Executives: Maximilian Schoeberl - Director, Corporate Affairs Harald Krueger - Chairman, Board of Management Friedrich Eichiner -

CFO
Analysts: Arndt Ellinghorst - Evercore ISI Marc Tonn - Warburg Research Kristina Church - Barclays Patrick Hummel - UBS Michael Tyndall - Citigroup Horst Schneider - HSBC Stuart Pearson - Exane BNP Paribas Michael Raab - Kepler Cheuvreux Fraser Hill - Bank of America Merrill Lynch

Maximilian Schoeberl: Good afternoon, ladies and gentlemen. This is Maximilian Schoeberl. I would like to welcome you all to our telephone conference for the first quarter results. With us today is Harald Krueger, Chairman of the Board of Management of BMW AG and Doctor Eichiner, our CFO. First, Harald Krueger will give you an update on the business performance during the first quarter of 2016.

Doctor Eichiner will then take you through our financial results for the first quarter. Afterwards, we will have time for our Q&A session. Mr. Krueger, please go ahead.

Harald Krueger: Good afternoon, ladies and gentlemen.

2016 marks the year of the BMW Group's centenary. A look at our history clearly shows how our Company has successfully transformed over the years, from an aircraft engine and motorcycle manufacturer to a multi-brand Group; from the world's leading producer of premium vehicles to a leading provider of premium mobility and services. Our task is now to prepare our Company for the digital transformation taking place in the area of individual mobility. We're turning the BMW Group into a high-tech provider of mobility. Our vision vehicle, the BMW VISION 100, embodies the innovative strength and clear future focus of our Company in a very special way.

It provides a glimpse into the future of mobility, from 2030 on sustainable, fully connected and highly automated. We're transforming the ultimate driving machine into the ultimate driver. Our focus moving forward will remain on our customers and their individual mobility needs. We want to continue to bring joy to our customers and exceed their expectations, with our premium vehicles and premium brands and, more than ever before, with our premium services for individual mobility. This will enable us to make mobility easier, more convenient and, above all, safer for our customers.

Ladies and gentlemen, in two days' time, I will present the BMW VISION 100 on its world tour in Beijing. Two more vision vehicles, from MINI and Rolls-Royce, will be unveiled in London in June. All three vehicles will be shown in Los Angeles in October, along with our vision on two wheels. So as you can see, we're working hard on creating the future. Our strategy realignment, NUMBER ONE > NEXT, sets two clear target dates, 2020 and 2025.

More than ever, we will need to be fast, professional and flexible to master the challenges that lie ahead, but also in our actions and our decision making. Over the last few months, we have already launched the first measures and projects for strategy NUMBER ONE > NEXT. These include the new BMW 7 Series, with its many technical innovation, our BMW iPerformance fleet and the new BMW M coupe, M2 Coupe. The new BMW 7 Series has been well received by customers. We have already delivered 10,500 BMW 7 Series since the beginning of the year.

That's over 20% more than during the same period last year. At the end of March, we launched the 730i which we expect will boost sales even further. Two additional variants of the 7 Series, the iPerformance and the M Performance versions, will even give customers more choice. An M vehicle for the luxury class was something many of our customers wanted and the BMW 740e iPerformance will show how we transfer BMW i born electric technology into our series vehicles within the BMW brand. Our plug-in hybrid BMWs will be under the label of BMW iPerformance.

This summer, customers will already have five iPerformance models to choose from. This means we will offer a plug-in hybrid for every class, from compact to luxury. Electrification of our vehicle fleet is a key element of strategy NUMBER ONE > NEXT. A greater proportion of all-electric and plug-in hybrid vehicles within our fleet is essential in order to meet Europe's ambitious CO2 emission targets for 2020. In the first quarter of this year, we sold over 5000 BMW i3 cars.

I'm also delighted that the German government is taking concrete steps to support electric mobility. I am optimistic that this will increase the demand for electric cars. In the long term and we're convinced of this, alternative drive trains will be an integral part of individual mobility and we want to be clearly the leader in the electric mobility. Ladies and gentlemen, our industry undergoing a fundamental transformation. Strategy NUMBER ONE > NEXT focuses on six key focus areas, brands and design, products, technologies, customer experience and services, digitalization and profitability.

For us, consistent profitability over the long term is a must. It gives us the foundation we need for investing into the future. We must also constantly evaluate our internal structures and processes. Here, we're concentrating on speed and efficiency, to prepare our Company for the digitalization of our vehicles and our production facilities. In the future, our attractive model range will remain fundamental to our success.

As part of strategy NUMBER ONE > NEXT, we will expand our product portfolio, for all of our brands and segments, with an additional model for the luxury class, an X7 to complement our X family, further additions to our M and M Performance ranges. I already mentioned the BMW M2 Coupe, a new Rolls-Royce which we're developing under the project name Cullinan and there will be new additions to the i family. In the second half of 2016, we will launch another i3 model with 50% more battery capacity. This will be followed by a BMW i8 Roadster in 2018. In terms of technology, we're working parallel on optimizing our combustion engines with Efficient Dynamics NEXT and also on electrification with battery packs and fuel cells.

At the beginning of 2020, our BMW i NEXT will unite the full range of future features, autonomous driving, digital connectivity, intelligent lightweight construction and next-generation electric mobility. Our goal is set out in strategy NUMBER ONE > NEXT. We want to be the leader in the digitalization of individual mobility. We will focus on three main areas, digital customer experience, connected and autonomous driving, business processes. Mobility service and digital services are already a part of our business model today.

DriveNow, ParkNow and ChargeNow are just three examples. Especially in major cities, customers need seamless and individual mobility solutions. For sustainable urban mobility, the U.S.A is our pilot market. In early April, we launched our car sharing service, ReachNow, in Seattle. The number of people who have registered has far exceeded our expectations.

ReachNow is modeled on DriveNow in Europe. Our partner for this service in the U.S.A is a technology startup called RideCell. Since March this year, BMW Connected Drive users in the U.S.A can download the BMW Connected app, a customized digital companion available from the Apple Store. This app offers customers convenient access to a highly personalized world of intelligent, connected digital mobility services. It's a cross-platform mobility concept that is based on an Open Mobility Cloud.

The Cloud gives us an even better picture of our customers' wishes and we can provide them with an even more tailored service. And that's exactly what we're aiming for, the best services in our competitive field. ReachNow and BMW Connected clearly show what we're pushing forward with the implementation of our strategy NUMBER ONE > NEXT. We're strengthening our core business, working intensively on operational excellence. At the same time, we're making swift progress in further developing our service range.

We have set ourselves a number of ambitious goals for the current business year, a slight increase in automotive sales which would be another all-time high for the BMW Group; a slight increase in Group EBT which would be another best result for our Company; and an EBIT margin in the automotive segment that remains within our target range of 8% to 10%. Our first quarter was a good start to the year. For the sixth time in a row, we achieved a new first quarter sales record, with more than 557,000 vehicles sold. Our BMW, MINI and BMW Motorrad brands posted their best first quarter figures yet. Group profit before tax was more than €2.3 billion, our highest first quarter figure ever.

Group profit rose to more than €1.6 billion. And our EBIT margin in the automotive segment currently stands at 9.4% which is at the upper end of our projected target range of 8% to 10%. So, after three months, we remain on track to achieve our targets for 2016. This assumes that business conditions remain stable. A number of risks could potentially affect our business development, such as the continuing normalization of the Chinese market, recessive developments in some emerging markets, political uncertainty in Europe and not to be forgotten, market conditions in the all-important market of the U.S.A.

This year, they appear to becoming more challenging. In addition, the premium segment remains highly competitive. On the other hand, the forecasted growth in the global automobile market is expected to provide momentum. And one of the greatest contributors to our business development will be our attractive range of the new BMW, MINI and Rolls-Royce vehicles. The new BMW 7 Series has been available with a full range of engines since March.

The new BMW X1 is proving extremely popular, with strong sales growth. The X1 long version is due for market launch in China in May. It will be manufactured at our plant at Tiexi. The new MINI Convertible has been on the market since March and in Rolls-Royce, the new convertible named Dawn will add further impetus to sales. Ladies and gentlemen, as you can see, we're shaping the transformation of individual mobility.

We're working from a position of strength, with a solid financial foundation. I remain confident that the BMW is on track for continued success, in its centenary year 2016 and beyond. Thank you very much.

Maximilian Schoeberl: Thank you, Mr. Krueger.

And now Friedrich Eichiner will give you an update on the financials of the BMW Group. Doctor Eichiner, please go ahead.

Friedrich Eichiner: Ladies and gentlemen, good afternoon from my side as well. The BMW Group made a positive start to 2016. In the first three months, automotive sales climbed to 550,000 vehicles.

Both deliveries and Group earnings before tax reached new first quarter highs. The EBIT margin of 9.4% for the automotive segment was also within our target range. The Company is looking to build on successful 2015 financial year and has set itself ambitious targets for 2016. We're maintaining our guidance for the full year. The first quarter fulfilled our expectations in a volatile market environment.

In Europe, our premium brands are in strong demand and our BMW X models remain especially popular. With its attractive product portfolio, the BMW Group is in a good position. In China, sales improved in the first three months, after a weaker 2015. Our X models and the revised 3 Series Sedan have been well received by customers. The Company also benefited from the healthy development of the overall market.

Over the course of the year, we expect sales to receive a further boost from the new, locally produced X1. Full availability of the new 7 Series over the next few months will also have a positive impact. The BMW Group and its Chinese dealer network have adapted to new conditions in the market. In general, we still see growth potential in the Chinese market. The U.S.

auto market has reached a high level overall. The trend towards SUVs continues in North America, partly due to low oil prices. The BMW Group set the right course early on and is now in the process of expanding the production capacity for X models. We have taken into account the changes in demand for sedans and adjusted our planning. The measures we have implemented will have a positive impact on the sales situation in the second half of the year.

Let's take a look at earnings performance at Group level. First quarter revenues totaled €20.85 billion and were therefore on par with last year. Compared with the previous year's high level, translation effects in several of the main currencies resulted in lower revenues. Adjusted for this effect, revenues increased slightly. BMW Group pre-tax earnings increased to €2.37 billion, a slight increase of 4.4% over the first quarter of last year.

At Group level, the EBT margin stood at 11.4%. Our profitability therefore reached the same high level as the previous year. The BMW Group continues to focus its capital expenditure on strengthening its future competitiveness. The Company invested a total of €405 million in products, equipment and other intangible assets in the first quarter. This no longer includes capitalized development costs.

It is usual for first quarter capital expenditure to be lower. The main focus of capital expenditure was on preparations for the ramp-up of new models. As already announced in March, we have redefined our CapEx ratio. It no longer included capitalized development costs. As a result, we're now targeting a CapEx ratio of less than 5% of revenue.

In the first quarter, the ratio stood at 1.9%, due to seasonal factors. The ratio for the full year should be on par with last year. The figure for 2015 was 4.2%. Research and development spending for the first quarter reached €974 million. This is an increase of 5.2% over the same period of last year.

R&D activities in the first three months concentrated on new vehicle development and refining future technologies, such as driver assistance systems. Further electrification of our vehicle fleet is another priority. The 3 Series and the 2 Series Active Tourer were released onto the market as plug-in hybrid models in the first quarter. This will be followed by the plug-in hybrid variant of the new 7 Series in the summer which will strengthen our Company's competitive position and underline its focus on sustainable mobility. The R&D ratio for the first quarter was 4.7%.

As usual, this will increase over the course of the year. The ratio for the full year should be on par with last year's level of 5.6%. BMW Group liquidity remained solid at €11.2 billion at the end of March. This high level of liquidity underscores the Company's flexibility and financial strength. The Company has further diversified its financing portfolio.

Over the past two months, the BMW Group launched its first bond offering at attractive conditions in China and the United States. Let's now take a look at the individual segments, first the automotive segment. Revenues for the first quarter totaled €18.81 billion and are therefore at the same high level as last year. During the reporting period, translation effects of some major currencies had a dampening effect. First quarter automotive EBIT totaled €1.76 billion which is slightly below last year's figure.

Dampening effects resulted from higher personnel costs, as well as increased depreciation and marketing costs. The EBIT margin for the automotive segment stood at 9.4%, therefore remaining in the upper half of our target range of 8% to 10%, like it did last year. As expected, pricing will remain a challenge in 2016. Pricing deteriorated slightly in the first quarter, compared with last year. During the first three months, the vehicle mix included a slightly higher percentage of compact vehicles.

The earnings contribution of our Chinese joint venture BBA, reported in the at-equity result, was lower than the previous year. This mostly reflects preparations for the ramp-up of new vehicles. Over the course of the year, the new, locally produced X1 and the 2 Series Active Tourer will provide positive momentum. The at-equity result for the first quarter also contains initial expenses in connection with the stake acquired in the mapping service HERE. The segment's financial result for the first quarter was a negative amount of €29 million.

This was an overall improvement of €131 million year on year. This positive development was mainly due to the market evaluation of raw material and currency derivatives. Pre-tax earnings saw a solid increase of 6.1% to €1.73 billion. Let's take a brief look at the segment's cash flow. Due to a €971 million higher increase in working capital compared with the same period in 2015, free cash flow in the automotive segment decreased to €532 million.

As previously announced, we expect free cash flow for the full year to be above €3 billion. At the end of the quarter, net financial assets in the automotive segment totaled €17.5 billion. Now, let's move on to the financial services segment. BMW Group Financial Services continued on its growth path in the first quarter. The focus remains on profitable new business and achieving a good balance between leasing and financing.

In the first three months, the segment concluded more than 410,000 new financing and leasing contracts with customers, 7.5% more than in the first quarter of last year. The volume of new business saw a solid increase to €12.46 billion. BMW Financial Services managed a portfolio of 4.4m customer contracts as per March 31. This represents an increase of 8.1% over the previous year. The Asia Pacific region again reported significant growth of 18.3%.

The Americas and Middle East/Africa regions also achieved solid growth rates. In the EU Bank, the portfolio of customer financing contracts increased by 3.5%. Penetration rate, the percentage of new BMW Group vehicles financed or leased by the financial services segment, reached 46.1% at the end of the quarter. This is an increase of 1.2 percentage points year on year. First quarter pre-tax earnings climbed 2.0% to reach a total of €570 million.

The risk situation in the segment remained mostly stable from the previous year, in line with expectations. The premium segment of the European used car market experienced a slight increase in prices in the first quarter. In North America, prices decreased slightly. The credit risk situation continued to improve. The credit loss ratio for the entire portfolio remained low, at 0.29%.

We expect residual value and credit risks to remain stable for the current year. The segment takes a comprehensive, proactive approach to risk management and makes appropriate provisions for business risks. Let's move on to our motorcycles segment. The segment continued on its successful course in the first quarter of this year, after a record year in 2015. In fact, BMW Motorrad had its best ever start to the motorcycle season with sales growth of 7.7%.

We delivered more than 33,000 BMW motorcycles to customers worldwide, the highest ever for a first quarter. Increases were posted mainly in Asia and Europe. The segment's positive business development is backed by our strong model lineup. The long-distance enduro, the BMW R 1200 GS and its sister model, the BMW R 1200 GS Adventure, were in high demand in the first quarter. The BMW S 1000 RR and BMW S 1000 XR models were also very popular.

Segment revenues reached a record first quarter high of €582 million, an increase of 2.6% over the previous year. EBIT for the same period decreased to €94 million, due to higher fixed costs for projects related to strategy implementation. We continue to work intensively towards our ambitious targets for 2020 and expect to see further positive development overall in the motorcycles segment. I would like to finish with a few words about the outlook for the Company. The BMW Group will continue to target profitable, sustainable growth in 2016.

We expect the positive business development of the first three months to continue over the course of the year. We're committed to our targets for 2016, assuming conditions remain stable for the rest of the year. The BMW Group is targeting a slight increase in pre-tax earnings for the full year. The automotive segment is expected to report slight increases in both sales and revenues. The EBIT margin for the automotive segment will remain within the 8% to 10% range.

With attractive new models, we expect BMW Motorrad to report a slight increase in deliveries compared with the previous year. For financial services, we expect return on equity to remain on par with last year and therefore above our target of at least 18%. I would like to emphasize that all our targets depend on stable political and economic conditions. Actual business performance may deviate from our present forecast if global economic and political uncertainties become even greater than expected. Ladies and gentlemen, over the coming months and years, we will gradually be implementing our strategy NUMBER ONE > NEXT.

We're setting the course for the future, with targeted investments in new technologies and drive trains and therefore in the competitiveness of the BMW Group. With its flexible structures and attractive model lineup, the Company is well positioned. The BMW Group stands for innovation and financial strength. Our focus on globally balanced, sustainable growth allows us to offset fluctuations in individual markets and respond flexibly to changing conditions, especially in times of high volatility. Financial strength, attractive premium brands and products, as well as high flexibility, form a solid foundation for the long term success of the BMW Group.

Thank you.

Maximilian Schoeberl: Thank you very much, Mr. Eichiner. Ladies and gentlemen, the line will shortly be opened for questions. Please wait for some technical advice.

Operator: [Operator Instructions]. Our first question comes from Arndt Ellinghorst of Evercore ISI. Go ahead. Your line is open.

Arndt Ellinghorst: It's Arndt Ellinghorst from Evercore.

Two questions, please, if I may, the first one on the U.S.. We've discussed the market intensely just a couple of months ago and your inventory situation and the mix as well. I just wonder whether you could give us an update on where you currently see the market. I realize that you have added the U.S. to the risk section in your outlook statement and you've taken out Russia, but of course, if the U.S.

starts slowing for BMW that would have a much, much bigger impact on your numbers. The second question, just briefly on inventories. As always, first quarter, pretty strong increase in inventories, €2 billion, roughly, this quarter, €1.7 billion the year before, so that's quite usual. Could you give us some color on how you expect the inventory reduction to proceed over the coming quarters and also in that context, whether you can keep the operational leverage and the level of profitability that you've just shown in the first quarter this year? Thank you very much.

Friedrich Eichiner: Well, Arndt, let me start with the U.S.

question first. So, I think it has a bit to do with the year 2015 and what we experienced in the U.S. market. Everybody was in the beginning of the year very bullish, with the U.S. market trying to compensate for a shortfall in China, so a lot of activity, high competitiveness and everybody brought a lot of product into the market.

It became visible that the fourth quarter in U.S. was not as strong as expected and we took a decision early on to clean up inventories to prepare for maybe a more flatter market and that is actually what we're doing those days. And we think it should come to an end in the second quarter and then we would see a much more healthier position overall for the BMW business in U.S. because then the inventory pressure will certainly be relieved. So that's the plan and it has some consequences.

Therefore, we're working, adjusting our production plans and reallocating more SUVs to the U.S. and working on a better mix and things like that are also on the way. In a nutshell, it means we have a bit a slower market in the first two quarters and should recover then in the second half of the year, that's our expectation. And this will be supportive for growing volume for 7 Series and for X1 at the same point in time and with the support of a higher capacity in the Spartanburg plant. So that's at least the plan and how we're working.

A similar picture we've seen in China. We've seen U.S. on inventory side and we do the clean up now. So, now the question about the inventory. Again, keep in mind our really strong working capital management in the fourth quarter of 2015.

So we brought the inventory level down, with positive effects in the last quarter of 2015 and now we have to prepare for higher sales in 2016. So the pattern will be that we have working capital to be built up in the third quarter, we'll bring it down to a certain extent in the second quarter and then heavily in the fourth quarter. It has also to do with the launch dates of the products to come in. So that is something we've planned. That is clear to us and we're working on that.

So it's not something that was a surprise to us. It was built into our numbers and is necessary in order to supply for the markets that are now supposed to sell stronger in the months to come. So that's more or less the background.

Arndt Ellinghorst: Now, should that reversal of working capital lead to better operational leverage in the coming quarters or worse operational leverage?

Friedrich Eichiner: Well, Arndt, you are aware we're not giving any guidance for quarters, so that's still our rule. But I think I gave a clear message that we're doing some clean up and we're waiting to get some benefits, especially in the second half of the year and that is basically the message I want to give.

Operator: Our next question comes from Marc Tonn of Warburg Research. Go ahead. Your line is open.

Marc Tonn: Just a question on the foreign exchange. I think you said this morning or at this point in time that you're expecting a three-digit million tailwind from FX.

Perhaps you could give us some idea whether this will be more backend loaded or how much of this has already been, let's say, recorded in the first quarter and how much risk there is with regard to this assessment. I'm assuming that potentially a lot of this non-cash position is in emerging markets currencies versus what you already, let's say, have in your books for U.S. dollar and the renminbi, perhaps some indication on that would be very helpful. Thank you.

Friedrich Eichiner: Basically, we have not seen much of a tailwind in the first quarter, so there's more expected in the next three quarters to be seen.

But overall, it will be a lower three-digit million number, FX and raw material together. So that's what we guided and we still expect this to come. Emerging markets are always a bit tricky, because it's hard to hedge, as you know. So we have a very solid position in the major currencies. We're almost hedged on this, so that's very clear to us.

But emerging markets, as I said, always hard to predict.

Operator: Our next question comes from Kristina Church of Barclays. Go ahead Your line is open.

Kristina Church: My first question is just carrying on from the FX point. You said you were almost fully hedged for this year on non-emerging markets.

Could you just update on where you stand for next year as well on FX? And then my second question relates to China. You've obviously done a bond in China now. I was just wondering what your outlook is for the financial services segment there, if you're seeing opportunities for leasing growth as well as further finance penetration in the market and if you've got any update on a growth outlook for the market. Thank you.

Friedrich Eichiner: Well, hi, Kristina.

So basically you know we're a very conservative company, so clearly we took risk out for 2017 already. We have a good position in the major currencies and that, as I said, should give us a position with less risk when it comes down to FX. Talking about China, we have a growing financial services business in China and there is basically a growing need for financing. We're quite happy that we were successful now with the first bond. I think this is opening up new opportunities for us and we will have to use them going forward, as we still think that China is a growth opportunity for us in the next couple of years.

Now, the market is also diversifying, so we see the first steps towards leasing. We're trying to build up the first business opportunities. It will not be a big part of our business, so the major business will still be on the loan side, but we look into it as the market is further maturing.

Operator: Our next question comes from Patrick Hummel of UBS. Go ahead.

Your line is open.

Patrick Hummel: A strategic question. I'm wondering to which extent were you surprised by the reservation figures we got for the Tesla Model 3 in the first few days after the launch and to which extent you actually see an impact on the 3 Series. In particular in the coming couple of years, does that pull away some demand from this key product of BMW? And second part of the question, does the strong interest in that model change your view on when to launch the next large EV? You told us a couple of months ago that the next launch is going to happen only after 2020. In light of this data point from Tesla, is that date still set in stone or are you thinking about bringing that a bit forward, given the strong demand?

Harald Krueger: The first question was on the Tesla Model 3.

I would like, first thing, we welcome new arrivals in the area in the time of electric mobility, because that will help us to develop that market and we strongly believe on sustainable mobility for the future. If it will have an impact on the 3 Series, we will see in the future, but that is definitely an area and ground where we would like to fight and protect. What we do in between, because the question was is there anything else we can do, we're starting already this year with, in the second half of 2016, we're increasing the battery capacity of the i3 which will have then 50% more model range and capacity battery wise and we're still working in the future on more. And the second one, we decided also to do an i8 Roadster in 2018 to expand the i family and then the iNEXT will come at the beginning of the next decade. The question is why late 2020 or beyond, because we also would like not just look on electro-mobility, also on autonomous driving, on lightweight structures and connectivity and interior of the future.

So we would like to have a car and then continue the i success story on a car which is not just moving and focusing on e-mobility, also on new areas of connectivity, on e-mobility, as well as autonomous driving and that takes a little bit of time, but we will see. I appreciate that we have now some support in the German country about electro-mobility, but I believe this market will develop in the future. The biggest market for e-mobility might be China in the future.

Operator: Our next question comes from Michael Tyndall of Citigroup. Go ahead.

Your line is open.

Michael Tyndall: A couple of questions, if I may. Just focusing on the U.S. again, Dr. Eichiner, I wonder if you could just remind us how many off-lease cars you've got this year versus last year.

And then, maybe I'm reading between the lines here, but you seem a bit more relaxed about used pricing versus when we saw you in the middle of March. So I'm wondering if that's a fair description of how you're feeling about used vehicle prices in the U.S. right now. And then the second question, I guess looking a lot further forward to your NEXT strategy and the development that you're doing on that front, I wonder if you could maybe give us a bit more detail. I realize it's early days, but is this something that you're looking to work with partners or is this something you're doing exclusively by yourself? Is it an open architecture, where other people can come along at a later stage? I'm just wondering how this fits with the rest of the industry and whether or not you see a reason for doing this all by yourself or in fact you're actually being the pioneer and hoping that other people will follow and use your technology in the future.

Thanks.

Harald Krueger: On the NEXT strategy, there was a question for more details on looking for partners. I would like just to take two examples. The one is in the future we will also need fuel cell cars and with fuel cell technology and we have, for example, a good collaboration with Toyota motor cars. We're developing components together for future generations of fuel cell cars and that is a strong partnership.

We also have a partnership with Toyota on a sports car. So that is just one example where, if we will find a win/win, we're looking for partners. A second one which you can see is the Nokia Here acquisition, for example, where it's aimed for the next generation and the strategy NUMBER ONE > NEXT. The digitalization of the maps for autonomous driving, for more safer driving, is absolutely important, where we decided together with Daimler and Audi to buy Nokia Here to have the best digital maps and as you can see, this wouldn't be worthwhile for one company only. But on the other side, we would like to be in a substantial good financial performance and foundation that we can fund the future.

For example, the next level of efficient engines or the next level of digital connectivity in the car, that we can fund this by ourselves. But the strategy is also where we find a good partner and we believe we can find a win/win, we will go for it.

Friedrich Eichiner: Well, basically, your question about the maturity of used cars in the U.S. market, I would say it's a diverse picture. First of all, of course we feel some pressure on sedans.

Why? First of all, the volume is a bit higher than in 2015. Secondly, we have the shift from sedans to the SUVs in the market, this also plays a role. But having said that, we also have countermeasures because it was clear that this would come and we have positives when it comes down to used car pricing on the SUV side and a bit more pressure on the sedan side. Overall, it's not yet really rushing through. And we have other markets like the German market, where used car pricing is improving.

So the portfolio within financial services is still in a healthy condition overall and it's reflected in our first quarter as well. So that's how we look at it. Now we have to see how this works out over the rest of the year.

Operator: Our next question comes from Horst Schneider of HSBC. Go ahead.

Your line is open.

Horst Schneider: I have got a few questions. First of all, maybe you can give us an update on the other cost changes that we can expect in the next few quarters. In Q1, we didn't see anything that was really a burden. So, maybe an update on that.

And then, second, I want to know your view on the regulation that is coming up in China. I want to know your view what you consider more as a risk, the emission regulation in China or the emission regulation that is coming up in Europe and I want to know what is your response to the upcoming threats and risks for foreign carmakers regarding these emission regulations in China. Thank you.

Friedrich Eichiner: Well, let's start with the other cost changes. So this year overall it will be fairly flat, so we think maybe a slight improvement of a mid-double-digit million number.

This is what we're expecting in this particular year.

Horst Schneider: Sorry, that's a burden or improvement?

Friedrich Eichiner: As I said, a slight improvement of, as I said, a mid-double-digit million number.

Horst Schneider: All right. Okay.

Harald Krueger: The regulations in China about emission, I don't see that as a risk; I see that as a challenge.

But you can see that worldwide we will see stronger regulations on emissions. Currently, probably the biggest regulation we have in Europe for the 2020 targets. But I would expect -- and that's why we're so focusing on sustainable mobility, e-mobility and other cars are well and plug-in hybrids. That's why I said in my speech we will have now, by the middle of this year already, also five high performance models on the brand BMW on the market which is an X5 plug-in hybrid which is, for example, very successful in certain countries in Europe. We have the 2 Series Actives; two are hybrid.

We have in China a 5 Series locally produced and assembled plug-in hybrid. So we will have enough cars in our portfolio which are electrified and we also have battery electric vehicles for the future. So that is the way we need to attack this one in every country, but the emissions side will be tough in each of the countries worldwide. But I think we're prepared in our product portfolio. And in our strategy NUMBER ONE > NEXT, we also said that we're focusing on efficient dynamics next, efficient dynamics 2.0, saying we will invest also into the combustion engines to make them further efficient and electrifying the whole portfolio.

Horst Schneider: All right. So if I get it right, then, this 5 liter consumption target that we get in China by 2020 is not really considered as a risk for you. And also new emission rules like B6, C6 in China which makes a combustion engine much more expensive, also that will be no challenge for you or risk.

Harald Krueger: That's something which is not absolutely unexpected. It was part of our long-range planning that things like this will come in China.

To meet them is definitely a challenge for everyone, but that is part of our strategy, to be successful with those challenging environments. So it's not unexpected for us.

Operator: Our next question comes from Stuart Pearson of Exane BNP Paribas. Go ahead. Your line is open.

Stuart Pearson: So, two or three questions. On the U.S., on the capacity side, I think you said that you're re-orientating the capacity to have more SUV supply, but just more specifically, I just wanted to check what that meant. Does that mean adding any fixed costs or is this just adding shifts and boosting productivity? So maybe you could elaborate a little bit on that. And also, perhaps the flip side of that, on the sedan side, when you reduce supply capacity there is that reducing shifts or are you able to take any fixed costs out? So that's the first question. The second was just on headcount, because I noticed that Q1 seemed to be your slowest rate of increase in headcount for around four or five years.

So is that a new normal or is that a temporary pause? Are you finding ways to boost productivity which I guess has been relatively flat for the last few years at a high level? And then just a final question, maybe technical, following up on Horst's question on the other line item. In fact, it's now turning more positive. Yet finance penetration, lease penetration is still quite high. Does that mean that your leases are now less profitable than the last two or three years? Is that the correct interpretation? Thank you.

Friedrich Eichiner: Well, okay.

First, let's talk about the effect of the capacity expansion in U.S.. Just to give you a few numbers, last year we sold in the U.S. 404,000 MINIs and BMWs and only 30% were SUVs. But the market is now gaining more and more momentum on the SUV side, driven by the low oil prices. This year, it should be possible to increase the SUV share up to 40%, so that is what we're targeting.

The ways of achieving it clearly is an increase of capacities especially in Spartanburg. We're working on of course extra shifts, but we also have to make investments on the supplier side. Altogether, it will give us additional volume not only for the U.S. market, because the demand for SUVs is also increasing in other markets as well. That's basically the plan.

So far, the substitution is not as high in order to give us a big problem for plants where we're reducing sedans, so sedans are still well balanced. We're adding new models and we're ramping up, like the 7 Series. Keep in mind the new 5 Series is already on the horizon. So there's a lot of new stuff to come to the market and this will help us as well. Now, just to make that clear, the other cost that Horst mentioned, that had to do with our EBIT bridge in the auto sector, where we have one item.

We're talking about future cost, efficiency gains and things like that. And that position I mentioned is positive by a mid-size double-digit million number. It has nothing to do with the eliminations that is associated to the leasing business. We expect earnings posted by the eliminations and other entity segments in 2016 to be in negative low triple-digit million euro territory, just to make that number clear also.

Friedrich Eichiner: I forgot a very important answer.

You asked about the headcount. Well, you know we said that the Company will grow in 2016 on a slower pace. That is always an opportunity to work on efficiency, as we don't have to manage many launches this year and that's what we're trying to do. So we have an eye on efficiency and it should reflected in the headcount number as well.

Operator: Our next question comes from Michael Raab of Kepler Cheuvreux.

Go ahead. Your line is open.

Michael Raab: There were press reports that most recently you apparently lost a couple of key people of your BMW i project crew to startups in Asia. So I was wondering whether this is an indication that BMW i internally is now enjoying less prominence than it may have a few years ago. And perhaps also, in conjunction with that, if that hypothetically was to be the case, knowing or apparently expecting that you're not going to launch a third all-new model under the BMW i brand before the end of this decade which apparently is not going to make any major contributions to reaching the 2020 targets, isn't that perhaps implicitly a positive signaling of the progress you believe to be able to make on the efficiency improvement front of your traditional combustion engines?

Harald Krueger: The question on the BMW i project and the people, it's overall four people who have left the Company.

Not all were working still in the i project. So there are some -- one person was just already on another job for a couple of months already, not just six and longer, that is not unusual that people are leaving the Company. It was not the project team. It's just some people out of the team and we're continuing the work there. So that is happening sometimes in business and it's not something which we believe is affecting us because we have good people which we'll further develop.

We have new projects in the i area, with the i8 Roadster, with the further development of the i3. And as you can see, we will also be very busy already with the iNEXT, because all the R&D development work starts now. So we will see that the i brand which has been so far very successful, we will continue to further develop and we have people on board to do so. The second question, maybe we're not quite sure if we understood that right. Maybe you can repeat that one.

Michael Raab: Yes, I'm more happy to rephrase, of course. Thank you for that. Now, my understanding was that the third new model under the i brand is not going to be launched before the end of this decade, so one would think that electric power trains are currently reducing the average CO2 emission of your fleet. Now, if apparently a new model is not being launched before the end of this decade, it means on the reverse that it's not making any major contributions to reaching that 95 gram target in 2020. It means, however, implicitly that you must believe to be able to make according progress on the traditional, i.e., conventional combustion engines to basically get there without a high electric share.

Is that correct? And if so, what would be the means for that, please?

Harald Krueger: Okay. That's clear now. First of all, on the CO2 strategy, reducing emissions, we work on three main pillars. The one is making our current engines, diesel and petrol engines, more efficient which we call Efficient Dynamics NEXT. So we have invested heavily also already into the engine area, making engines more efficient and you will see that in the next years to come already.

That's one portion which is contributing to the lower emissions. The second one, we're not talking only about the battery electric vehicles. We will have an expansion of the plug-in hybrids in the portfolio and these are significantly contributing to the reduction of the CO2 targets as well, with the 2 Series Active 2 or with the X5 Series plug-in hybrid, the 3 Series plug-in hybrid, the 7 Series plug-in hybrid. We already see an increasing demand this year taken up by customers, so there's already people. In some countries, we see an order income which is quite positive.

So with this one, it also contributed on the side of electrification. It's not battery electric vehicles only. And the other one, we will also have by the end of second half of 2016 already four BMW i3 models, with two different ranges and with one range extender or without range extender, so the customers can choose. So with all three pillars in terms of further developing the iNEXT on electric and the i8 Roadster, as well as the i3 further cars, with a contribution; secondly, with the plug-in hybrids expansion which we will see in the next years to come and more efficient combustion and diesel engines, we will meet the targets.

Michael Raab: Okay.

Given your comments, Mr. Krueger, I sense a certain optimism of yours concerning the increase of the share of plug-in hybrids in the next years. This being said, could you perhaps put this into numbers and tell us what you think the share of plug-in hybrids out of your total global sales in 2020 is going to be, please?

Harald Krueger: No, that's too difficult to forecast. If I would know this one, I would do maybe something different. No, that's really difficult.

But I can tell you from the first market feedback we have seen so far. Take one example in Baja, where we see, in selling X5s, the percentage of X5s with the plug-in hybrid has come up to 40% of the mix already which is also relating to is there any subsidies, is there support, is the infrastructure available. But it's difficult to forecast, but we will see an increasing demand on plug-in hybrids especially for long-distance driving.

Operator: Then the final question comes from Fraser Hill of Bank of America. Go ahead.

Your line is open.

Fraser Hill: Just wanted to come back to the issue of these other costs or the future costs relative to efficiency savings in the auto division. As you said, you're expecting actually a moderate tailwind from that in 2016. Can you talk about that in the out years, in 2017 and 2018, perhaps? How do you think that balance of future cost step-ups relative to efficiency measures is going to trend beyond 2016? I guess what I'm really trying to look at there is, is this an unusually positive year in terms of the cost savings that you're seeing coming through the business and just those future cost step-ups begin to be more of a weight in the years subsequent to 2016? And then just one final question, on China and BBA. Could you give us an idea of what the underlying profitability of that business would have been year on year ex the product startup costs for the new models? So just on an underlying volume and price basis, what would your net contribution have been from BBA year on year? Thank you.

Friedrich Eichiner: Well, your question about future cost, so basically I don't give you -- cannot give you a number now for 2018, 2019 or 2020, because there's a lot still on the move. We see two trends. First of all, we have to consider additional costs that will come in, in order to develop new technologies that we desperately need for autonomous driving, for emission reduction, for CO2 reduction, electrification. All that stuff will still play a huge role going forward. I think we have to carry that burden in order to be competitive and this is something, but on the other hand, then, that should be compensated, looking for countermeasures where we look into every and each corner of the Company.

So we work on headcount as well as we're working on the purchasing side, material cost side, taking complexity out of the Company; for example, streamlining our portfolio as we did now with many similar ideas for BMW portfolio on the way. So there are more than one idea and more than one measure that has to be implemented in order to compensate the burden, that is something that we did over the last couple of years and so far it worked always out. So keep in mind that the Company was able to keep profitability in a range of 8% to 10% now quite for a while and this is still our commitment going forward. But we don't have now taken a decision for every and each measure for 2018 to get to this point. There's still a lot of work to be done.

So that's one point. Your second question then was about China BBA profitability, net contribution of BBA. Well, what we can see is that we have in the first quarter €101 million. That is the result, right, that we have. That's the profit.

But you have to take into account that actually we're building up capacity, we're localizing products. So we have now a certain burden for future investments within BBA, because another three models will be launched in the Chinese market, all locally produced and therefore we have to carry the burden on the cost side as well. But having said that, same point in time, this is the next step for growing the business within BBA as well. And the operational performance, that's something I really can confirm, is absolutely in line with our expectation.

Maximilian Schoeberl: Thank you very much, Mr.

Eichiner. Ladies and gentlemen, thank you for joining us today. We wish you a pleasant day. Bye, bye and thank you very much.

Operator: This now concludes the conference.

Thank you all very much for attending. You may now disconnect your lines.