Executives: Maximilian Schöberl - Director, Corporate Affairs Harald Krüger - Chairman, Board of Management Nicolas Peter -

CFO
Analysts: Patrick Hummel - UBS Kristina Church - Barclays Arndt Ellinghorst - Evercore ISI Horst Schneider - HSBC Michael Tyndall - Citigroup Tim Rokossa - Deutsche Bank Philippe Houchois -

Jefferies
Operator:

Maximilian Schöberl: Good afternoon, ladies and gentlemen. This is Maximilian Schöberl. I would like to welcome you all to our telephone conference for the First Quarter Results. With us today is Harald Krüger, Chairman of the Board of management of BMW AG; and Nicolas Peter, our CFO. First, Harald Krüger will give you an update on the business performance during the first quarter of 2017.

Nicolas Peter will then take you through our financial results. Afterwards, we will have time for our Q&A session. Harald, please go ahead.

Harald Krüger: Good afternoon, ladies and gentlemen. The BMW Group always takes a long-term approach.

The business environment remains volatile and characterized by growing uncertainty. We continued to chart our own course. To this end, we make strategic decisions and enter into partnerships. This is how we will continue to secure the future competitiveness of the BMW Group. As I said at the annual accounts press conference, we are going on the offensive.

This means, first, we have set ourselves ambitious goals for the current financial year. After the first quarter, we are on the right track. Our guidance for the full year 2017 remains stable. Second, we inspire our customers. We are launching the biggest model offensive in our company’s history.

This year alone, we will launch more than 20 new and revised car models, with another 20 to follow next year. And there will also be 14 new BMW Motorrad models this year. Our customers will be able to choose between a wide range of different drivetrains. And third, we are setting a course for the future. That is what our Strategy Number One Next is all about.

We are leveraging the possibilities of digitalization to take mobility to a new dimension for our customers. This applies to both our vehicles and services. Our production and internal processes are also becoming more digital. This will also significantly increase the speed of our actions. Our goal is clear, to be the technology and innovation leader in mobility.

I would like to say a few words about all three of these areas. Let’s start with the first topic. You know our targets for the financial year 2017, a new all-time high for deliveries at group level and a new record for group profit before tax. We expect the EBIT margin in the Automotive segment to remain within the range of 8% to 10%. And we also have set ourselves the goal of selling 100,000 electrified vehicles.

After the first quarter, we are well on track. Group sales posted a record first quarter. Our BMW MINI and BMW Motorrad brands also reported their best ever first quarter. The brand delivered more than 0.5 million vehicles in a single quarter for the first time, the BMW brand. The EBIT margin for the Automotive segment reached 9%.

Our pretax earnings increased significantly to more than €3 billion. As previously reported, this is mainly due to valuation effects in the financial results. We are planning high upfront investments for the full year. This will include investment in our model offenses, our locations worldwide and in future technologies, such as electrification and autonomous driving. All these factors will affect our earnings momentum this year.

Electrification of our portfolio is a clear priority. We know from experience that customers prefer to have more choices. In the first quarter, we delivered twice as many BMW plug-in hybrids, BMW i3s and i8s than in the same period of last year. Almost 20,000 customers opted for alternative drivetrain. This means that electrified vehicles already account for more than 3% of BMW Group total sales.

When the new MINI Countryman plug-in hybrid arrives in summer, we will have a total of nine electrified models in showrooms. Our electric BMW i3 was designed for urban mobility from the ground up. And i Series produced models with a combustion engine, the sales curve for the i3 is continuing its upward course. In the first quarter alone, sales figures were up 50% over the same period of last year. Of course, the extended range also contributed to this.

As I’ve said before, electromobility is a marathon. New models will provide us with further momentum. In 2018, the BMW i8 Roadster; in 2019, a pure electric MINI; in 2020, a pure electric BMW X3. Our efforts will continue to require extensive investment. Let’s move onto the second aspect.

We inspire customers. The new BMW 5 Series sets the benchmark in connected services and also offers a wide range of drivetrains and extras. Customers like that. The 5 Series Sedan is in great demand. In the first month since market launch, we have sold more than twice as many cars than we did of its successful predecessor in the same timeframe.

We are also very pleased about the strong incoming orders for the plug-in hybrid model and the M performance variant, which has been on sale since March. In June, the success of the popular long-wheelbase version in China will become available as well as the Touring. All these new models will generate further impetus for growth. Sales of our flagship BMW 7 Series were 50% higher than in the first quarter of last year. As you know, we want to increase our sales in the upper premium segment significantly by 2020.

To achieve this, we are selectively expanding our product offering in the luxury class. Towards the end of the year, Rolls-Royce will launch the eighth generation of the legendary Phantom. It will come with a new aluminium architecture. For 2018, we have announced the BMW X7, a model with a very strong emotional appeal. Our new models will also strengthen our position in the high margin luxury segment.

In addition to its new top model, the X7, the successful BMW X family will also will become attractive new additions in other segments, the new BMW X3 later this year and a brand-new BMW X2 next year. Also, the entire BMW 4 Series range has been revised. All 4 Series models, including the M4 Coupe and M4 Convertible, are even more sporty, connected and upscale. At MINI, the Countryman has had a good start just like the John Cooper Works model. The plug-in hybrid will be available in June.

On to our third topic, we are setting the course for the future. One of the BMW Group’s strengths is a high level of flexibility in all areas. Our balanced distribution of sales, and our presence in the main market regions of the world help us offset regional fluctuations. For production, we can rely on a highly efficient global network of 31 locations in 14 countries. This allows us to adjust our model mix quickly in response to changes in demand.

When it comes to drive technologies, we prefer a broad and flexible approach. It is still too early for accurate predictions about which drivetrain will prevail, in which marketplace and when. That’s why it’s even more important for us to stay quick and ready to react. Strategy Number One Next will take Efficient Dynamics to the next level, Efficient Dynamics 2.0. We will continue to make our combustion engines even more efficient.

An important factor remains the aerodynamic optimization of all our models. By 2025, all our vehicles with combustion engines will be fitted with electric EV recuperation systems. This will bring a further CO2 reduction of around 5% to 7%. We are working on fuel cells for longer distances with our partner, Toyota. The modern dealer drivetrain is also a component of Efficient Dynamics 2.0.

There is much being written and said about diesel. However, we prefer a more fact-based and rational discussion. I would now like to say something based on the facts. One thing is certain. Diesel plays a key role in Europe’s ambitious climate policy.

Clean diesel vehicles of the Euro 6 generation use at least 25% less fuel than comparable petrol models. Therefore, they emit at least 15% less CO2. One thing is clear. It will not be possible to meet the EU’s strict CO2 targets for 2020 without diesel. We will continue to meet clean diesel drivetrains in the future.

That’s why we equipped our new models with the most modern technologies for exhaust gas treatment. As the number of Euro 6 vehicles in the market grows, diesels will account for less and less of overall particulate matter and NOX emissions. Particulate matter is anyway only an issue for diesel cars over 10 years old without a particular system. Particulate emissions from engines only account for a very small percentage of the total volume. Nevertheless, in public discussions, air quality alert and banning diesel vehicles are often mentioned in the same breadth.

Without the facts, the debate about diesel creates uncertainty, especially for the owners of older diesel models. Additionally, incentives could be used to motivate car owners to switch to new technologies, like electromobility, or to new and more efficient combustion engines. Big cities benefit from an intelligent mix of solution. For example, improved traffic flow, support for e-mobility, and charging infrastructure, promotion of car sharing with modern low emission vehicles, less congestion and easier parking through digitization, as well as environmentally friendly buses and taxies. As a global company, we need planning reliability for our investment decisions.

The same applies to customers and their purchasing decisions. But how is anyone suppose to make a decision when every country has different regulations and every big city has its own concept for low emission zone. Planning reliability comes from joint solutions. Individual mobility in diesel needs a coherent framework, both at a national level here in Germany and across the European Union. Ladies and gentlemen, with our strategy, we have a clear roadmap for the future.

Let me give you two current examples. First, autonomous driving. We are working intensively with Intel and Mobileye on the development of autonomous vehicles. We are making good progress. Second, electromobility.

We are strengthening this important future technology at our home base in Germany. We have the highest level of in-house development in electric engines, power electronics and high-voltage batteries of any of our competitors. We are now electrifying all our brands and model Series. We are creating flexible architectures for both conventional and electrified drivetrains. This enables us to meet the varying needs and demand in the markets.

Already today, nine locations worldwide produce nine electrified models, eight of which are plug-in hybrids. From 2021, the iNext will be our new innovation spearhead. We have decided to build the iNext at our Dingolfing plant. Together with our Landshut plant, we are expanding Dingolfing as our second competent center for e-mobility, alongside our Leipzig plant. Dingolfing has much experience in lightweight construction, highly complex model Series and connected vehicles.

The iNext and larger BMW i vehicles, fits into the spectrum. Ladies and gentlemen, all of this shows we are implementing our strategies step-by-step. At the same time, we focus on being agile and flexible, so we can respond quickly to unexpected changes in an ever growing world of uncertainty, and new trends in our industry. Our strong financial foundation and our operational strengths enable us to continue to shape our own future. Thank you.

Maximilian Schöberl: Thank you very much, Harald. Nicolas, please go ahead.

Nicolas Peter: Ladies and gentlemen, good afternoon from me as well. The BMW Group has begun the year with a strong first quarter, and we were able to build on the success of the 2016 financial year. In the first three months of the year, group profit before tax increased by around 1/4 to €3 billion.

As communicated two weeks ago, this increase is mainly due to positive valuation effect. The EBIT margin in the Automotive segment was at 9.0%. And we made clear at our analyst and investor conference, our focus is firmly on the future. This year, we will be investing in the further electrification of our model line up and new technologies. Sustainable profitability within our car business is the basis for this.

Let’s start by taking a look at the performance at group level. In the first quarter of 2017, group revenues reached €23.45 billion and were 12.4% higher than previous year. Group pretax earnings totaled €3.01 billion. This was partly due to positive effects from new investors acquiring a stake in the mapping service here, as well as valuation effects in the other financial results. The earnings contribution from our Chinese joint venture BBA benefited from its strong market position.

Driven by a dynamic sales performance, it increased by €87 million to a total of €188 million. In the first quarter of 2016, the production change over for the BMW X1 had an adverse effect here. Thanks to the factors mentioned earlier, the group’s EBIT margin stood at 12.8%. Group net profit rose to €2.15 billion. As previously announced, this year, we have launched the largest product offensive in the company’s history.

The new 5 Series Sedan and the new MINI Countryman came into the market during the first quarter. Preparations for further new models are already underway However, the bulk of the costs is likely to be reported over the rest of the year. We invested a total of €605 million in property, plant and equipment and other intangible assets in the first quarter. This represents a relatively low CapEx ratio of 2.6%, in line with seasonal factors. For the full year, we expect the ratio to be above last year’s level, but below our target of 5%.

As forecast, research and development expenditure for the first quarter increased significantly and reached a total of €1.32 billion, €343 million more than last year. Therefore, as expected, our R&D ratio of 5.6% slightly exceeded our target range of 5% to 5.5%. For the full year, the ratio is likely to be slightly above our target corridor. Over the course of the year, we are planning further substantial investments in our product offensive, continued development of e-mobility and strategic projects like autonomous driving. Ladies and gentlemen, let’s move on to the Automotive segment.

Deliveries of our three brands rose by 5.3% in the first quarter. In China in particular, growth remains strong. This is due to our attractive new models and a consistent focus on the needs of our Chinese customers. We have further expanded our offering with the extended wheelbase version of the BMW X1 and the recently launched 1 Series Sedan. The new long-wheelbase version of the 5 Series Sedan will provide a further boost midyear.

The positive trend in automotive sales also continued in Europe. In the Americas, measures taken last year are now showing results. The sales situation has stabilized, as expected. We continued to adopt the SUV share to the high demand and cleared stocks. Ladies and gentlemen, going forward, we will be keeping a clear focus on earning quality in all sales regions.

The solid growth in worldwide deliveries also drove revenues to €20.69 billion, a 10% increase compared to the previous year. The X models and the BMW 7 Series are especially popular with customers. We are also seeking positive effects from the launch of the new 5 Series. Segment EBIT rose by 6.1% to around €1.87 billion. The EBIT margin stood at 9%.

The financial result in the segment for the period reached a total of €408 million due to the affects mentioned earlier. Pretax earnings in the Automotive segment increased by almost third to €2.28 billion. Automotive free cash flow have developed positively and stands at €1.6 billion, mainly reflecting the strong net profit, as well as sound management of inventories. As forecast, free cash flow for the full year is expected to total more than €3 billion. Let’s continue with the Financial Services segment.

In the first quarter of 2017, we concluded around 466,000 new financing and leasing contracts with retail customers. This represents a significant increase of 12.6%, mainly from growth in Chinese credit financing. At the end of March, BMW Financial Services managed a total portfolio of almost 4.8 million customer contracts. 49.2% of new BMW Group vehicles were financed or leased by Financial Services in the first quarter. Pretax earnings for the segment reached €595 million, a 4.4% increase year-on-year.

The positive development of the risk situation continued in the first quarter. The net credit loss ratio of 0.33% remains broadly in line with last year’s low level. As expected, used car prices worldwide, with the exception of Asia, decreased slightly, driven by seasonal factors. We have made comprehensive provisions to cover existing and potential risks in our Financial Services business and constantly monitor our risk management parameters. Of course, this also applies to our diesel vehicles.

From today’s perspective, we are well protected against residual value and credit risks. Ladies and gentlemen, I would now like to talk about our Motorcycles segment. Right on time for the start of the new season, our current product range, which includes many new models, has been very well received by our customers. In the first three months of 2017, BMW Motorrad sold more than 35,000 motorcycles, 5.5% more than last year’s record figure. This March, saw our entry into the segment below 500 cc with a G310R.

The long-distance enduro R 1200 GS has been solely redesigned and was also successfully launched in March. With the new R nineT Pure and R nineT Racer racer, we have extended our popular heritage family to four models. They will be joined by a fifth model, the R nineT Urban G/S from June. Segment revenues also rose in line with deliveries, climbing 7% to €623 million. EBIT rose to €125 million, benefiting from higher volumes and positive mix effects.

This was an increase of 33% over last year. Due to seasonal factors, the first quarter EBIT margin stood at 20.1%. This is an increase of almost 4 percentage points over the same period of last year. Finally, I would like to come to the outlook for the company. Our guidance for the full year 2017 remains unchanged.

We still expect to achieve a slight increase in group profit before tax, slight increases in deliveries and revenues in the Automotive segment, a significant increase in BMW Motorrad deliveries, an EBIT margin within the target range of 8% to 10% in both the Automotive and the Motorcycles segment, and a slight decrease in return on equity in the Financial Services segment, although it will still remain above the targeted minimum level of 18%. Our guidance assumes, there will be no significant change in political and economic conditions. Ladies and gentlemen, the first quarter of 2017 shows that the BMW Group is well on track. All segments are on course to meet their targets for the full year. And with new products like the new 5 Series Touring in the pipeline, we expect the strong performance of our core business to continue.

High upfront investments in areas, such as electromobility and autonomous driving, will slightly dampen the upward trends in earnings over the coming quarters, as forecast. I would like to emphasize. Profitable growth remains our focus. This strategy has paid off over the years. The BMW Group has been one of the world’s most profitable car companies for years.

At the same time, we strive to remain a leader in new technologies and innovations with a clear focus on electromobility. We remain firmly committed to pursuing these goals in the future. Thank you.

Maximilian Schöberl: Thank you very much, Nicolas. Ladies and gentlemen, the line will shortly be open for questions.

Please wait for some technical advice.

Operator: Thank you. [Operator Instructions] Our first question is from the line of Patrick Hummel at UBS. Please go ahead. Patrick, your line is now open.

Patrick Hummel: Thank you very much. Good afternoon everyone. Thanks for taking my questions. The two, please, if I may. First one, regarding your statements about diesel, you said you want to have a facts-based debate about diesel.

However, in spite of facts, it’s also a fact that the diesel share in the main European markets have come down quite considerably between 300 and 500 basis points year-over-year. And it seems even an accelerating trend looking at the March and April data as far as they are available already. So I’m wondering, first of all, what actually has your diesel share done year-to-date. Any color would be appreciated. And second of all, from a strategic point of view, how are you going to tackle this? It sounds like you’re ready to do a lobby campaign in favor of the diesel, but will we also see any product content response? For example, adding more multi hybrids 48-volt technology in the gasoline engines in the short term.

And my second question for Dr. Peter. Regarding the free cash flow, it was yet again a very strong free cash generation in the first quarter. There was about EUR 1.4 billion in the other line, positive free cash flow. You gave some short explanations in the quarterly report, but I will be grateful if you could give us a bit more color.

And in particular, whether we should see that as quarterly swing factors, i.e. a reversing trend in the coming quarters, or what’s exactly behind there. Thank you.

Maximilian Schöberl: Thank you very much, Patrick. We start with the Chairman to the diesel question.

Harald, please go ahead.

Harald Krüger: Patrick, concerning your question on the diesel share, the latest data we have is for the brand BMW, and for the group BMW different. To give you three levels of details. The one is, on the global average, we had last year an average of around about 37% of our mix is worldwide diesel engines. This remained in the first quarter 2017, also nearly on that level, yes, it’s around about 30 points, 6.5%.

So it’s really no change. The reason for that, we see increases in diesel shares, for example, in countries like Japan, like Russia, like Korea. On the European level, we had in 2016 for the BMW brand, 73% diesel portion and mix. And in the first quarter, we had 71%. So a reduction by 2%.

On the German market, for the same period; 2016 average, 65%; 2017 first quarter, 64%. So just a 1 percentage reduction. So for BMW as a group, and therefore, the brand, I can clearly assure you that we don’t see a significant change and reduction on diesel engines. And to add one more factor, this one, even on March, I don’t have the April data, but in March, the order intake for diesel engines have increased. So I cannot share from the BMW Group’s perspective that we see a decline in the diesel mix and portion.

That was the one question. The other one was on, how we will be acting changes in terms of the product offer. Clearly, as I’ve mentioned in my speech, Patrick that we are clearly focusing, on the one side, on electrification as the top priority. We have set ourselves the target of 100,000 electrified vehicles this year, and there are only three companies who can achieve that around in the world. So I think the 100,000 is a significant increase.

If you think, we had last year 62,000 electrified vehicles, and then the year before, in 2015, there was around about 30,000. So we are ramping up from 30,000 to 100,000 electrified vehicles in two years time. And I think that answers your question.

Maximilian Schöberl: Thank you very much. Harald.

Free cash flow, your second part of the question will be answered by Nicolas.

Nicolas Peter: Patrick, let’s maybe a little – go a little bit more into the details regarding the free cash flow. The free cash flow in the Automotive segment in Q1 amounted to exactly €1.599 billion, and was approximately €1.07 billion above the figure of the first quarter 2016. Main reasons, main positive impacts came from the higher net income, approximately €435 million, and a little bit lower cash outflow, which is related to change in working capital, plus, approximately, plus €350 million, as well from another positive impact in other items. We still forecast positive free cash flow of more than – slightly more than €3 billion for the full year, so you cannot extrapolate the Q1 free cash flow for the full year.

Maximilian Schöberl: Thank you very much. Next question please?

Operator:

Operator: We now go to the line of Kristina Church at Barclays. Please go ahead your line is open.

Kristina Church: Yes. Kristina Church here.

Just coming back to diesel, I'm afraid. Just wondered, if you did start to see any further decline in diesel demand, how flexible are your production facilities? From my understanding, you are relatively flexible in the switch to between diesel and petrol, but is that really the case? Are there any supply constraint? My second question, it relates to – you made a small change to your forecast for the U.S. market, now it's being slightly down for the year. Do you see any further risks to answer that forecast going forward? And how are you seeing demand for sedans in that market in your core models compared to obviously, your forecast for the overall market generally? And then final question, sorry, is on the UK market. Clearly, the headline numbers on the UK today were down quite sharply not so bad adjusted.

What is your strategy and focus for the UK market going forward? Are you expecting to see further declines in that market? Thank you.

Maximilian Schöberl: Thank you very much, Kristina. I think we start with Nicolas for the U.S. outlook and then Harald. Nicolas, please go ahead.

Nicolas Peter: Kristina, well, maybe let's shot a look at the development of the U.S. market in April. Total market was down by 5% in year-to-date, April minus 2%. Our clear focus in the U.S. market in the actual environment is on profitability.

We have -- we are clearly focusing on sound and strong management of our inventories and to reduce the discount level in our business and I believe we are well on track. But this is clear priority for our U.S. business. And therefore I would confirm what you said. We remain careful and cautious regarding the further development of the U.S.

market.

Maximilian Schöberl: Thank you very much, Nicolas. Harald, please, go ahead.

Harald Krüger: Hi Kristina, I would start with the UK first. I mean what we have seen in the UK, as we noticed, the market was down in April by minus 20% lay over.

But premium was only down by minus 5%. With the brand BMW, we had even in April a small -- a slight increase but we remain conscious, I would call it, because there's a little bit of uncertainty. The targets in the first quarter for the UK market have been clearly achieved. April is a little bit weakening. And as we said before the Brexit discussions creates a little bit of uncertainty.

And I hope that Brussels, as well as London is having a clear discussions and pragmatic solutions for the future because uncertainty is not good for the consumer and for the business. So, that's where I hope that we find pragmatic going forward, that we find good solutions. If we look further at the first question, diesel and how flexible we are. We are having designed system where 3, 4 and 6 the engines, petrol and diesel engines can be produced and manufactured in one system. So from the design point of view, from the assembly point of view, we are quite flexible.

It always comes sometimes to limit with certain specific parts like turbocharger and so, what else. But in general, we are very flexible to switch between diesel and petrol engines but it depends on how quickly the market also changes and how fast we can react. On the flexibility of the production system is on the one side, on the car side as well as on the engine side, I think at a very, very competitive level.

Nicolas Peter: Kristina, you had one more point, I think regarding the U.S. This was about the development of sedans.

Overall, we continue to see a trend towards SUV. However, the first couple of weeks after the launch of our new 5 Series were very encouraging so we are very optimistic that the new 5 Series will be performing very strong in the U.S.

Harald Krüger: Yes. And Kristina, I would like to add one more on the UK, for the UK, for example, the new 5 Series has a very good feedback in the market and the new Touring, as I mentioned will come in June on the market. And this Touring -- 5 Series Touring for example, a car which is very important for the UK market.

So overall, we have a product momentum also for the UK where I think we can remain, in principle optimistic.

Maximilian Schöberl: Thank you very much, Kristina Church. Next question please.

Kristina Church: Thank you.

Operator: We now go on to the line of Arndt Ellinghorst at Evercore ISI.

Please do go ahead. Your line is open.

Arndt Ellinghorst: Good afternoon everyone. Two quick questions from me. Firstly on the earnings guidance for this year.

Only a couple of weeks back, we all met, and you've been guiding for a somewhat slower start to the year and then stronger momentum into H2. Now after you've had a very strong start into the year, it seems that you're guiding down a little bit into the rest of the year. So I just wonder, what has changed really or whether you were just surprised yourself how strong it went this year so far. And secondly as I understand, you're adjusting your residual value assumptions on a quarterly basis. So could you give us some color what your current average residual value assumption is across your portfolio that sits on your balance sheet and also, whether you've made some adjustments, some larger adjustments in Q1 this year? Thank you.

Maximilian Schöberl: Thank you very much, Arndt. Your question will be answered by Nicolas.

Nicolas Peter: Arndt, you are absolutely right. As I said at the very beginning, we had a strong start into 2017. But despite this strong performance in Q1 we believe that the political and the economic environment really remains volatile.

It's still unclear how the Brexit negotiations might impact the business. We talked about the U.S. market and as a result, we believe it's advisable to remain to continuously monitor development of our business, to monitor the key influencing sectors of our business and to focus on the strong performance in Q2. And we discuss the rest. It's too early to adjust the guidance at this point in time.

Arndt Ellinghorst: No, no, Nicolas, I understand that. But the question is more, do you think that the macro environment for the auto industry has improved or worsened over the last one or two months?

Nicolas Peter: Well, if you look at the April development in some of the major markets, and of course, this might have been impacted by Easter being in the middle of April. But we've seen a negative trend in the U.S., we've discussed the UK development. And in Germany, another major market, whilst, let's say a balanced development in the market as well. On the positive side, we continued to be optimistic regarding China.

So it's a mixture of different developments around the globe. And therefore, we believe that, thanks to our -- and if you look into the details, you will see that our performance in those markets is, I believe strong. Why? Because we have a good product momentum. And in particular with the new models kicking in, we stay optimistic and we are confident to deliver in line with our guidance.

Harald Krüger: And Arndt, to add to this one, maybe take two or three examples.

The one is in China, we will have the 1 Series Sedan and the 5 Series long-wheelbase Coupe completely available in the second half of 2017. So we also always said in the first half of 2017, we will have bigger launch costs, but we are also investing heavily into the future. And we shouldn't underestimate that investing into the digital business yes, the autonomous driving where we had yesterday the first of our 40 autonomous vehicles which we will put on the road this year, being launched in California. So we will have R&D spend as well in this year and increasing launch costs in the second half. So that's why it balances out.

But we need to heavily invest into the future at the same time where we need to use every operational chance in China or in our other markets.

Nicolas Peter: Arndt, your second question was regarding, residual value used car price development. I think we have to focus on the three major leasing markets, U.S., UK and Germany. And in those markets, as expected we've seen slightly negative development however in line with our expectations. We continue as you know to monitor those developments very, very closely and we view them every quarter.

And as I said we are from today's perspective in line with our guidance. I think one -- maybe one topic which is important to be mentioned. The penetration rate of leasing contracts in our overall business has slightly gone down from 21.3% to 20.4% which is mainly driven by this development in the U.S. market.

Arndt Ellinghorst: All right, thank you.

Maximilian Schöberl: Thank you very much, Arndt Ellinghorst. Next question please.

Operator: We now move to Horst Schneider of HSBC. Please do go ahead, your line is open.

Horst Schneider: Yes good afternoon and thanks for taking my questions.

First of all, I want to come back again to this diesel issue. I'm sorry for that, but you mentioned in your speech that diesel is necessary to meet the CO2 targets in Europe in 2020, 2021. Then you were giving us now the diesel shares for 2016 and Q1. I would be interested in your CO2 powertrain mixed planning, what decline of diesel do you expect until the 2020? And how does that planned decline compare against the current run rate? Then the second question that I have is also more longer-term. I listened yesterday to the conference call of Tesla, and they talked with the -- they talked by now about potentially 1 million unit sales that they do as a company when they launched the model Y in, yes late 2019, respectively 2020.

And I just want to know, when you do your own planning for yes on the long-term basis, how do you assess competition? Not particularly maybe Tesla. I know you don't want to talk about particular competitors. But do you assume that there is a significant competitor coming up which could take market share from you? Thank you.

Maximilian Schöberl: Okay. Thank you very much, Horst.

Harald?

Harald Krüger: Horst, back to your question. First of all, I would start with a strategic view. We have a clear target for the portion and the mix of electrified vehicle in our group sales level for 2025 between 15% to 25%, so around about every fifth car for example, in the group being sold would be then an electrified vehicle. If it's a purely battery electric vehicle or a plug-in hybrid, it's difficult to forecast because that remains very much also on the conditions and legal and regulatory framework in the different countries. Take one example, in the Netherlands had a high portion of electrified vehicle.

They took away by the 1st of January 2017 the subsidies they are giving to plug-in hybrids. The results of this one, and then there was a reduction of 50% on the plug-in hybrid sales figures for all companies. So what I believe is strategically, you will see the electrified and electrification going on and moving on forward definitely in China and some other markets. What we will see is we have set ourselves this target of 15% to 25%. And we have set ourselves a target of 100,000 electrified vehicles this year.

And we would like to ramp up. The portion for 2020 concerning what do we need as a mix of diesel or electrified, it's also depending on what the mix looks like. I can't give you a number for 2020. But the clear strategy is, we need the diesels on the one side for 2020 CO2 targets, and we clearly have the priority on the electrifying all brands and the portfolio to ramp up.

Horst Schneider: Okay.

But would it be easier to work with -- to get some more details and granularity. The concern is always that the CO2 targets cannot be met, not only by you, but by the industry in total. Right.

Nicolas Peter: First of all, Horst, we clearly have said we are going to meet the 2020 targets. And this is clearly our target.

We are on the right track. And this one -- but we need the diesel engines for this target as well. And everything else, I don't want to share because it's also a little bit of a competitor's edge and knowledge if we tell more details what we would like to achieve. And in the past, if you look at us, we always met our targets in terms of CO2 emission targets. We even have fulfilled our commitments and BMW was one of the companies who are looking -- if you look at the Dow Jones Sustainability Index, for example we have seven years in a row, we were winning the first prize of sustainability and emission target meeting as part of our Strategy number one that is very clear.

Horst Schneider: Okay.

Nicolas Peter: Okay, thank you very much Horst Schneider. Next question please?

Operator: Next question is of the line of Michael Tyndall at Citigroup. Please do go ahead.

Michael Tyndall: It’s Mike Tyndall from Citi.

Two questions, if I may. Can we go back to free cash flow, please? If I look at the Automotive division and I look at cash flow from operations, there is a €1 billion inflow from other up €600 million year-on-year. First question I guess is what's in there? But also, when I look at on the group level, it's completely erased. So I'm wondering, where does it go on the group level? And then the second question overall is kind of a philosophical question. Your intra-group financial assets now sit at over €14 billion, so roughly two-thirds of the cash that you have in the auto division.

Is there a natural limit to how much of that cash you're going to sit within the group? And can you just remind us again why it sits there? And is it sitting with the Financial Services group? Thank you.

Maximilian Schöberl: Okay. Thank you very much. Nicolas?

Nicolas Peter: Let's start with free cash flow in the Automotive segment. Well, the positive effect of one, plus a little bit more than €1 billion is also due to -- on one hand side, seasonal increase in personnel-related liabilities, holiday pay and some effects from liabilities resulting from deferred taxes.

Second topic natural limit of liquidity. I think Michael, if you look, we have Financial Services business of a plus minus €100 billion to be refinanced. And BMW Group has one of the strongest ratings in the automotive sector, the best of all European manufacturers. And this is also due to the fact that we have cash, and we are in a -- from this perspective, in a strong position. So this is definitely part of our business model to keep a high cash position in order to be able to refinance our Financial Services business at best possible interest rates.

Michael Tyndall: Can I just jump back to the other question? I'm trying to understand why is it eliminated at the group level? I can understand what you're saying in terms of bonus accruals and DTAs. But I'm just wondering why at the group level, it's basically a net zero?

Nicolas Peter: Well, this is due to intragroup receivable liability payments and other tax effects.

Michael Tyndall: Okay, thanks.

Nicolas Peter: Thank you very much, Michael Tyndall, so I think it is eight minutes to three, we have time for two more questions. Next question please?

Operator: The penultimate question then will be over to the line of Tim Rokossa at Deutsche Bank.

Please go ahead Tim.

Tim Rokossa: Yes thank you very much for taking my questions. I'll limit it to one then. Harald, it feels like the regulator leaves you somewhat alone currently. You still don't really know what the 2025 regulation will be like in Europe.

China is still a bit uncertain. This diesel discussion potential bans in sort of guidance so on, so forth. When do you believe you will have more clarity on the longer-term regulatory framework in your major markets? And somewhat related to that, Continental told us that they expect that the last generation of combustion engines in Europe will be launched by 2023. Would you agree to that? And do you believe that maybe a time when once that's developed, that you can start spending less R&D? Thank you.

Maximilian Schöberl: Thank you very much, Tim.

I think that's the right question for the Chairman. Chairman, please go ahead.

Harald Krüger: First, we start Tim, with the regulation on 2025 beyond 2030. In Europe, this is going to be clarified, in the maybe the last quarter this year, beginning of 2018. That's the discussion we have about the European level.

That's why Brussels will come out with proposals by the end of the year or beginning of next year. For China, as you know, probably, the discussion about what comes was which portion of electrified vehicles you need to have in the mix for which year is may be in the next weeks and months. It takes some more time, so we are on discussion there as well. And this is going to continue. And as you know, the U.S.

is also in discussion. So I believe this will be part of our business, that this is ongoing discussion and we have clear strategies in place to react, that's why the electrification is a clear priority. That's why we do the MINI pre-electric vehicle, for example, because for urban mobility, this is definitely a good lever to achieve CO2 and emission targets. And that's why we have decided the electrified X3. The second one is what our answer is, and I mentioned that in my speech, we need to be very flexible.

That's why we have now flexible architectures for the vehicles where we can mix between a petrol engine on the one side and an electrified vehicle. So we will have flexible production systems for the vehicle, whether it's a battery electric vehicle, a plug-in hybrid or a combustion engine. And we have the same flexible, as Kristina was asking on the petrol and diesel side and the engine side. So my clear answer to this one, you need that volatility, and that uncertainty what comes in which country, at which time. The only answer is flexibility in your manufacturing and design processes.

Tim Rokossa: Thank you. And would you agree to the Continental statement when it comes to the internal combustion engine platforms in Europe?

Harald Krüger: That combustion engine in Europe somewhere, now I disagree and we can peg a good bottle of wine if you wish on this one. But I disagree on this one. We will see the diesel and the petrol engines going to be continued after 2023, I'm sure.

Tim Rokossa: Thank you.

Maximilian Schöberl: Okay, thank you very much, Tim. Last question please?

Operator: Okay. Well, the ultimate question then is from the line of Philippe Houchois at Jefferies. Please go ahead, Philippe your line is open.

Philippe Houchois: Yes thank you, good afternoon.

A couple from me. Mr. Krüger, I hear what you said about diesel, and I fully agree. My question there is you -- I think so far, you are the only major CEO of a car company who has come out betting for diesel. And what's your view in general, about the risk that the industry is losing the PR battle on diesel? That you may have the right point, but it's going to be very hard to defend diesel against public opinion consumers and regulators, even there isn't more a collective effort on the part of the industry.

And therefore, what is happening? You may not be able to tell us now what's been happening behind the scenes. But do you think the industry will come together and act try to make sure that diesel continues? Because we all know the benefits, but the PR battle is being lost, as I said. The other question I have for Mr. Peter is about the - your two major competitors in Q1 had to recapitalize their Financial Services business again. We can't see from your disclosure or you may have done this the same thing, I don't think so, or my simulation you're the most capable of no self funding or retain earnings funding, the growth of your Financial Services.

But I just wanted to ask if it's clear that you have not tried to add capital to your Financial Services business. Thank you.

Maximilian Schöberl: Okay. Thank you very much, Philippe. We start with Harald and then Nicolas.

Harald Krüger: Philippe, I may be a strong wise, but not the only one for the diesel engine. As you maybe have heard that Maximilian just announced as well that he sees for the VW Group also diesel as part of the solution and not as a problem. And in Europe, in my view and I'm not the only one who is convinced on this one. For sure if you look at the second perspective and I think this is important. What happens really - what the customer is doing.

The one thing is what do we have at headlines in the public, yes? And what do the one or the other journalists is speaking about or writing articles about. What I mentioned before so far, I mean you never know, but so far we have never seen a significant change in our customer demands. I was even surprised that we saw an order intake increase on diesel engines in March. So the customer is still somebody who is very careful about what are the costs of driving, what are the total costs of owning a car, and what fuel efficiency he has or she has. And that's why the customer has so far decided still to continue also to buy diesels, and they need diesels.

Yes? And the other portion is, what is our reaction strategy or strategy forward? In the first quarter, we sold 20,000 electrified vehicles. We are clearly on track for the target of 100,000. This is an increase by more than 50% compared to the first quarter of 2016. So we are clearly focused on ramping up and selling more electrified vehicles to be on the safe side for the 2020 target. So you need to do both, but we are clearly aggressive on ramping up electromobility.

Maximilian Schöberl: Nicolas?

Nicolas Peter: Well, Philippe, if you look at the, first of all, from a group perspective at our equity position, equity grew by approximately €2.2 billion since December 31 of last year. If we now have a closer look at the different segments, in the Automotive segment, this resulted in an increase of the equity ratio from 41.3% to 41.9% and on the Financial Services side, an increase of the equity ratio from 8% -- exactly 8% to 8.4% at the end of the first quarter. On group level, equity ratio slightly increased from 25.1% to 25.9%. So if we look a little bit deeper into Financial Services, slightly up equity level. We believe definitely, we have a very robust equity base.

And of course we comply with all regulatory frameworks and capital requirements around the globe. It might be required in the course of 2017 to increase capital in some Financial Services entities, in particular in Asia, as the business is growing very fast.

Maximilian Schöberl: Okay. Thank you very much, Harald. Thank you very much, Nicolas.

I think we are on time. It is 3’o clock. Ladies and gentlemen thank you for joining us today, and we wish you a pleasant day. Bye-bye, and thank you very much.