804,000 new financing and leasing contracts were concluded with retail customers in the first half of 2020, a decrease of 17.2% year-on-year. The total portfolio of 5.5 million retail contracts was at the same levels at the start of the year. Due to the slump in demand caused by the pandemic and higher risk provisioning in the light of the worldwide slowdown of the economy in the second quarter segment earnings before tax for the first half year decreased significantly to EUR581 million. We constantly monitor the development of all the main business risks. Based on current assessments we are appropriately hedged against residual value and credit risks.

Let's turn now to the Motorcycle segment, which also felt the impact of the coronavirus pandemic. However, we did see a slight seasonal catch-up effect in the second quarter after a number of European markets gradually reopened. Despite temporary retail closures a total of around 77,000 motorcycles were delivered to customers in the first half of the year. The segment reported an operating result of EUR65 million and an EBIT margin of 6%.

Ladies and gentlemen, let's now take a look at our guidance for the year. Our forecast still assumes the economic environment will stabilize slightly over the course of the third quarter. Moreover, our outlook does not factor in the possible impact of the rising infections of COVID-19 and containment measures. The same applies to the risk of production stoppages resulting from local coronavirus outbreaks near plant site. A possible economic downturn in China due to recession in other regions of the world is also not taken into account here. Supply disruptions from more intense competition also pose a risk for our guidance. Automobile markets are only recovering slowly. Despite the current signs of recovery, we expect to see a significant decline in the global premium segment of almost 20% this year.

We are therefore still assuming that global vehicle sales at the BMW Group will be significantly lower in 2020 than last year. In the Automotive segment, we still expect the EBIT margin to be within the range of 0% to 3%. Deliveries in the Motorcycle segment are likely to decrease significantly during the forecast period with an EBIT margin of between 3% and 5%. On the Financial Services side, we anticipate a moderate decrease in return on equity mainly due to the declines in new business and an increase in risk provisioning. Group earnings before tax will remain well below last year's figure.

Ladies and gentlemen, we are cautiously optimistic about the second half of the year. Thanks to our good credit ratings and the immediate action we have taken, we have an excellent liquidity basis. Having good access to capital markets secures our operational capabilities at all times.

Our focus is on safeguarding earnings and stabilizing free cash flow. Over the coming months, we will set all levers in motion to get our free cash flow for the full year back to positive territory. As mentioned before, possible payments related to the antitrust provision are not included in the free cash flow. To achieve this, we have set many measures in motion some of which have -- already have an impact in the second quarter. This includes for example the systematic management of our vehicle inventory.

We will see further efficiency gains in the second half of the year, as we intensify and extend our performance program. Absolute cost discipline and fully leveraging the opportunities presented remain a clear focus in all areas of the company in the second half of the year. This will pave the way for us to meet our targets for the year as planned. Thank you.

Maximilian Schoeberl -- BMW Group, Director Corporate Affairs

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

Questions and Answers:

Operator

Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] And the first question is from Jose Asumendi, JPMorgan. Your line is now open.

Jose Asumendi -- JPMorgan -- Analyst

Thanks very much. Jose, JPMorgan. Hello, Oliver and Nicola. A couple of items please. And I'm trying to, sort of, understand how BMW is using the current situation to come out stronger from this -- in this crisis. And looking to get also, I guess, a confirmation that you are also looking to achieve that 6% to 8% margin target in the medium term. So the specific questions, please, behind this topic is, can you quantify, please, the impact of this agreement you've done with the Unions? Specifically, the 40 to 38-hour reduction, how much EBIT-wise will it improve, please, the performance of the auto division? And from which quarter will it kick in?

The second question, please, around the 6,000 workers that you have agreed with the unions to leave gradually. Can you quantify a little bit the time frame behind these workers leaving? And the third question, a bit more strategic for, Oliver, please. Can you speak a bit about the ramp-up of your Mexican plant? And what is the status of the Hungary plant at this stage? And how are you progressing across both brands? Thank you.

Maximilian Schoeberl -- BMW Group, Director Corporate Affairs

Okay. Thank you very much, Jose. We start with Oliver and the plant in Mexico and Hungary. Yes.

Oliver Zipse -- Chairman of the Board of Management of BMW AG

Yes. Thank you for your question, Jose. Let me start with the two plants. The Mexican plant which we opened now some three years ago, I think, it's currently fully running. We currently have -- despite the pandemic evolving in the United States and also in Mexico, we don't see any larger supply problems. So our plants in Mexico and also in Spartanburg are running full steam. They both produce vehicles which are in high demand; Mexico, the three Series and Spartanburg our X models. So currently, fingers crossed, the supply chain and also the plants supply the markets in a very good fashion.

To your second question, the 6,000 workforce reduction time frame, this is directed toward the end of 2021. About half of which we will do this year. What you must know that, temporary workers, where we usually have a very high proportion of it, is not included in that. We reduced, during the pandemic, without being seen in our official structure, because these are temporary workers. More than 12,000 workers where we were able to reduce during the low point of the pandemic, some of which we have now employed again, because production has been ramped up very fast. But the 6,000 is only our BMW workforce and we are currently running with a reduction a little bit ahead of our originally planned targets.

Maximilian Schoeberl -- BMW Group, Director Corporate Affairs

Okay.

Dr. Nicolas Peter -- Finance

As part of the first one -- yeah, yeah. Second question, so maybe let's start with the -- and maybe I'd be one or the other element to what Oliver just explained regarding the 6,000 workforce reduction. If you compare the 6,000 to the size of our company, I think, that's an ambitious target. We are, as Oliver just said, very well on track to achieve the number by end of 2021. By the way, it's likely that we have that built within our 0% to 3% EBIT margin guidance that we will have in provision and build a provision in the area of a mid-three-digit million euros amount in 2020. So that's already included in our guidance. And definitely if you add all different elements of our headcount and personnel cost elements, we are working extremely well and in a constructive way also with our Workers' Council. This will lead to a mid-three-digit million euro positive impact.

And of course, coming to your first topic, we stick to our target of 8% to 10% EBIT margin in, what I would call normal circumstances. And this is why, we have already set up three years ago our performance program. And with our performance program, we are not just focusing on cost elements as personnel cost, as just mentioned, and bringing down investments in order to reduce depreciation in the years to come.But, we also focus on the top line in areas, what we call our really granular performance management to improve the quality of our business pricing market-by-market. And as I said at the beginning of my speech, we were well on track at the beginning of the year of cost impacted by the corona crisis. But, I'm very, very optimistic that we will come out strongly.

Maximilian Schoeberl -- BMW Group, Director Corporate Affairs

Okay. Thank you very much.

Jose Asumendi -- JPMorgan -- Analyst

Thank you very much.

Maximilian Schoeberl -- BMW Group, Director Corporate Affairs

Next question please.

Operator

The next question is from Tom Narayan, RBC. Your line is now open.

Tom Narayan -- RBC -- Analyst

Yes. Tom Narayan, RBC. Thanks for taking the question. My first question is how were you able to maintain the guidance for 2020 on automotive EBIT margins, given the Q2 results? From the prepared commentary, it sounds like it maybe coming from better than expected delivery outlook. Is that right?

And then my second question is and how should we think about working capital in Q3? A large supplier this morning called for a meaningful decline in production in Q3. But as we've been noticing July auto sales, especially for you guys in Europe, are looking quite strong, possibly helped by stimulus. Could we expect working capital to be a source of cash as a result in Q3? Thanks.

Maximilian Schoeberl -- BMW Group, Director Corporate Affairs

Okay. Thank you very much. Tom, your question will be answered by Nicolas.

Dr. Nicolas Peter -- Finance

Tom, let's start with the working capital development in Q3. And of course, your underlying question is I assume how will free cash flow develop as well in Q3 and Q4? So, as I said, our clear aim is to achieve a positive free cash flow for the full year. The third quarter will be slightly better, slightly better than the second quarter. Why just slightly because you rightly said, we have a good momentum on one hand side in some of the markets, and you've rightly mentioned some European markets Germany, France, Italy, are doing in our segment pretty OK.

And of course, we have-as we have to supply those markets with production and in particular, also to supply production to overseas markets we will have a balancing effect coming from working capital. And we forecast, as we speak today with -- on the things we have in -- as said in our guidance, for the full year with a stronger fourth quarter, so slightly better third quarter and stronger fourth quarter.

Now, what will be -- coming to your first question. Why do we believe that the guidance we already gave at the beginning of May is still valid despite and as planned negative Q2 of EUR1.5 billion -- a little bit more than EUR1.5 billion. We will see definitely stronger sales in the second quarter. Oliver mentioned the strong demand, good demand in Asian markets. You rightly mentioned the improvement in European markets. Compared still U.S. is a little bit more challenging, but compared to what we've seen in April and May also improving. So this will from volume and EBIT perspective contribute.

Furthermore, we have a strong product momentum. And luckily in particular, despite all the challenges, we might face in the industry our production is running very, very smoothly, including Spartanburg. We have some positive effects, if you compare year-on-year coming from warranty, and of course efficiency gains. And from our perspective if you look, and I've mentioned it, if you look at our provisions, we've took for residual value topics in the Automotive segment. Based from what we know today, we believe we have done what we had to do for the -- for the full year. So we definitely stick to our guidance.

Tom Narayan -- RBC -- Analyst

Okay. Thank you.

Maximilian Schoeberl -- BMW Group, Director Corporate Affairs

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

Operator

The next question is from Patrick Hummel, UBS. Your line is now open.

Patrick Hummel -- UBS -- Analyst

Hi. Good afternoon, gentlemen. Patrick from UBS. A few questions please. First one for Nicola regarding the relatively high credit and residual value provisions you booked in the second quarter, which seemed to be substantially higher than for the peers. I'm just interested, whether you would consider that a big bath approach so that we shouldn't see any material provisioning anymore in the quarters ahead? Or have you just been more aggressive in your underlying assumptions than your competitors triggering these relatively high provisions in the second quarter?

My second question is a bit bigger picture, and I guess more for Oliver. You've given yourselves your 2030 CO2 targets and implemented that in your compensation structures and everything. I mean, it seems very much compliance driven rather than driven by the willingness to sell as many EVs as possible. And in simple terms one could say a strategy that aims at selling as many EVs as possible. And Inteva's case yields a $300 billion market cap. Your Power of Choice strategy yields a EUR40 billion market cap. So isn't it actually more feasible right now to say, we're all in on electric cars and just incentivize the entire management team on selling as many EVs as possible?

And in that regard do you still firmly stand behind your flexible architecture approach as even more competitors like PSA seem to go into the dedicated architecture? And the very last one very shortly, after the AV joint venture or collaboration with Daimler has been put on hold can you just update us what -- how you want to tackle the AV topic because it's a quite cost intense area? And now that you're by yourself it looks like that requires quite some spending with limited returns in the next couple of years? Thanks.

Maximilian Schoeberl -- BMW Group, Director Corporate Affairs

Okay. Thank you very much, Patrick. So we start with your bigger picture the Power of

Choice and CO2 and our collaboration with Daimler. And Oliver, please Oliver.

Oliver Zipse -- Chairman of the Board of Management of BMW AG

Yes Patrick. Very good questions. I think, if you look at the time frame from now until 2030 you will see different phases. Europe is not by far not yet to the EV market. It's not even 10% of the whole market is EV and that is growing now and we are already substantially profiting from that. But Europe is far away from becoming a 100% EV market until 2030. Otherwise, the target would be zero grams CO2 in 2030 if it would be a full EV market. So the question for the next decade is how do you conquer the growing EV market and at the same time do not lose the existing market. That's the task at hand. And we are not talking about 2050. Nobody of us knows, how the automotive industry will exactly look like then.

Our aim is to stay as profitable as possible and grow as much as possible during the next decade. Therefore, the approach to have a Power of Choice strategy, I think is the only one which is going to work. Despite the fact, how you achieve that whether with flexible architectures or with dedicated flexible. And that is our approach. And I think the current market conditions support that. We have strong growth in the EV markets plug-in hybrid and EVs. The MINI electric is fully sold out -- fully sold out independent of range. So the range is for us completely overrated topic. And for us there is no -- I think no other way.

Specifically, if you want to have a cost-based approach, if we are convinced that if you are not able to include EV structures into your normal industrial structure, your cost base will go out of range. So, I think we are -- we feel fully confirmed in our approach and we will see together next year when the i4 comes to the market, when the iNEXT comes to the market. These are outrageously great products. We drive them every day and we are quite proud of what is happening there. And so we confirm that approach.

In the second half of the century, so '26, '27, '28, when we have a market share of EVs of 50% plus, then you go into new -- into the next phase into the next cycle of architecture development. Of course, then if we develop new cars the focus on more electric will of course be dominant. But for -- at least for the next six, seven years, we're exactly on the spot with our strategy. And coming to your ADAS question, we adequately and we professionally put our plans together. I think, we know what we have at hand. I think we departed adequately and put a pause into it. We did not terminate it forever. We just said with our product content as you know we will bring our next -- next year we will bring our iNEXT product and we will bring the seven series product. I think this will be absolutely competitive products.

So, the question was, how do you bring your development cycles together? I think in '20 -- end of 2021, '22, we will be right on spot what the market demands you will see. And then of course, if your partner is not at exactly the same timing, then it's very difficult to bring that together. This is not competence base. This is simply due to the fact that our time lines don't fit together. And at a later point in time, we could continue of course.

Maximilian Schoeberl -- BMW Group, Director Corporate Affairs

Thank you, Oliver. Patrick, your first question was about the credit and residual value provisions in Q2. Nicola?

Dr. Nicolas Peter -- Finance

Yes. Patrick, first of all, as you know, we have a very structured approach to calculate our provisions and we use market-by-market underlying assumptions, macroeconomic factors like GDP development, unemployment levels and so on. I will be very precise in the second quarter with added to -- in the Auto segment in the Automotive segment a mid three-digit million euro amount to our provisions and of course for residual value and risks and in the Financial Services area another three-digit million euro amount for both credit and residual value risk.

Having -- this mainly is focusing no surprise on two markets, U.S. and Germany. Why no surprise? Because we've seen in particular in the second quarter, negative development in those markets in April and May. Having said this outlook for the second half, I have to say I feel very comfortable with the level of provisions we have right now. Of course, we are observing the further development. But from what we know today, I think, we are well on track.

Maximilian Schoeberl -- BMW Group, Director Corporate Affairs

Okay. Thank you very much, Nicolas. Ladies and gentemen...

Patrick Hummel -- UBS -- Analyst

Thank you.

Maximilian Schoeberl -- BMW Group, Director Corporate Affairs

Thank you, Patrick. So its five minutes to three. I think we have time for two more questions. Next question, please.

Operator

The next question is from Horst Schneider, Bank of America. Your line is now open.

Horst Schneider -- Bank of America -- Analyst

Yes. Thanks for taking my questions. I had two please. The first one is again coming back on your guidance of a Black zero in the free cash flow. I just want to understand under which circumstances you would reach them in the context the upper end of your EBIT margin guidance of 0% to 3% in automotives? So basically, I want to understand what is the link between the EBIT margin and the free cash flow guidance?

Then the second question that I have the ratios again to the EBIT bridge and comes back to my question that I asked also in the Q1 call. There was an -- other cost changes. And you said that the other cost changes should turn positive in the full year. So we have seen now again a quite substantial burden in Q2. But I understand just by following your comments on Financial Services provision that we should expect a quite significant turnaround in H2 so maybe you can give some guidance on other cost changes again as you did in Q1? And the last one would be in the light of the recent FX moves that we have seen what is the potential impact of currencies in this year in 2020? Thank you.

Maximilian Schoeberl -- BMW Group, Director Corporate Affairs

Thank you very much, Horst. Nicolas?

Dr. Nicolas Peter -- Finance

Let's start with the third one. As it moves we stick to our guidance we already gave in March and in -- at our Q1 call early May mid three-digit million euro impact for FX and raw materials. There's no reason to adjust our guidance so far. If we look again to the -- your first question we stick to -- as I said we stick to our EBIT guidance of 0% to 3% and we are confident today to be in a position to achieve both a Black zero and guidance of -- EBIT guidance of 0% to 3%. What are the main elements in the free cash flow bridge on one hand side positive, of course, the EBT development slightly negative capex and R&D and some lower provisions for warranty and variable pay and slightly negative from working capital lower -- little bit lower payables. So that's in a nutshell and the -- which for the free cash flow assumption.

Other cost changes your assumption is right will be positive in the second half of the year. Why? This is a value cost lower in the second half. This of course had an impact warranty is positive in a year-on-year comparison and R&D is slightly positive -- as planned slightly higher capitalization costs.

Maximilian Schoeberl -- BMW Group, Director Corporate Affairs

Okay.

Horst Schneider -- Bank of America -- Analyst

Okay. Just a quick follow-up. So the Black zero on free cash flow would be also achieved if you were at the lower end of the 0% to 3% EBIT margin?

Dr. Nicolas Peter -- Finance

We are -- we are of -- we are confident to achieve both 0% to 3% and a positive free cash flow.

Horst Schneider -- Bank of America -- Analyst

Okay.

Maximilian Schoeberl -- BMW Group, Director Corporate Affairs

Okay. Thank you very much, Horst. The next question please.

Operator

The next question is from George Galliers, Goldman Sachs. Your line is now open.

George Galliers -- Goldman Sachs -- Analyst

Thank you. Firstly, I just have a quick question on future investments. So this morning you mentioned EUR30 billion investment in R&D up to 2025. I think traditionally you've tended to guide for LTE R&D as a percent of sales. But is it correct to this comment as you're expecting around EUR6 billion per annum over the next five years? Or will it be a higher number in 2021 and 2022 which then fade? And is there a similar number for capex?

And then the second question I had was just with respect to eDrive zones. I believe you launched this on certain models at the end of Q1. The questions I had were is this standard on all your new plug-in hybrids? Are you able to retrospectively implement it on hybrids sold last year? And then could you give some insight as to what percentage of customers are using this? And whether you've seen any particular trends among the 80 cities, which I understand it's available for to-date? Thank you.

Maximilian Schoeberl -- BMW Group, Director Corporate Affairs

Thank you very much, George. So we start with the eDrive zones. And Oliver? Yes.

Oliver Zipse -- Chairman of the Board of Management of BMW AG

Yes. Thank you very much George. The eDrive zones is I think a peculiarity of BMW to combine needs of cities with the competencies of the vehicles, with more than 80 cities currently who build on our zone ability and this is expanding by every week. And we have a high customer demand for these functions, but of course only in the cities where the city is offering these eDrive zones, because we have to map the eDrive zones into your navigation map.

But I think it's a very, very smart move to combine the competencies of our cars driving without any emissions with the needs of a customer to have a car where he can use it also in everyday use. And it confirms us in our direction that plug-in hybrids are here to stay for quite a while.

Maximilian Schoeberl -- BMW Group, Director Corporate Affairs

Okay. Thank you very much. And concerning George, your question about R&D outlook Nicolas please?

Dr. Nicolas Peter -- Finance

George, so it will not be EUR6 billion flat over the next couple of years, we will most likely be slightly higher in the next two years. Why? Because as you know we are heavily investing in particular in topics as the one just discussed with Oliver. E-Mobility launching the i4, the iNEXT next year and further fully electric cars, and it will then go slightly down. Capex outlook you've seen with significantly reduced capex in 2020 versus 2019 we will continue to have a very strong focus on capex, but we are not guiding yet year-by-year what we will spend in capex area, because of course it depends as well on model launches investment in the plant updates and so on.

Maximilian Schoeberl -- BMW Group, Director Corporate Affairs

Thank you very much. So George...

George Galliers -- Goldman Sachs -- Analyst

Thank you.

Maximilian Schoeberl -- BMW Group, Director Corporate Affairs

Thank you very much. George, now the last and final question, please.

Operator

The next question is from Tim Rokossa Deutsche Bank. Your line is now open.

Tim Rokossa -- Deutsche Bank -- Analyst

Thank you very much for giving the question. So Oliver, I guess, this is to you. Investors also have the Power of Choice and it goes a bit into Patrick's direction and they're choosing to invest into electrified and connected business models rather than traditional i business models or even flexible ones. You are a leader on EVs, your cars are OTA capable, why don't you consider to give the market a real choice and actually provide some financial transparency around your i brand? For example, and really give people a possibility to market that and value-add maybe separately. Because I'm 100% sure that the traditional business, which is often just called legacy also has certain value, but people want that transparency.

And then also just as an aside on the OTA updates, why do you think it is the case that the average Tesla fan can't stop talking about the OTA feature on its car and the average BMW customer doesn't seem to know that it even exits. What exactly can you update over-the-air right now? Thank you.

Maximilian Schoeberl -- BMW Group, Director Corporate Affairs

Thank you very much. Oliver, please.

Oliver Zipse -- Chairman of the Board of Management of BMW AG

Thank you. Thank you, Tim. It's a pleasure to answer your questions.

Maximilian Schoeberl -- BMW Group, Director Corporate Affairs

The right question for the CEO.

Oliver Zipse -- Chairman of the Board of Management of BMW AG

Right. No, no. You are not the first one to ask this question by the way. First of all, BMW i brand is a BMW brand. It's not a solely standing alone brand and it has ever been even the i3 was the BMW. And we continue to have these pillars in our line-up with the M brand quite successful. We have the i brand quite successful. And after the i3 the road was -- what we learned from i must now be integrated into BMW. Why do we do that? Of course, BMW i is a distinct value. But what would that mean to BMW to separate that from BMW? I think BMW is a brand which is always at the forefront of technologies with a slight disadvantage that a brand which is very pinpointed but still very small has the advantage of being more distinct to the market. But of course, these brands do not build 2.5 million vehicles per year with a growing tendency.

BMW is a growing brand. And of course, whatever means i will grow here as well. And there will come a time when we have -- the majority of our vehicles will be electrified. So I think from a point of where we come from building 2.5 million vehicles there is no other way to go that route, if you still want to grow. Otherwise it would mean, you will create an old world and a new world and the combustion world is not old. It's quite profitable. It is growing by the way worldwide. It's not shrinking. And to add the combustion world with the electrical world I think that is a sweet spot for us.

And I think we are right on track in delivering and that will expand of course. We have two electric vehicles today. In three years, we will have 12. So there are great things to come. The over-the-air updates, we are not -- we don't build rockets. And it's quite difficult to have the same communications to everyone if you don't build rockets. But of course, we can of course build cars like everyone else. And over-the-air, we can update every line of code. So we don't see a very big difference between us and other competitors.

Tim Rokossa -- Deutsche Bank -- Analyst

Good. Can I just follow-up on the first element of that question. I'm not asking you to spin this business. I think that's more of an American thing. That wouldn't really be profitable for a company like you with your ownership situation. I think you can fix the problem of not wanting to do that by just providing a bit more transparency other than unit sales. You could simply give us something that you make the i brand into something like almost MINI and then maybe provide some sort of cash flow or EBIT numbers. Wouldn't that be something that you think is a possibility?

Oliver Zipse -- Chairman of the Board of Management of BMW AG

Tim, I understand your question, but we don't even do that for Rolls-Royce and MINI. Don't -- it's a very inclusive business. And if it would be -- if we would deem that positive for the course of our business, we would do that, but I think it's not necessary.

Tim Rokossa -- Deutsche Bank -- Analyst

Thank you, Oliver.

Maximilian Schoeberl -- BMW Group, Director Corporate Affairs

Okay. Thank you very much, Oliver and Tim. Ladies and gentlemen thank you for joining us today all the best and greetings from Munich. Bye-bye.

Duration: 117 minutes

Call participants:

Maximilian Schoeberl -- BMW Group, Director Corporate Affairs

Oliver Zipse -- Chairman of the Board of Management of BMW AG

Dr. Nicolas Peter -- Finance

Jose Asumendi -- JPMorgan -- Analyst

Tom Narayan -- RBC -- Analyst

Patrick Hummel -- UBS -- Analyst

Horst Schneider -- Bank of America -- Analyst

George Galliers -- Goldman Sachs -- Analyst

Tim Rokossa -- Deutsche Bank -- Analyst

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