Ladies and gentlemen, I would like to welcome you all to the BMW Group's telephone conference for the Q2 results. With us today are Oliver Zipse, Chairman of the Board of Management of BMW AG, and for the first time, our new Chief Financial Officer, Walter Mertl, who took over from Nicolas Peter in May. He has been with the BMW Group since 1998, and has held various management positions in finance and sales in Germany and the U.K. Walter, a very warm welcome. First, Walter Mertl will take you through our financial results. Oliver Zipse will then give you a general business update for the BMW Group. Afterwards, we will have time for our Q&A session. We start first with Walter Mertl. Walter, please go ahead.
Many thanks, Max. Ladies and gentlemen, good afternoon to you all. I'm very pleased to be able to present the BMW Group's quarterly results to you for the first time today. In the Q2 of 2023, the BMW Group delivered a solid performance under difficult conditions. The group EBT margin came in at 11.3% for the quarter, and 12.6% for the H1 . In the automotive segment, we achieved an EBIT margin of 9.2% in the Q2 , and 10.6% for the half year. We expect the positive business trend to continue in the H2 of the year, particularly due to the ongoing strength of the order bank and an expected improvement in the availability of vehicles.
As a result, we communicated an increase in our deliveries forecast for the 2023 financial year as part of an ad hoc announcement on Tuesday. In addition, we raised the guidance for the EBIT margin and return on capital employed in the automotive segment, as well as the outlook for return on equity in the financial services segment. I'd now like to take you through our financial figures for the Q2 in more detail. To do so, I've brought along a few slides with important key figures to explain the main developments and relevant influencing factors. Let's start with the group. Group earnings before tax for the quarter totaled EUR 4.2 billion. The EBT margin came in at 11.3% in the Q2 , and 12.6% for the first six months. This is clearly above our strategic target of 10%.
Group pre-tax earnings for the H1 decreased by just under EUR 6.8 billion. We mustn't forget that we had a one-off profit of EUR 7.7 billion last year due to the fair market valuation of the BBA equity stake. Without this effect, looking at the underlying operating result instead, group earnings were significantly higher year-over-year. I'd like to look at the individual segments, starting with the automotive segment. Sales, revenue, and earnings development in the automotive segment over the past six quarters are depicted on the chart. In Q2 2023, vehicle sales were up 11.3% on the prior year quarter, over 626,000 units. Compared to the Q1 , sales rose 6.4%, and all regions contributed, and we were able to achieve a good balance.
Deliveries through the end of June were 4.7% higher year-on-year, and the order bank for our vehicles remains high. As a result of our strong market position, we expect a positive trend in deliveries in the H2 of the year as well. We therefore now forecast a solid increase in deliveries in 2023. Our BEVs contributed to this development, and we see continued strong momentum. In Q2, we sold more than 88,000 all-electric vehicles. On top of the figure of nearly 64,000 units sold in the Q1 , this adds up to around 153,000 BEVs delivered in the first six months. That is more than double our BEV sales for the same period of last year and represents 12.6% of total sales.
The BEV share of overall sales already hit 14% in the Q2 and will reach 15% for the full year. The growth in sales and strong product mix increased revenues in the automotive segment, which after six months, were up 10.9% on the previous year. Roughly half of this increase resulted from the full consolidation of BBA revenues in 2023, because in 2022, the revenues of our BBA joint venture were only included with the full consolidation from February 11th onwards. In the box on the bottom right, you can see how the operating result has developed in the automotive segment. In the Q2 , EBIT totaled around EUR 2.9 billion, with an EBIT margin of 9.2%. Without depreciation of PPA assets from the purchase price allocation, the margin was 10.2%.
For the year to the end of June, the EBIT margin was 10.6% and 11.7% without the depreciation of PPA assets from the purchase price allocation. I'd like to use the next slide to explain the operating result in the automotive segment in more detail. The bridge starts on the left with Q2 of last year, with an EBIT of EUR 2.5 billion and an EBIT margin of 8.2%. From Q2 2022 to Q2 2023, we see a headwind of around EUR 300 million from the net balance of currency and raw material positions. This is mainly due to currency translation effects from the development of the U.S. dollar, the Chinese renminbi, and the Japanese yen. Raw material prices remain at the same high level as a year ago.
Together, volumes, the model mix, and strong pricing generated a tailwind of EUR 500 million. The mix is stable overall, with solid volumes in the upper segment. We are seeing positive impulses from the X5 and X1. While we are seeing the first signs of normalization on the market, we remain focused on price discipline. Expenses for research and development rose year-over-year to around EUR 300 million, mainly in connection with investments in electrification, digitalization, and automated driving. The BMW Group's R&D expenditure is calculated by adjusting R&D expenses for capitalization and scheduled depreciation. This forms the basis for the calculation of the R&D ratio according to the German Commercial Code.
The ratio for the year to the end of June came in at 4.6%. For the full year, we expect the ratio to be within our long-term target range of 4%-5%. Sales and administrative costs increased by around EUR 100 million due to higher expenses for personnel and digitalization projects. As for the item, other cost changes, we see burdens from higher material costs on the one hand. Additionally, we reassessed warranty provisions in the Q2 and updated several parameters. This adjustment resulted in higher warranty costs in Q2. On the other hand, the development of licensing revenues had a positive effect in Q2. The full consolidation of PPA also resulted in a positive reconciliation item. The negative impact of PPA consolidation effects was EUR 800 million higher in Q2 2022 than in Q2 2023.
This included both depreciation on inventory, inventory from the purchase price allocation and the elimination of interim profits in connection with intra-group deliveries. Free cash flow in the automotive segment totaled EUR 1.2 billion in the Q2 . The effect from working capital, totaling EUR 2.4 billion, largely resulted from the increase in inventory. Global demand for our vehicles and our order bank remain high. We ensure the availability of the right products and thus fulfill the wishes of our customers while reducing waiting times. In doing so, we will maintain our profitable growth in the H2 of the year. The delta from capital expenditure and depreciation improved free cash flow in the Q2 by EUR 0.5 billion. We continue to invest in the mobility of the future with our focus on electromobility, digitalization, and automated driving.
The CapEx ratio came in at 5.1% for Q2 and 4.4% for the H1 . We expect the ratio for the full year to be around 6%. Allocation to provisions increased free cash flow by around EUR 500 million in Q2, and through the first six months of the year, free cash flow in the automotive segment totaled EUR 3.1 billion. For the full year 2023, we expect a free cash flow of above EUR 6 billion. In addition to higher investments for the transformation to e-mobility, we are planning for increased inventories in 2023 compared to the end of 2022. We plan across the years to ensure the necessary vehicle supply to the markets in order to fulfill profitable, high customer demand. Let's turn now to the financial services segment.
Earnings in the segment result not only from new business, but largely from the entire portfolio of contracts. For this reason, I will focus primarily on a 6-month perspective for financial services. Higher interest rates resulted in noticeably increased financing costs for consumers. The financial services sector also remains as competitive as ever. Therefore, year-to-date June, the number of new financing and leasing contracts concluded with retail customers decreased by 10.6%. However, there was a noticeable positive trend in the Q2 , since new contracts were at the same level as in the previous year's quarter. Higher prices and an improved product mix in the automotive business led to an increase in the average financing volume. As a result, the volume of new business in Q2 was 3.3% higher than in the same quarter of the previous year.
Segment earnings before tax at the end of June amounted to EUR 1.7 billion, a decrease of 14% compared to the H1 of 2022. The main reasons for this are higher refinancing costs and a smaller total portfolio compared with the previous year. On a positive note, income from the resale of end of lease vehicles is still high. In addition, the risk situation in the segment remains mostly stable. A credit loss ratio of spot 15%, or better to say 15 basis points, confirms the high quality of our portfolio. We anticipate that the positive effects from the remarketing of lease returns will remain stable through to the end of this financial year. We therefore now expect a return on equity in the range of 16%-19% for the full year. Let's move on to the motorcycle segment.
For the past 100 years, the BMW Motorrad brand has offered an impressive range of attractive products. Its strong portfolio contributed to a successful Q2 in 2023, with record figures in deliveries and EBIT margin. Sales reached almost 65,000 units and were therefore 8% higher than the prior year quarter. The segment also significantly increased its operating result compared to the Q2 of 2022, growing from EUR 127 million to EUR 158 million. The EBIT margin was 16% for the quarter and 16.2% for the half year. This brings me to the overview of our guidance for the financial year 2023. In the automotive segment, we now expect deliveries to show a solid increase over the previous year.
As a result of the positive volume development, we now expect the EBIT margin in the automotive segment to be within the range of 9%-10.5%. Accordingly, we raised the target range for segment return on capital employed to be within the range of 18%-22%. We now forecast return on equity in the financial services segment to be between 16%-19% over the year. All other guidance figures remain unchanged. Our forecast does not take into account the deep recession in key sales markets. Furthermore, in our outlook, we do not expect further escalations of the conflict between Russia and Ukraine or an expansion of the war. Ladies and gentlemen, our industry is in the midst of a profound change. We are steering the BMW Group profitably through this transformation with sound financials.
In doing so, we always focus on the long-term success of our company. Our strategic focus is on electromobility, digitalization, and sustainability. To this end, we are making necessary investments in next-generation technologies. We are maintaining our course in our current core business. Operationally, we are strong, and that secures our profitability. We have the necessary latitude to invest in the future of the company and, at the same time, create value for our shareholders. The BMW Group has a young, highly attractive product line-up on the market, with an array of new models to come over the next three years. With the Neue Klasse, we will shape the future of mobility and secure our competitiveness, and with it, our financial performance. The BMW Group maintains the right balance between the three core elements of its business success. First, a profitable core business. Second, a continuing growth trajectory.
Third, a clear path to lower CO₂ emissions. This is how we can continue to create value for the BMW Group. We deliver on our promises. That is our pledge, and something I'm personally committed to.
Thank you very much. Thank you very much, Oliver. Now our CEO, Oliver Zipse. Oliver, please go ahead.
Well, ladies and gentlemen, in just a few weeks, the IAA Mobility will take place right on the BMW Group store strip here in Munich. Our company and brands will be showcased as part of the open space on Max-Joseph-Platz, in the heart of the city and on the trade fair grounds. The IAA Mobility will turn the whole city into a mobility hub, creating a platform for constructive dialogue between all mobility providers and residents, stakeholders, and guests from around the world. Few business segments offer such a wide range of opportunities for innovations that can benefit us in our everyday lives, and at the same time, speed up progress in society. We firmly believe this and have the facts to back it up. Our BMW Vision vehicles are the embodiment of this approach.
They focus specifically on individual future topics and demonstrate how we at BMW are tackling and implementing them. Take, for example, the BMW i Vision Circular from 2021, which was systematically designed for closed-loop material cycles. A circular economy is our vision for the long term, because this will make our company less dependent on valuable raw materials, and therefore, even more resilient. Another example is the BMW i Vision Dee from the CES at the beginning of 2023 in Las Vegas. It demonstrates the potential of what happens when hardware and software merge. The car becomes a digital companion that learns and understands. We believe there are three key action areas that will dominate the mobility of tomorrow: first, electric, second, digital, and third, circular. Each of these on its own is already a challenging and inherently complex task.
Combining all three aspects into a coherent overall concept is the ultimate challenge. This capability will determine future competitiveness in our industry. With our next vision vehicle, we will open up new dimensions in several areas: design, operating concepts, efficiency, and sustainability. On September second, the BMW Vision Neue Klasse will celebrate its world premiere. The date was chosen to honor a historical milestone. It will be almost 60 years to the day that BMW staked the claim of the Neue Klasse, and back then, the decision to launch a groundbreaking new product range enabled BMW's success and kept it going over the following decades. Now, once again, we are turning vision into a reality. I can promise you that the Vision Neue Klasse is close to standard production and will be on the road soon.
Production of the Neue Klasse will get underway in 2025 at our new plant in Debrecen, Hungary, followed by Plant Munich in 2026. To mark the 20th anniversary of BMW Brilliance, we also announced local production of the Neue Klasse at our plant in Shenyang, China, from 2026 onwards. The Neue Klasse is a mega project that spans the entire company. It is about nothing less than the future of the BMW brand, the BMW Group, and our portfolio. We are in intensive preparation for this and will continue to make significant investments in relevant future technologies over the next few years. Internally, we are working together with a new organizational structure, such as our tech clusters, like the one for the electric drivetrain, for example. In this way, we're able to address, in parallel and in an integrated manner, the mission-critical issues of cost efficiency and sustainability.
It is clear to us that with innovations drivers like the Neue Klasse, we can grow as a company, both quantitatively and qualitatively. That is what counts. At the BMW Group, everything has to get a little bit better every day. That is what we aspire to. In late July, the new BMW 5 Series began rolling off the assembly line at our plant, Dingolfing. It will be released onto the markets towards the end of the year. As with the BMW 7 Series, 4 Series, X3, and X1 models, customers once again get to choose between different drivetrain variants. With the all-electric i5, the BMW Group will then, as promised, offer at least one BEV model in every core segment.
The i5 will help ensure that 40% of all the vehicles we build at our biggest European plant will be fully electric from next year onwards. In addition to the 5 Series, the new BMW X2 is also in the starting blocks, including the BEV variant, iX2. The 5 Series is receiving very positive feedback in the media and social media. The eighth generation of our successful business sedan has been praised, in particular, for its tech highlights, including the Level 2 hands-off system. The 5 Series is the first car in Germany to be approved for partially automated driving at up to 100 km/h on motorways. This exemption means drivers can use the new BMW Highway Assistant, which allows them to take their hands off the wheel while driving.
Another feature has been added to our BMW Highway Assistant, the Active Lane Change Assistant, with so-called eye confirmation. The world's first that allows the driver to change lanes as suggested by the system, simply by looking in the corresponding exterior mirror. For the BMW Group, safety will always be a core element that our technological innovations must all contribute to. We test our vehicles on the proving ground, not on our customers, and only release perfectly tested, highly advanced vehicles onto the market. Just last week, we opened a new testing site in the Czech Republic. It is by far our largest test track, and where we are testing highly automated driving. Our future mobility development center in Sokolov provides the ideal infrastructure and reproduces the road conditions of countries from all over the world. The site covers over 600 hectares and consists of six tracks.
We are also focusing on production trials for fully automated parking. Together with our partner, Valeo, we are developing solutions for automated valet parking. Compelling products that create value for customers, as well as surprising innovations, are the foundation of our business success. There is a positive correlation here. Strong products generate strong demand across all drive technologies and all market regions. As you know, we at the BMW Group are taking an open technology approach to the transformation of our industry. We are concerned with both climate effectiveness and a sustainable business success. For us, there are no old or new technologies, only future-proof ones. For effective climate production, all types of drives must contribute to the reduction of CO₂ emissions.
This technology-open approach is a strength of the BMW Group, because after all, the world regions and individual markets will continue to develop differently and at different speeds in the coming years and decades. This applies to technologies and regulation, to the expansion of infrastructure for e-mobility, and of course, to the wishes of customers, because different political framework conditions lead to different customer behavior. In the United States, for example, the internal combustion engine remains relevant parallel to the ramp-up of e-mobility, which we see above all in states like California. In China, the government is promoting e-mobility. There is no question of banning the combustion engine. In Japan, hybrid drive is in demand. There is a high level of interest in hydrogen. Thanks to our flexibility, we can react swiftly to changing requirements in the markets at any time and in any situation.
We can provide customers with adequate offers without sacrificing market share. We continue to pursue this approach consistently and with conviction, because the holistic view of customer needs, environmental requirements, and political guidelines is a unique selling point of BMW. I see this as further proof that our strategy is working and bearing fruit. This was also true in the H1 of 2023. Despite a somewhat subdued global economy, the BMW Group delivered more than 1.5 million vehicles to customers, an increase of 4.7% compared to the previous year. BMW remains number one in the global premium segment with over 20% market share. All regions, from the Americas and Europe to China and Asia, are currently supporting our growth. The ramp-up of our all-electric models remains a clear priority.
As you know, BEVs should account for 15% of our global sales for the full year. Our BMW iX came first in the BEV ranking in the J.D. Power APEAL Study, which rates customer satisfactions among new vehicle owners in the United States. One thing is clear, e-mobility needs suitable framework conditions. As a founding partner of IONITY here in Europe, we've been promoting the development of a comprehensive charging infrastructure since 2017. Now, we are transferring our commitment to the United States of America. Together with six other car manufacturers, the BMW Group is establishing a new joint venture for a fast charging network in North America. Our goal is to build at least 30,000 charging points in cities and on highways. The first stations will be opened as early as summer 2024.
The network will be open to users of all brands and will support both CCS connections and also the NACS technology. What is clear, our products with all drive technologies are in demand, and our plants around the world are operating at high capacity. Our order book remains high. The world of the future is not a zero-sum game, rather, new technologies create new opportunities. Only companies that pursue a broad, innovation-based strategy across all technologies will be successful and continue to gain additional market share. All our brands are making their contribution. Rolls-Royce is launching the all-electric Spectre later this year. BMW Motorrad, in its anniversary year, is now pushing ahead with electrification following the CE 04 with the eParkourer CE 02. MINI is reinventing itself from the ground up with the new MINI family.
The new MINI Cooper Electric, with its spectacular interior and infotainment system, will be unveiled before the end of the year. We will also be building all-electric MINI vehicles in China going forward. In March, we introduced a new customer-centric direct sales structure for the MINI brand in China. In Europe, we'll be launching our new sales model for direct customer access with the MINI in 2024. The BMW brand will follow in Europe in 2026. Ladies and gentlemen, all of this shows how we are setting the BMW Group on a profitable course for the future through quantitative and qualitative growth with both our products and technologies. We are aiming for appropriate market penetration and intent to systematically exploit opportunities. Thank you.
Thank you very much, Oliver. Ladies and gentlemen, now the line will shortly be open for questions. The operator will first give you some technical instructions.
Ladies and gentlemen, we will now begin our Q&A session. If you have a question, we ask that you please use the Raise Hand function at the bottom of your Zoom screen, or if you have dialed in, please press star nine to enter the queue. Once your name has been announced, you can ask a question. If you want to withdraw your question, please lower your hand using the Raise Hand function in the Zoom app or via telephone by dialing star nine. Thank you, and a moment for the first question, please. Our first question comes from Daniel Roeska from Bernstein Research.
Thanks very much for taking my questions. Maybe two short ones for Walter and then a more strategic one for Oliver, please. On pricing in Q2, you're down about 5% year-over-year and sequentially. How does that reconcile with your statement on strong pricing? Could you just dissect for us the pricing change, kind of mix pricing discounts, and how should we think about the moving parts kind of for the rest of the year? And then on the working capital in the automotive business, could you specify whether that's unfinished goods or finished goods? And kind of, can I read into that, that you're quite confident on your H1 as you are kind of, priming the channel, that we shouldn't or that you're not expecting a, a significant headwind in H1 at this point in time?
Oliver, you just outlined the different rollovers for the Neue Klasse. Could you give us some overview on the medium-term capacity outlook that kind of creates? This year, the guidance brings you close to the 2.5 million cars that were your previous peak, and then you're adding Shenyang, Debrecen, Spartanburg a little bit. When does that get you up to the 3 million units, and is that kind of still medium-term kind of number in your mind? I know you talked about this kind of before we went into this weird COVID situation the past three years. A little bit more on the strategic capacity outlook that would be super. Thanks.
Thank you very much, Daniel. We start with Walter and the first part of the question, pricing and inventories. Yes?
Mm-hmm. Hi, Daniel Roeska. Pleased to see you. Well, I think we raised nicely prices last year in 2022 already, and they are lasting even in 2023. That's how it should be. That is our strong pricing position I referred to. Across the world, I would say we have actually still strong numbers on that. Eventually, you do a retail divisor based on revenue. Well, we account our revenue based on wholesales, first of all, and, secondly, we have also in the revenue some FX impacts, which is eventually driving your calculation a bit downwards. If we have a look for the individual markets, we are still strong delivering our price levels, especially year-on-year, because of these price increases we did last year already, lasting until today. That's the first point. The mix is still strong, stable across the world.
That is also quite good and supporting our revenue side. With regards to your questions to inventories, we have a lot of finished goods in transit currently, supporting sales for the H2 . That is hardly any extra unfinished goods. The massive majority of our inventory increase is based on finished goods, and thereof, as I just mentioned, it is in transit. We filled the pipeline, especially in Q2, in order to get our lovely cars to all of our customers.
Thank you very much, Walter. Now we come to Oliver. Medium-term capacity outlook, when 3 million units? Oliver.
Well, Daniel, as I said, the business we are in is not a zero-sum game. The more traditional drivetrains like otto and diesel, with a strong performance of the auto side, diesel being fairly, fairly stable, is overall together, including the plug-in hybrid, is fairly stable. It's not shrinking. All the growth comes from the BEV segment. So that is a strong growth impetus we have here from the BEV segment. As you rightly mentioned, we're ramping up now with the Neue Klasse, with the 6th generation of our electric drivetrain, plus a completely new digital architecture. We also said that before 2030, the year doesn't play such a big role, but before 2030, we will have 50% of our global market share will be fully electric.
As you also mentioned, we are building up capacity, for example, here in, in Europe, in, in Hungary. So there's a growth impetus from our product strategy, and there will be profitable growth, and the volume will be a result. Whether a specific number is reached, let's see how our strategy works. If, if you calculate together what I just said, you can come to a conclusion for your answer. Yes. Thank you.
Thank you very much. Next question, please.
Thank you, gentlemen.
Our next question comes from Dorothee Cresswell, from Exane BNP Paribas.
Yes, good morning, thank you for taking my question. My first one is around your free cash flow guidance, where you've obviously trimmed that a bit to take into account higher investment spending and higher inventories. If we start with the investment spending, you haven't actually adjusted the outlook for the R&D ratio or the CapEx ratio, so I'm guessing you just want to be nearer the top end of the guidance range for those two metrics. Can you tell us exactly where the additional spending is going? Because it's obviously something you've only recently decided to do. Then when it comes into, inventories being higher at year-end, is that a function of the 5 Series ramping in China? Is it to do with the direct distribution model at MINI, or what's driving that?
Because some additional color there, too, would be helpful. My second question is around China. When we think about how intense the local competition is becoming, do you still feel sufficiently well set up with the existing architectures and then obviously Neue Klasse from the middle of the decade, so that you can continue to thrive in that market? Because you'll be aware that VW and Audi have obviously decided they need access to a local player's EV architecture. So I'd like to know whether that's something that would also be an option for you. Thank you.
Okay. Thank you very much, Dorothee. We start with Walter and the free cash flow.
Hello, Dorothee. Pleased to give you an answer. Of course, I understand the questions with regards to free cash flow, and as I mentioned in my speech, we are not reducing at the end of this year the inventory side as much as we did last year in 2022, but we will operate it on a slightly higher level. That means the pipelines won't be reduced as we reduced them in 2022. Why is that? Because we still have a fantastic order bank currently, which is lasting to the end of this year. We have still raising incoming orders, especially for the last few months, not just in the total, but also on the EV side, which is great. We are filling the pipeline in order to fulfill customers' demands and wishes, and that is a profitable growth.
There is no topic that we would create inventory, just that we have inventory. No, we are selling this inventory profitably around the world. With regards to the, where it is, on the BMW 5 Series launch, of course, we are filling the pipeline, but that was planned all the time. The MINI China topic is just ramping up from Q4 onwards. These numbers are minor at year-end 2023. That will rather kick in than in Q1 next year. No, there is no impact at the end of this year with this new MINI China situation. I think the core top for the end of this year, and that's the reason why we rephrased our mentioning on the, on the era of where we are ending up with at the free cash flow, and we said above EUR 6 billion.
We are not saying we are striving for EUR 6 billion, but we are above EUR 6 billion. That is key. Of course, we are optimizing all things, but we want to optimize the full channel, the PNL, and we raised the EBIT margins in our guidance, but we also want to organize our inventory side in a slightly better mode than we did eventually end of this year. That is really great. Yep.
Yes. Thank you very much, Walter. The second part of the question is about China and will be answered by Oliver.
Dorothee, hello from Munich. China, I think we have to look with a magnifying glass. First of all, there's no German automotive industry. There are big, big, big differences how they perform. We're quite happy with China. We are growing this year by 5%, by the way, in more or less all segments, BEV or not. We are quite happy. On the BEV side, which you mentioned, I think we have to look at two different market segments. One segment is below 350,000 renminbi, and the one above 300,000, 50,000 renminbi. If you look below, yes, there is a lot of change coming on in China. The electric cars are seen, unlike in Europe, are seen something for the base segment.
Cheaper cars have an electric drivetrain. This is how it operates in China. That is not the case in the upper, especially in the premium market segment. There is a normal development like we see it in Europe or the United States, if you look at the complete market. We really have to look with a magnifying glass in these two different market segments. The majority of our cars are in the upper markets as the segment above CNY 350,000. On the lower end, with MINI, we already have a joint venture-
where with Great Wall, where we have a common platform for MINI and for Great Wall. To do a joint movement, a joint development with Chinese manufacturers is not a new idea. As a matter of fact, it's quite, it's quite an old idea. To sum it up, we have a very broad product range in China with the iX3, which is locally produced, by the way, in China for the world. We have the i3 long version. We are launching the i5 long version. We have the iX5, the i7, the iX. We have a whole range of products there, which are fully electric, and we are very well set up for the market conditions.
To sum it up, it's a growing market for us. Thank you.
Thank you very much, Dorothee. The next question, please.
Our next question comes from Henning Cosman from Barclays.
Yeah, good afternoon. Thank you for taking the question. My first one is on the phasing of the margin piece. Obviously, the new midpoint of the guidance implies 8.9% automotive EBIT margin for the H2, which is mechanically below the Q2 . At the same time, I understand that some of the drivers of the sequential normalization versus Q1 were rather a bit temporary in nature. We've talked about several elements of these warranty costs, perhaps some compensations in China, in the distribution organization, where my understanding is that they are rather a bit temporary in nature. I would expect once these don't repeat in the H2 , there is perhaps a bit of upside again compared to the Q2 .
If we could just clarify that, please, or if you see these, these negative impacts as a bit more sustainable, the ones that, that I think are a bit more one-off in nature, and therefore, is it perhaps possible that you're more at the very top end, or at least in the top half of, of your, of your new guidance range? That's the 1st question, please. Second is also on China. Is it possible to share the EBIT that has come from BBA and how that has compared to the Q1 ? Was that stable? Was it down on the Q1 as well? And would you be able to confirm the classic seasonality where for the last couple of years, the Q4 was always much weaker in China?
Do you expect the same thing to happen this year? Thank you very much.
Thank you very much, Henning. We will clarify your question. Yeah, Walter.
I'm happy to do so. Hello, Henning. Good to speak to you. I think, our EBIT margin is clearly mathematically derived from, because, with an 8, we would have, interesting H2 margins ending up with an eight. Math-wise, the nine is a good one, and the 10.5 one is also a good one. Just this range is the range we are heading for. Of course, we are looking forward to always have a good margin, as I just mentioned. I think total incoming order in Q2, this is really supporting it across all regions. That is, I guess, most relevant. Across the regions, we have positive incoming orders, and those, those are stronger than in Q1 2023, but also stronger than in Q2 2022.
That is what drove us more or less to raise both guidances, volume as well as profit. We cannot neglect, profit-wise, our headwinds from FX or higher expenses for suppliers due to inflation and supply chain, as you know, and also logistics. That is still we are dealing with. Our purchasing departments do a tremendous job on this topic, but we shouldn't forget that we are also good and fair partners with our suppliers. We have to balance these topics in order to come to the best because we have long-term contracts also. That's the reason why we are not getting overexcited straight away. We balance this approach. With regards to China, BBA is still doing strongly performing, so that is quite good.
The EBIT margins, I will definitely not tell straight away in this discussion, but it is consistent and stable, and we also see there the demand. Would we have wished for more? Of course, we would have wished for more. We also discussed already that things could have increased since April, but we had this discussion. We are still running on a good run level. We are not declining neither on volumes nor on profit.
Thank you very much, Henning. Next question, please.
Our next question comes from Michael Tyndall, from HSBC.
Afternoon, gentlemen. Thanks for taking my question. Just a couple, if I may. Can we just go back to pricing for a second? On the press call this morning, you talked about normalization, but the message appears to be that pricing is strong. I'm trying to reconcile those two comments. Can we talk about pricing in the context of how it looks in Q2 versus Q1, maybe, and whether or not there is a direction there? The second question is just around the warranty issue that you flagged. I wonder if you could just give us a bit more color on that so that we can understand if it's a one-off, if it relates to cars that are still in production today. Anything you can give around that would be great.
Then I'm gonna be greedy and just ask one last one. If I look at the minority interest line and use that as a proxy for China, maybe this is the wrong way to do it, but it seems like it's down quite significantly sequentially. I wonder if you can help me out. What am I missing in terms of minority interest and the implications that has for China profit? Thanks.
Thank you very much, Michael. Walter, please.
Hello, Michael. Pleased to talk to you, I'm happy to give you the answers. Coming back to the pricings again, Q2 versus Q1, as I mentioned beforehand, the normalization from 2022, of course, that is the point. We see it also in some markets, no doubt. As I mentioned also, we increased some price levels quite nicely in 2022 already lasting into this years. We still see that we are getting these prices into our books. That is positive. As I previously mentioned also, we see on the translation, on the revenue side, translation impacts, which are reducing the revenue per car, if you just do the easy math, I would say. Contribution-wise, this is not hitting our PNL. Revenue-wise, it's reducing it, but not on the contribution side.
I guess that is the relevance because of the FX impacts, as I mentioned. With regards to the BBA side, doing your math, we mustn't forget the spot rate we are calculating. End of this quarter, we had rather an 8.0 to the EUR level, and we had previously a much nicer exchange rate. A lot of that is impacting on FX spot rate. With regards to the warranty, I can just refer what I mentioned beforehand. Well, the warranty provision is related, and I can say that to non-recurring business impact, and are related, as usual, to different recall actions. These have been made out of an abundance of caution, as you do know us. As I said, we reassessed warranty provisions in the Q2 , and we updated several parameters, and that ends up with this one-off.
Good.
Brilliant.
Thank you very much.
Thank you.
Thank you very much, Michael. Next question, please.
Our next question comes from Stephen Reitman from Société Générale.
Yes, good afternoon. I have two questions. First of all, again, on the financial services and lease penetration rates, we've seen obviously, that you lease penetration has been falling, and you've made comments that you didn't want to get into price wars and some of the actions of some of the non-auto finance companies, which were causing some disruption in the market. What's your view for the rest of the year? Also, how will that impact on the eliminations as well, as you look to the end of the year as well? My second question is on China.
When you mentioned that, you had to look at it with a microscope, I thought you were originally referring, you were going to talk about the premium market for electric cars. We've seen the obviously very good sales of your 7 Series ICE in China, if my number is correct, you've sold about just over 5,000 of them in the H1 of the year. If I look at the i7, it's about 245 cars. Admittedly, June was better. Can you talk about what the attitude is of your clients towards the premium end for electric cars and what measures you can do to spur that interest? Thank you.
SF, please.
Okay, we start with SF. Walter, please. Yes.
Hello, Stephen. Good to talk to you. Hope you're fine. With regards to this financial services, yep, we recognize that the penetration has come down, but that has changed. As also mentioned, we are already on the same level in Q2 as Q2 previous year. China is nicely down, because of this bank commission war, I would classify it, to be frank, because they have to accept the cash and the liquidity, and there's a big discussion. Month-on-month, we are catching up in China, more or less 1 % point penetration ratio, so we are lifting it. In Q2, it was already better. Is it in the middle of the 30-40s? No, not yet. Will it be there end of this year?
No, it won't in China, but it will increase step by step, more or less a percent point, 0.5%, and 1% a month. In the States, there's a total different situation. In the States, we recognize, as we did since end of last year, that local banks are stopping their engagement into the financial services business because their costs seem to increase also nicely, it is less of their interest. By doing so and recognizing so, our financial services business is catching up, coming to a nice penetration ratios again. Plus, the IRA impact in financial services also a nice business for us because we qualify for with our EV cars there, and that is running via the lease contracts because all leases are qualified for the $7,500. That is great. This is also, of course, an impact.
It's not just local banks stepping out or not doing the business anymore, but also the IRA. In the EU, we also recognize raising penetration ratios, especially in Q2. It wasn't that massively in Q1 already, but in Q2 it stepped back. We also recognize for the rest of the year that they will do proper business, and rest of world is quite stable. Residual values are stable, and the risk is stable, as I just mentioned. And then you had a question on the fantastic elimination calculation. We won't finish the math finally, but as long as we have less financial services business on the penetration side, we will see positive impacts on the elimination side, because we don't have to add back the sales which we have to take out.
That will normalize as the penetration rates is coming step by step. The biggest part is that rather the U.S., U.K., and Germany, then China, because China was rather on the loan side, not on residual values. That is the point. Did I catch up with all, right?
Yes, it's fine.
Fantastic.
Stephen, the second part of your question was about China and the premium BEV market. Oliver?
Well, Stephen, our strategy to conquer the BEV market is we start with the top end first. We started with the i760 and the i7 70, which bears a price tag of almost RMB 1.9 million. We started with the top end, so the lower figures you see here is not a surprise. As we speak, we also introduced the i750, which will be the top seller there. The lower numbers are a consequence of our strategy with which segment we start, and you will see over the year after the i750 is introduced, you will see growing figures.
Okay. Thank you very much. The next question, please.
The next question comes from Horst Schneider from Bank of America.
Yeah, thank you for taking my questions as well. Just I've got a few left. Just to follow up on this order intake statement that you made, about, because I think just in Europe, there's really a build to order behavior. Could imagine in the U.S., it's for you by now a little bit different, because the supply shortage was so intense. Could you maybe specify that to which extent you really have got visibility in China and U.S.? Because usually you sell their cars from the lot. That's number one. The number two is related more to other cost changes, and within other cost changes, the supply costs. You said you're a fair partner to suppliers, we see now basically that the raw material prices more or less turned around significantly.
Sooner or later, the supply costs should become again a tailwind. I just want to understand if that is a, an item that could become a tailwind already in the Q4 , or we talk here really more about a more substantial tailwind then for 2024. The last one is on FX, because you mentioned renminbi, and of course, you have got a very high exposure to China. We are seeing now the first negative impacts from FX. Here, more the question, is this magnitude that we have seen now in Q2, even though it's kept together with raw materials, is that an impact we could also see in the next few quarters? Of course, if the renminbi Euro rate stays unchanged, that is an item that should get more negative, bigger burden next year. Thank you.
Okay, thank you very much, Horst. Walter?
Yeah. Hello, Horst. Pleased to speak to you.
Hello.
Let's start on the order income side. We are really happy that, especially in the EU, we are getting a positive order income side on all elements, especially also in July, a massive lift off in order incomes in July. That was really positive. With regards to the U.S., you mentioned, we still see a massive growth. In the quarter, for example, we presented to you just this morning, 11.5%, stock was short, especially end of last year. That's the story with the pipeline I just mentioned on the inventory side. We are filling this pipeline. Good on that. With regards to the supply costs and the raw material side, we are on par, hence the hit in Q2, year-on-year.
We, we benefit from coming down raw material prices, but on the supply chain, we are paying here there more for the material costs than we paid last year. We have to swing that one around, and I hope that the raw material pricing is still coming down even further in order to get on par with the extra bills we are paying to the supplier side. That is, that is the point. Year-on-year, Q2, this is not favorable in total. On the RMB side, the negative FX effects, yep, that is currently bigger on the translation side with regards to revenue. Luckily, we have a good hedging strategy. That means contribution-wise, we are so far quite fine. All the rest, yeah.
It's fine.
It's disappointed.
It's fine.
Mm-hmm.
Thank you very much, Walter.
Thank you.
It's, it's 3:00, but we have time for two additional questions.
Our next question comes from Philippe Houchois from Jefferies.
Yes. Thank you. Good afternoon. A couple of questions. A lot of them were asked already. I was just wondering if I can go back a little bit on the warranty issue, though. I completely understand what you're saying, that, you know, the stick up with some Q2 is linked to recalls. It seems like across the industry, that issue is creeping up, that the cost of repair is higher because of inflation, including labor inflation, and also the increasingly increasing complexity of the vehicles, whether it's eDrive powertrain or sensors for ADAS, tends to raise the cost of warranty. I look at your history. It has gone up and down. It's rather now below the long-term average at BMW right now.
Should we think there's potentially 50-100 basis point of headwind coming through as you reassess warranty, just on inflation as well as the growing complexity of the vehicles? Then my second question, maybe for Oliver Zipse, is more, I'm sorry to put you on the spot like this, but you've mentioned again, the power of choice, and I think you stuck to that view and you've been proven right. You've also said that Europe is the only region in the world that is really has a program to kill ICE by a certain date. Do you think in your position that this deadline of 2035 is realistic still? Thank you.
Okay, we start with, the warranty, with Walter and then Oliver Zipse. Walter, please.
Hello, Philippe. Hope you're fine. Many thanks for the question. I'm happy to give you an answer on that. Well, inflation is always a topic. We had a big discussion there already in Q4 last year with year-end. Of course, we're also doing these exercises now. Of course, I can see your point, this inflation, material costs becoming more expensive than they have been years ago. We took account for these tops already, and we did now again. Of course, all the other relevant projects we are running in order to get material costs down or better process in order to get the right components exchanged, this is all going on, and our engineers doing a good job there. They are helping me and us in order to be on a good level. It's of course, an ongoing increase.
We will still have always this discussion of this raising costs, especially then on the warranty side. It's not an ongoing assessment permanently going forward, right? All the other topics is just a usually catch up, and assessment of technical, technical actions, and this is what we just placed it for.
Mm-hmm. Thank you very much, Walter. Now about the EU, about the ICA ban and ICE ban.
Yes. I think our opinion about what is going to happen is very stable. With current development of framework conditions like charging infrastructure, like access to raw materials and cost for raw materials, and real customer behavior, and, and so on and so forth. If that regulation keeps intact, the industry will shrink, specifically in the volume segments. We see a different behavior in the premium segment where we are operating in. We see a rather strong development and also in terms of market size. This is just in Europe, just a small figure. If, if the developments continue, this industry will, will shrink, and of course, other manufacturers who have better access to raw materials, who are more effective in operating in the basis segment, will also gain market share here.
We've said that all along, and I think that that statement is still true, that this will have substantial effects on the industry structure.
Thank you very much, Oliver. We are coming to our last question, please.
Our final question will come from Jose Asumendi from J.P. Morgan.
Thank you, Max. Jose from J.P. Morgan. Two questions, please. Walter, when I look at your, your positive comments with regards to the order backlog, it looks like you could be hitting somewhere around 2.6 million, 2.6 million units in 2023, maybe, you know, slightly below that. In the light of the, of what you're seeing in the market and the strong order backlog, do you think you can be, you know, in the light, you know, you could be hitting 2.7, north of 2.7 million units in 2024? It's just trying to gauge a little bit there, what you're seeing in the market, the order backlog, and then the, the projection into, into next year, if that will be a reasonable assumption.
Second, Oliver, I'd love to understand a little bit more just back to the topic of China. When I look at your, your, your monthly sales, electric vehicle sales in China, you seem to be doing, you know, a very good job at, at capturing market share. How do you think about the balance between providing more incentives in the market to remain relevant in the electric vehicle segment in China, but at the same time, capture that growth in the market? How do you balance that, the volume versus incentive equation in the Chinese market? Thank you.
Thank you very much, Jose. We start with Walter and then Oliver.
Mm-hmm. Oliver, in calculation is quite nicely done. We appreciate your calculation and think about positively, I think. What we end up is we shall see. With regards to 2024, we speak next year in March, what the final suggestion is all about and what our company is thinking. That is too early, and I guess you understand this because of the dynamic environment. If you just think about last year, no one could have happened now, 12 months ago, what happened in China in Q4, even lasting into Q1 this year. I don't know what happens in six months or in 12 months. We have a plan, and we can react nicely whenever it is necessary, because we are absolutely convinced that we have strong products.
We have growth, automatically as a result because of these lovely competitive cars. We are not frightened about anything there, otherwise we wouldn't have lifted up our guidance, I guess. As long as they are lovely profitable, we know what to do, selling profitable cars.
Well, Jose, about the China market share, of course, as I said before, we have to look with a magnifying glass in the lower base segment and the premium segment. There is a very solid brand-based premium market in China on the BEV side, as well on the combustion engine side, and we will not slip down into the base segment. We've never done that, and there's no reason, just because the biggest change in China is currently in the base segment, that does not motivate us to slip down into the base segment. Then we look, we look in every segment to have pricing, which leads us to good market share and also to profitable growth.
With the iX1, we do the same thing with the i3, we do the same thing with the i5 and the combustion engine cars of the 5 Series, and we do the same thing with all other cars. We have to look at it segment by segment, but one thing is super consistent in China, there is a very robust premium market in the upper price segments, and that's where, where we are aiming at.
Ladies and gentlemen, thank you very much. Thank you very much to Walter and Oliver, and we wish you all from Munich, wonderful summer time, and see you latest at the IAA in September in Munich. Thank you very much, and Servus from Munich. Bye-bye.