May 6, 2014
Executives
Torsten Schüssler – Head-Investor Relations Norbert Reithofer – Chairman-Management Friedrich Eichiner – Chief Financial Officer
Analysts
Kristina Church – Barclays Capital Securities Ltd. Philip R.
Watkins – Citigroup Global Markets Ltd. Laura I.
Lembke – Morgan Stanley & Co. International Plc Marc-René Tonn – Warburg Research GmbH Stuart P.
Pearson – Exane Ltd. Michael Punzet – DZ Bank Horst Schneider – HSBC Trinkaus & Burkhardt AG Arndt A.
Ellinghorst – International Strategy & Investment Ltd.
Torsten Schüssler
Good afternoon ladies and gentlemen, I would like to welcome you all to our Telephone Conference for the First Quarter results. With me today are Dr.
Norbert Reithofer Chairman of the Board of Management of BMW AG and Dr. Friedrich Eichiner our CFO.
First Dr. Reithofer will give you an update on the business performance during the first three months of 2014.
Dr. Eichiner will then take you through our financial results for the first quarter.
Afterwards we will have time for our Q&A sessions. Dr.
Reithofer please go ahead.
Norbert Reithofer
Ladies and gentlemen, in 2014, we are focusing even more strongly on innovative technologies and customer satisfaction. Through innovation, we continue to develop our brands and drive progress forward in our industry.
This is how we secure our own future in an ever changing environment. And that is how we create added value for our customers and shareholders.
Let me give you three examples, first the BMW i3, the demand for our innovative electric vehicle is high. In March alone, we sold 1,000 BMW i3 cars worldwide.
Just a few days ago, the BMW i3 was launched in the US, American customers are particularly open to new types of drive-trains. We expect the majority of BMW i cars to be sold in the US.
We especially focus on California as a relevant market for electric cars, as it is considered by experts to be a trendsetter for the whole of United States. In Japan, the i3 has been available for customers since early April, and China is due to follow later in the year.
At our site in Leipzig, production is being ramped up according to schedule with 100 vehicles produced a day. Significantly more than 5,000 BMW i3 cars have been built so far in total.
Many of these cars were delivered to our global markets as demonstration and exhibition vehicles. Now, more and more cars are being built to meet customer demand.
Second the BMW i8, as promised, we are going to launch the second member of the BMW i family in June. It combines a total of three world firsts in one.
The BMW i8 is the world’s first plug-in hybrid sports car with the BMW i Life-Drive architecture. It is the first sports car with a three-cylinder drivetrain.
And it is the first series car featuring the new laser light technology. Just like the i3, the US could become the key market for the BMW i8 as well.
It is currently being tested by international media at our press event in Los Angeles. With BMW i, lightweight technology plays a central role.
Carbon fiber is a material with a significant future in our industry, and we will also use it in other series models. Third, the BMW 2 Series Active Tourer, this is the first BMW model with front-wheel drive and is a trailblazer to acquire new customers to the BMW brand.
It offers the best technological solution for this very practical and functional car. The Active Tourer will be available as of the fourth quarter.
All these initiatives are part of our long-term strategy. Number ONE, it continues to be our roadmap towards the future.
We have held the lead in the premium segment for almost a decade now. Our strategy covers a time frame up to the year 2020.
Naturally, we are already thinking beyond this. It goes without saying, we monitor closely all the relevant trends in our environment and beyond, as well as assessing the external challenges that have an effect on our business.
Some of the questions we ask ourselves are, what do customers expect of a leading mobility company today and beyond tomorrow? How do we remain at the forefront of technological trends and create attractive services?
How do we want to develop our brands further in a timely manner so that we can win new customer groups without compromising on our brand identity? How can we master the complexity arising from the many requirements and the growth targets we have set for ourselves?
And last but not least, what kind of company do we want to be in the future? As always, our goal is long-term profitable growth.
Following four straight record years, we are aiming at continuing our successful business development this year. Our 2014 targets are as follows, new record sales on Group level of over two million cars.
A new record in Group profit before tax, significantly above the last year’s level. And an EBIT margin in the Automobile Segment in the range of 8 to 10 percent.
We have started the new business year with a strong first quarter. Between January and March, we sold around 487,000 cars worldwide.
This is more than ever before in a first quarter. We posted new first quarter record sales for BMW and Rolls-Royce as well as BMW Motorrad.
The MINI sales figures were affected by the model update of the Hatch. Our BMW brand exceeded for the first time in a first quarter as the mark of 400,000 cars delivered.
30 years ago, this was the sales figure for an entire year. This highlights the innovative strength of our company and the appeal of our brands.
The BMW 3, 5 and 6 Series as well as the BMW X5 are currently the market leaders in their respective segments. Our Group profit before tax stands at over €2.1 billion.
Again, this is a new record for a first quarter. The Group net profit amounts to over €1.4 billion.
And the EBIT margin in the Automobile Segment continues to be in the upper half of the targeted profitability range of between 8% and 10%. This all shows that, following the first quarter, we are on track towards meeting our targets for 2014.
Two factors should have a positive effect on our business development this year. First, demand in the key automotive regions of North America and Asia is increasing.
In Europe, we are also able to record a slight growth in sales in the first quarter. Second, we are offering our customers a young and attractive model portfolio.
Of course, it is important that the economic uptrend in Europe stabilizes further. However, we are well aware that a number of risks still exist.
High public debt, unequal development of worldwide economic markets, and political tensions and conflicts. Our business environment can be affected by these and so remain volatile.
As a successful global company, we continue to aim for a balanced distribution of sales in the three large regions, Europe, Asia and America. In this way, we avoid one-sided dependencies.
As a basis for further global growth we are strategically expanding our capacity, in keeping with the principle production follows the market. The Americas are and will remain a key region for our global growth.
With the expansion of our site in Spartanburg, we will increase our production capacity in the US to 450,000 units annually by the end of 2016. This is 50 percent more than today.
Our respective investment in the period 2014 to 2016 stands at one billion dollars. In the fall of this year, our new BMW plant in Brazil will begin production.
Its annual output is planned to reach up to 30,000 units in the mid-term. Our customers all around the world have diverse and individual needs.
In 2014, we will offer them even more variety, not only to meet their diverse tastes but also to fulfill their individual aspirations. Our BMW X range continues to be a huge success.
More than 3.3 million X vehicles sold since 1999 attest to the popularity of this model family. Today, more than one in four vehicles of the BMW brand is an X model.
The model update of the BMW X1 has been available since March 2014. It is to be followed by the model update of the BMW X3 in May.
In July, a new member is going to join the X family – the BMW X4. Plus, with our BMW Concept X5 eDrive, we have shown how we will be able to increase the efficiency of our X range even further with a plug-in hybrid.
And for the future, we have announced another completely new model – the BMW X7. The new BMW 4 Series is also very popular with customers.
The new BMW 4 Series Convertible came out in March. In June, following the Coupe and Convertible, the third model in the new 4 series will be launched, the Gran Coupe.
And for those customers who enjoy an even sportier drive, the M version will be available in September. Two further new M models are the BMW M3 Sedan and the BMW M4 Coupe, both available as of June.
The new BMW 2 Series Coupe arrived at the dealerships in March and has had a successful start. At the same time, the new generation of the MINI Hatch was launched.
From the second half of the year on, the new MINI will also be manufactured by our partner, VDL NedCar in the Netherlands. The Rolls-Royce Ghost Series II is going to be delivered to customers as of fall.
Ladies and gentlemen, we will continue to invest in new models, in innovative technologies and in our facilities around the globe. Our innovative drive, our financial strength and our business success provide us with the necessary flexibility and latitude to grow.
That is how we will continue to remain Number ONE. Thank you very much!
Torsten Schüssler
Thank you, Dr. Reithofer and now Friedrich Eichiner will give you an update on the financials of the BMW Group.
Dr. Eichiner, please go ahead.
Friedrich Eichiner
Ladies and Gentlemen, after a strong first quarter, the BMW Group is on track. Over the full year, we expect to see an upward trend in the European markets and significant growth in our major overseas markets, the US and China.
The first three months have met our expectations. We are seeing the first signs of recovery in Europe, and sales are several thousand units higher than this time last year.
This could be a good indication of a sustainable recovery in the European car markets. In the United States, the BMW brand posted sales growth of 11.5% in the first quarter.
MINI volumes were lower due to the model changeover. After the market launch of new models, this will shift in the second half of the year.
Asia and China, in particular, reported a strong increase in sales. Deliveries in the Chinese market exceeded expectations, climbing 25% year-on-year.
This was largely due to higher sales of locally-produced models. The positive business development so far confirms our guidance for 2014.
In the first three months, BMW Group revenues were 3.9% higher year-on-year. Group pre-tax earnings reached €2.17 billion – an increase of 8.1% over the same period last year.
At Group level, the pre-tax EBIT margin stood at 11.5%. Profitability was therefore on a par with the first quarter of 2013.
The BMW Group is maintaining its growth course. In the first quarter, we invested a total of €1.24 billion in new products and equipment to strengthen our competitiveness.
This represents an increase of 1.6% over the previous year. The CapEx ratio for the first three months of the year stood at 6.8%.
We aim at a 2014 ratio lower than last year, moving closer to our target of below 7%. The BMW Group spent a total of €993 million on research and development in the first quarter – a 4.2% increase over the same period of last year.
The development of new low-emission and lightweight technologies and other measures to enhance fuel economy remains our main focus. This R&D spending is designed to strengthen our future market position.
Our R&D ratio of 5.4% is unchanged from the first quarter of last year. In 2013, the ratio was 6.3%.
For the full year 2014, the ratio should move closer in line with our target range of 5% to 5.5% of revenue. Group liquidity remained solid in the first three months.
At the end of the quarter, liquid assets and securities totalled €10.75 billion, which assures the company the financial flexibility it needs. The Automotive segment benefitted from higher sales, with more than 487,000 vehicles delivered, sales in the Automotive segment grew by 8.7%.
Revenues climbed to €16.56 billion. This represents an increase of 4.1% over the same period last year.
Revenues rose more slowly than sales in the first quarter due to currency translation effects. Adjusted for these effects, revenues increased by 7.3%.
Also, revenues do not take full account of sales of vehicles produced locally in China. Our product mix improved in the first three months of the year.
Due to the model change, MINI accounted for a lower percentage of sales – although this was even out over the course of the year this will even out. EBIT in the segment for the first quarter totalled € 1.58 billion, which is in line with the previous year’s figure.
The BMW segment achieved an EBIT margin of 9.5%. We see this as confirmation of our guidance and also expect EBIT margin in the Automotive segment for the full year to stay within our target range of 8% to 10%.
Segment earnings benefitted from higher deliveries and improvements in the model mix. However, additional expenditure for future projects and costs for the market launch of new models offset this.
Segment earnings were affected by marketing and sales costs for the launch of the new 4 Series Convertible and Gran Coupé models, the new 2 Series Coupé, the new MINI Hatch and the X5. The total change lies in the high two-digit million euro range.
The response of media and dealers to our new products has been extremely positive. We therefore expect good growth opportunities, as planned.
It remains to be seen whether this will also have a positive effect on pricing. In spite of lasting challenges, these are initial signs of pricing improvement in the European markets.
However, we did not benefit from this in the first quarter. Higher investment resulted in a larger impact from depreciation.
Segment growth also raised personnel costs. In the first quarter, changes in currency and raw material prices had no significant impact on segment earnings.
For the full year, we are well hedged for the major currencies and raw materials and anticipate similar headwinds as those of last year. However, due to price changes profit might be affected in the course of the year.
In the year to the end of March, we produced almost 33,000 more units than we delivered – in preparation for traditionally strong sales in the second quarter and sales growth in overseas markets. For example, new 4 Series models and the BMW i3 are now also available in the US and Japan.
Overall, the second half of the year will benefit from stronger product momentum, as additional new models are launched. First quarter growth led to a corresponding increase in working capital of €918 million.
The segment generated a strong operating cash flow, with the free cash flow of €932 million. This figure is €308 million higher year-on-year.
As previously announced, we expect free cash flow to be higher than in 2013 and closer to €3 billion. At the end of the first quarter, net financial assets in the Automotive Segment totaled almost €13 billion.
As stated in our Annual Report, we brought our accounting into line with IFRS standards 10, 11 and 12 in the first quarter. This means that our joint ventures with the SGL Group are now reported as joint operations.
Consequently, their earnings contributions are no longer reported in the at-equity result, but proportionately consolidated. This results in minor changes at Group level and in the Automotive Segment and Eliminations.
Ladies and gentlemen, the Financial Services Segment also expanded its operating business in parallel with sales. In the first three months, we concluded more than 348,000 leasing and financing contracts with customers: 2.3% more than in the first quarter of last year.
BMW Group Financial Services managed a portfolio of 4.17 million contracts as per the 31 of March. This represents an increase of 6.8% over the previous year.
At 40.5%, the segment penetration rate – the percentage of new vehicles leased or financed by Financial Services was lower than for the first quarter of 2013. In this segment, a profitable new business and a good balance between leasing and financing is our priority.
The segment reported pre-tax earnings of €460 million in the first quarter of 2014 and increase of 2.4%. Risk situation developed in line with expectations.
Pricing on the international used car markets, including Europe, remained largely unchanged. In the US, prices trended downward slightly.
Over the full year we expect this price trend for used cars in North America to continue as a market mildly cools. In Europe pricing should remain stable throughout the year.
The credit risk situation for financial services remain stable in the first quarter. In general we make risk provisions for our Financial Services segment inline with our analysis and forecasts.
Overall we remain confident about 2014 as financial services continues to benefit from strong sales growth and model ramp-ups. The Motorcycle segment reported another new sales-high for the first quarter.
A total of more than 28,700 BMW motorcycles were delivered to customers – an increase of 16.1%. The mild winter across Europe brought an earlier start to the motorcycle season, with particularly dynamics sales growth in France, Italy and Germany.
Revenues for the year to the end of March climbed 8.3% to €472 million. EBIT for the first quarter reached €64 million – an increase of 25.5% over the same period last year.
The models R nine T,S 1000 R, R 1200 RT, R 1200 GS Adventure and K 1600 GTL Exclusive have all been available since March. The C evoluation electro-scooter will be launched in May.
Ladies and gentlemen the BMW Group is committed to its ambitious growth targets for the full year. Our planning assumes that the company will continue its positive business development.
This will depend on a stable recovery in the European markets and continued strong growth in markets outside of Europe. As already mentioned we are maintaining our guidance which calls for significant increase in pre-tax earnings at Group level.
After the first three months of the year positive business development in the segments indicated that we are on track. In the Automotive segment, dynamic product momentum should generate a significant increase in deliveries and revenues.
However, as announced, revenues might be affected by translation effects. We expect to see continuing signs of recovery in the European car markets, as well as price stabilisation.
We expect continued effects from expenses for product ramp-ups, up-front investments and preparations for further growth. In the Automotive segment, EBIT margin should remain within our target range of 8% to 10%.
Assuming conditions remain stable, we expect our Financial Services segment to achieve a return on equity of at least 18%. This will be slightly lower than last year, however, as we make necessary investments.
From today’s perspective, it appears we have made adequate provisions for the risks typically associated with this segment. BMW Motorrad is likely to continue its positive business development, with new models producing a slight increase in sales over the full year.
However, the rate of growth achieved in the first quarter will not be sustained throughout the rest of the year. Our forecast for the year assumes that political and macroeconomic conditions remain stable.
Risk factors, such as increased volatility in the markets, could affect our guidance, however. Our focus in 2014 will be on consolidating the BMW Group’s position as the world’s leading premium car company, targeting profitable growth for the full year.
In the interests of all its shareholders and associates, the BMW Group is enhancing its future competitiveness today – and striving to maintain its leading role in the premium segment. Thank you.
Torsten Schüssler
Thank you very much, Mr. Eichiner.
Ladies and gentlemen the line will shortly be opened for your questions please wait for some technical advice.
Operator
(Operator Instructions) The first question comes from Ms. Kristina Church from Barclays.
Please go ahead madam.
Kristina Church – Barclays Capital Securities Ltd.
Yes Kristina Church here. Thank you for taking my questions.
My first question relates to pricing and I think you've said that pricing was flat in the quarter. I was just wondering whether you're seeing signs of that beginning to pick up and what your expectations are for the rest of the year, particularly in Europe?
And then the second question relates to your technology spend and again, it's the sequence of how that will step up for the remainder of the year or whether the spending levels of Q1 are on a par? And related to that as well, if you could just remind us how much of the lightweight technology IT sits in BMW versus how much sits in joint ventures with SGL etc?
That would be helpful. Thank you.
Torsten Schüssler
Thank you very much Kristina. Mr.
Eichiner.
Friedrich Eichiner
Yes, I mean the pricing is more or less coming as we expected it to see. So, our plans are that as the year goes by.
That in a second, third and fourth quarter, with the introduction of all the new models, we should be able to improve pricing and as you know it should be close 200 basis points that’s at least our target. So far, we’ve seen a stabilizing European market in terms of pricing first time, so that’s from our perspective a positive sign, but not an improvement particularly in a first quarter.
So, we have to see this works out going forward. And then, the technology spendings I mean as always the R&D programs they are picking up momentum in the course of the year.
And higher spendings are normally in the first quarter. So, we still maintain our guidance that overall that the amount of future cost and efficiency enhancement will burden earnings in 2014.
And from today’s perspective we expect the burden to be in a same magnitude as last year. The last question was about the lightweight technology SGL operation and IPs.
So, I mean we have to look at the value chain, so the joint venture covers the carbon fibre and the fabrics. And everything that is associated to carbon fibre and fabrics that is born within a JV, and that is also due for IPs, everything else that’s the remaining part of the process chain.
So, to say the building of the parts for the production process and things like that they are solely owned by BMW 100% and all the IPs in this part of the value chain, they are 100% now in our hands.
Kristina Church – Barclays Capital Securities Ltd.
Thank you very much. That's very clear.
Friedrich Eichiner
Okay.
Torsten Schüssler
Thank you very much, Kristina Church. Next question please.
Operator
The next question comes from Mr. Philip Watkins from Citi.
Please go ahead sir.
Philip R. Watkins – Citigroup Global Markets Ltd.
Good afternoon. Thanks for taking my questions, as well.
Just on the JV, I know you may have dealt with this a bit this morning, were there any particular one-offs in the China JV profitability? It looks pretty good in the quarter.
And perhaps could you give us a suggestion about how that might develop sequentially over the next couple of quarters? And secondly, on the eliminations line, it was also quite a low number.
How would I - how can we start thinking about what that number could look like for the full year? Thank you.
Torsten Schüssler
Thank you very much, Philip. Mr.
Eichiner.
Friedrich Eichiner
Well, basically we had a good start into 2014 in China. That’s true for the import business and its true for the JV business as well.
And I have to say a bit better than we expected that’s since how we started. On the other hand we should not take now the first quarter result of the JV and multiply it by four because we are expecting that the cost momentum will pickup over the next three quarters.
And so we see more cost coming and that’s a reason why we should be a bit more careful with the very good result of the JV in the first quarter. So that it was not an one-off effect it was basically the reason that the cost otherwise was lower than average in the first quarter of 2014 in the joint venture.
Well, we expect combined earnings generated by other entities in eliminations in 2014 to be slightly more negative than they were in 2013. Moving in mid range triple digit million euro territory, so that’s was I think your second question.
Philip R. Watkins – Citigroup Global Markets Ltd.
Thank you very much. (indiscernible) Was it just to do with the IFRS changes to the eliminations there, or were there other reasons?
Friedrich Eichiner
Well any elimination basically its more influenced by our leasing business we are expecting strong business in U.S. for example especially in the second half of the year.
So the leasing business should increase as well and then elimination will play a bigger role in 2013.
Philip R. Watkins – Citigroup Global Markets Ltd.
Thank you.
Friedrich Eichiner
Welcome.
Torsten Schüssler
Thank you very much Philip Watkins. Next question please.
Operator
The next question comes from Ms. Laura Lembke from Morgan Stanley.
Please go ahead madam.
Laura I. Lembke – Morgan Stanley & Co. International Plc
Yes. Good afternoon, and also thank you for taking my questions.
The first one is on your autos profitability. I think typically H1 you have a slightly stronger margin.
I'm just wondering if this would also be the case in 2014, given that H2 you obviously have a much stronger product momentum and also, I guess, some of the headwinds that you're seeing from the ONE future and also the launches will fade, so if you could give us any kind of indication on how you think the margins will progress through the quarter. And then the second question was on your warranty expenses.
I noted that they actually doubled in Q1, and I'm just wondering what is driving the disproportionate increase in that line relative to the volume growth that you've seen. Thank you.
Torsten Schüssler
Thank you very Laura and Mr. Eichiner.
Friedrich Eichiner
Well, basically we really support our guidance for the EBIT margin in automotive segment of 8% to 10% so far we don’t give a guidance for every and each quarter and the volatility between the different quarters, it’s hard to predict. Because there are so many other influences, but we are quite sure, that we keep it in a range of 8% to 10%.
And your second question was about the warranty, well there was an increase and – in the first quarter we will have provision for success based remuneration and bonuses. So that was the major driver of that.
So our profit participation scheme was at the end of day driving the effect. And that’s basically what we can say about this number.
Laura I. Lembke – Morgan Stanley & Co. International Plc
Okay. And can I just quickly follow up on the one about the profitability?
Would you say that Q1 in absolute terms is now the lowest profitability that we've seen this year?
Friedrich Eichiner
Well, as I said, we are not giving guidance for particular quarters. But if you get back to our guidance for the year we said that you would like to see a significant profit growth this year on the group level.
And if you look at this and what we achieved in the quarter I mean it’s quite logical that the other three quarters, should not fall much behind the first quarter.
Laura I. Lembke – Morgan Stanley & Co. International Plc
Okay, thank you. That’s great.
Torsten Schüssler
Okay, thank you very much. Next question please.
Operator
The next question comes from Mr. Marc Tonn from Warburg Research.
Please go ahead sir.
Marc-René Tonn – Warburg Research GmbH
Yes. Hello.
This is Marc Tonn. Just two questions left.
One would be has there been any significant differential between wholesale and retail sales development in the first quarter, and how will this develop in the second quarter and going ahead? Given the huge amount of new models you will launch, should we expect larger wholesale growth in the second quarter already, when compared to retail growth?
And the second question would be regarding the material costs for carbon fibers. I think it was a factor of 10 compared to advanced steels from two years ago.
And where you are already and where you want to be when you implement this material into, let's say, the more common BMW products. Thank you.
Torsten Schüssler
Thank you very much, Mark. Mr.
Eichiner, please.
Friedrich Eichiner
Well basically, as you know we are not disclosing wholesale numbers, but I can confirm that retail was higher than a whole sale in the first quarter. And now as we have to fill up the pipeline first this production and the whole sale will follow expectation is it on a wholesale side we should turn right more and more momentum going forward.
With all the new models that we are bringing into the different markets worldwide. So that’s what I can say about whole sale and retail.
Carbon fiber, yes this it’s true carbon fiber is more expensive than steel and aluminum. From our perspective that’s the reason why we have to look carefully where we are implementing carbon fiber parts into our broader product range but it’s not only a cost issue we have technical advantages as well it’s about stiffness, it’s about driving behavior and things like that play a role.
So in our architectural thinking we make our decisions where we are using those kind of materials and we are not using those kind of materials. On the cost side it’s a question of economies of scale and it’s a question of the progress we want to make would be development in a development process, where we are learning day-by-day.
But we can do better on in the construction, so in essence we still apply more technologies to drive from the textile industry and things like that and this is on progressing and with the next generation of products I think it will make a big step forward. Thanks.
Marc-René Tonn – Warburg Research GmbH
Thanks.
Torsten Schüssler
Thank you very much, Marc Tonn. Next question please.
Operator
The next question comes from Mr. Stuart Pearson from Exane.
Please go ahead sir.
Stuart P. Pearson – Exane Ltd.
Yes. Good afternoon.
Just a couple of questions. Firstly, on the i range, to start there, just on the i3, you've talked a bit about the volumes, but I wonder if you can just talk about how the economics of that have fared relative to your expectations.
Obviously, huge marketing campaigns are going on to support the vehicle, so I don't know if the spending you've had to put in to support the marketing and educating customers on what's obviously a revolutionary vehicle has surprised you, either positively or negatively. And depending on the answer on that, where that leaves us with potentially the i5 and whether we're edging closer to a decision there, and if so, could that change the future ONE cost guidance, either for this year or next year, or is that just going to be leveraging existing technology?
And then just a quick one, just following up on the pricing comments, because you mentioned improving pricing on the newer models later this year, but is there any risk that perhaps we're starting the year a little too optimistic on pricing, as I guess we did last year? Because obviously, still half your range, the 1, the 3 and the 5, presumably you'll have perhaps slightly bigger discounts that might more than offset that.
So how confident are you that we should see positive pricing this year? Thank you.
Torsten Schüssler
So thank you very much we start first with the discussion about the i range with Mr. Reithofer and then Mr.
Eichiner. Mr.
Reithofer?
Norbert Reithofer
What I can say is at the moment sales in production of the BMW i3 have ramped up according to plan. And I mentioned we had a very good March, with about 1000 retails and as you know the BMW i8 will soon ready for delivery.
And customer demand for the BMW i3 remains strong and I would like to add we have really strong order bank. I will not mention how many months, but we have real strong order bank.
And I mentioned during my speech following the market launch in Europe. We are now in the progress of introducing the BMW i3 in the U.S.
and the U.S. will be according to our expectations.
Our largest market, for the BMW i3 and as you know I will not mention how many car where we expect in the year 2014. Our company in the meantime, so we are happy where we are at the moment.
Our production figures is above 5,000 units and we have a very good order bank and that is what I can say and not more. And you mentioned by yourself that we are in the middle of the launch phase of a brand new technology carbon fiber, electric drivetrain, and so on.
And where we are at the moment we are quite happy.
Torsten Schüssler
Okay. Thank you very much.
The second part of the question was about the pricing risks. Mr.
Eichiner?
Friedrich Eichiner
Well. Basically, you are right.
In 2013, our expectation was we could improve pricing and it didn’t happen and are basically if you look at pricing there are elements in our hand, but there are also elements that are not in our hand. On our side that’s where the product momentum comes in we knew already that last year that we get more and more momentum.
This year this will be even stronger with 16 new models in the market. So this is on in our hands it’s on our side and should stabilize pricing it should improve pricing.
On the other hand there is competition out there and we have to see how they are reacting and what this means. And there is the macroeconomic environment and political environment that’s completely not in our hands.
So those are the factors. Now looking at the first signals of 2014 makes us believe that the most problematic markets, when it comes down to pricing, the European markets are in a bit better shape.
So last year we are seeing a declining market, this year it seems to be that the market is coming back to gross again. And this is a big difference if you compare 2013 to 2014.
And this makes us believe there is chance with new models coming in with a increasing market in Europe that pricing should be improved in a course of 2014.
Torsten Schüssler
Thank you very much, Stuart. Next question please.
Operator
The next question comes from Mr. Michael Punzet from DZ Bank.
Please go ahead sir.
Michael Punzet – DZ Bank
Yes. Michael Punzet.
Once again, a question on the pricing issue. Could you make a general comment of the situation in the US and in China, because so far we have only or mostly talking about Europe?
And the second question is can you give us some comments about the political situation in the Ukraine, Russia, and as well as Brazil, and the possible effects to your business?
Torsten Schüssler
Okay, thank you very much, Michael. We start with Mr.
Eichiner and then Mr. Reithofer about the political situation.
Mr. Eichiner?
Friedrich Eichiner
Well, looking at the U.S. market pricing so far is not really an issue as we see it in Europe.
There are always some tactical spendings in a game, in a run out phase. For example in certain segments but that’s not out of order, and we expect that the U.S.
market will not be a burden on a pricing side. It should remain stable at a similar level we’ve seen it last year China is coming a bit better than we expected.
So we see improvements on a 7 Series side. And we see that all the remaining range of our portfolio is quite in good shape.
And it comes down to pricing. So China was stronger because the market was pulling a bit more than expected.
So at the end of the day it’s all coming back to the development in Europe, where we are far away from all the levels. And we’re expecting improvements this year.
Torsten Schüssler
Thank you very Mr. Eichiner, Mr.
Reithofer?
Norbert Reithofer
I mean your question regarding the conflict in the Ukraine I mean it’s a bit difficult for me sitting here in Germany to make an accurate assessment of this complicated and changing situation. Therefore we ask for your understanding that we’re not able to comment.
But if you ask my opinion I believe it is important to find the political solution to the conflict. In our opinion it is very important to find a political solution.
And your question regarding Brazil and impact on BMW business I mean you have to see our investment in a new car plant in Brazil from a long-term perspective. I mean you have to see the investment into a new production plant.
I mean you have to see 10, 15, 20 years if you invest in a plant structure. And you have to ask yourself what is the potential the future potential of a market like Brazil.
And if the future potential is to be a car market of four even five million cars per year, then it the right decision to invest in a plant structure in Brazil. So it is wrong to see such an investment coming from a short-term perspective.
So and Ukraine and Russia impact on BMW business, I mean if I look into our sales figure even including April, we are still in a very good shape in Russia. We sold during the first four months more than 13,000 cars in Russia and we don’t have signs that we are more in a difficult situation, we have no signs.
So that means the car market is running on track in Russia according to our budget plans. And Brazil I mentioned already our plant investment you have to see from a long-term perspective.
And I compared always with the situation in South Africa, you have ups, you have downs. But if you see it 10 to 15 years then you are definitely on the positive side.
Michael Punzet – DZ Bank
Okay thank you.
Torsten Schüssler
Thank you very much. Next question please.
Operator
The next question comes from Horst Schneider. Please go ahead sir.
Horst Schneider – HSBC Trinkaus & Burkhardt AG
Yes. Hi.
It's Horst from HSBC. Thanks for taking my questions.
First of all, I would be interested in your view on I mean regarding the global light vehicle sales growth. I see in your Q1 report that you lower the growth expectation from 4.7% for 2014 to 3.6%, and I think that's due to a lower forecast in Brazil, Russia, and also a little bit in the US.
So I want to know if that has also impacted your view on the premium market growth in total, and I want to know if that is also impacting your own unit sales forecasts. You don't change your guidance on deliveries; I see that.
But I want to know if there is now a slight negative impact from that lower market growth on your own sales. And the next question is regarding financial services.
We see a very strong margin in Q1, and I want to know how we should think about Q1. Was it more a one-off, or you expect that profitability to stay as strong as in Q1 also in the coming quarters?
And, yes, these were my two main questions. Sorry, the last question is on provisions.
I mean you mentioned that this was related to provisions regarding bonuses. Will that provision increase continue in the next few quarters, or was that a one-off in Q1?
Torsten Schüssler
Thank you very much, Horst. So we start with Mr.
Reithofer and two parts of your question and then Mr. Eichiner.
Mr. Reithofer?
Norbert Reithofer
Look I have to look into our major sales regions and our major sales regions, first the United States second to European Union of course including Germany and third China. And I would like to mention other car markets as well like Japan and South Korea for example Australia.
But let me start with the U.S. I mean, we expect the car market of roughly 16 million units in the U.S.
in 2014. If you compare it with the pre-crisis level it’s nearly back to it’s levels before the financial crisis in 2008.
It’s a positive signal. How we see it, if you see the European Union, I mean with an economic growth of approximately 2.2% over the previous year.
We expect 12.5 million units, Germany will be a roughly on a level of 3 million units and China will grow roughly 10% to about 18 million units. And these regions are the most important regions for the BMW Group.
And Russia I mentioned already, it’s a moment we are on track in Russia, if I see Brazil during the first four months, we are on track as well, April was not so good. But the first four months we are on track in Brazil.
Though at the moment, we are okay with our figures. And as I said I mean the U.S.
16 million cars nearly back to pre-crisis levels, China was a good growth rate of more than 10% to about 18 million, European Union 12.5 million. At the moment we see no signs for hurdles, or how you have say in English.
Horst Schneider – HSBC Trinkaus & Burkhardt AG
So your view is the premium market has not really changed, right?
Norbert Reithofer
No, at the moment no change.
Horst Schneider – HSBC Trinkaus & Burkhardt AG
All right. Thank you.
Norbert Reithofer
I mean, I’m not a guy to look into a crystal ball if I see the situation in Russia for example. I think, you have to go to a witch doctor.
Horst Schneider – HSBC Trinkaus & Burkhardt AG
Thank you.
Torsten Schüssler
The second part of your question were about financial services and provisions. And these will be answered by Mr.
Eichiner.
Friedrich Eichiner
So, first if you look at the first quarter, and then the result within been financial services was strong. But should not be multiplied by four.
The reason is that the cost base was very low. We are actually investing in a lot of IT, which we need in order to improve processes, in a banking environment and especially in European markets.
And this will have a cost and the cost will come in over the course of 2014 more strongly. So at the end of the day, we will be still hold on to look the guidance we gave in the beginning of the year for that financial services maybe sees a slight improvement.
But it’s not an improvement as big as four times the quarter one result. So that’s what I can say about financial services.
Then provisions you have to understand that the bonuses are paid out in the middle of the year. So we are building up provisions and we get the payout in middle of the year, which will reduce it.
And then we pull it up again. So that is what we are doing.
And in the first quarter of course we had to accrue provisions for the employee participation scheme that will be paid out in 2015. So that’s how it works and so that was a reason of the build up of provisions in the first quarter.
Horst Schneider – HSBC Trinkaus & Burkhardt AG
But then the – sorry. Then the provisions for 2015, they are now all covered, right?
The provisions, they don't have to increase again in the second quarter and third quarter?
Friedrich Eichiner
No, they are not all covered. That's done pro rata, so we have to build it up step-by-step, quarter-by-quarter.
And it comes along with the broad profit that we’re generating in a particular quarter that’s the logic behind but the message we wanted to give to you that the build up phase. But there’s also a payout phase and the payout phase will come in the second quarter.
Horst Schneider – HSBC Trinkaus & Burkhardt AG
All right. Thank you.
Torsten Schüssler
Thank you, very much Horst Schneider. Next question please.
Operator
(Operator Instructions).
Torsten Schüssler
I think we have time for two more questions.
Operator
We have a further question from Arndt Ellinghorst from ISI Group. Please go ahead sir.
Arndt A. Ellinghorst – International Strategy & Investment Ltd.
Thanks, and good afternoon, everyone. Two questions.
Firstly, on the financial services penetration, I've noticed quite a strong decline, both from the end of last year and also year over year. And I wonder whether you can talk about this a little bit in the context of net pricing, whether you have stepped on the brake somewhere in your book when it comes to leasing or financing offers, because a 400 basis point dip in a quarter is pretty much something we've never seen before.
That's the first question. And the other question is on your future cost line in your EBIT bridge.
We all understand it's going to be a similar headwind number, incremental headwind number this year. I wonder whether you can talk a bit more structurally about that line, and whether there is a chance that this will ever actually become a positive in your swing factor analysis, because otherwise I just fear a little bit that that's becoming sort of your comfort zone, where you keep adding costs like increased labor costs and so forth.
We just see an ever increasing number in your bridge from these future costs or other costs. Thank you.
Torsten Schüssler
Thank you, Arndt Ellinghorst. Mr.
Eichiner
Friedrich Eichiner
Well, if you look at the leasing business there are two effects. The first effect is that we had a very strong business in China.
And you all know there’s no leasing in China. So that was one reason 25% gross is quite something.
Our gross rate in U.S. was not a strong in the second quarter.
This was a mid-single-digit number and 3.5. So much lower and therefore the U.S., which is the strong leasing market didn’t contribute so much into the penetration rate.
So that’s the first information. Second is that we really intended to balance the risk in a leasing business.
So we have been a cutting down a bit because we had a quite a high penetration rate in the fourth quarter of 201. And as a consequence we tried to put the foot a bit more on the break when it comes down to leasing in the first half of 2014.
So that’s more or less a background of the 40% compared to the 44%. And now your question about the future cost, we understand what you say, we understand your message as well.
But I have to remind you we always said, that we have two big years. And the first one was 2013, which was really the peak, and then we tried to bring everything back down again.
And we should make progress in 2014. That is visible now if you look at R&D spending so this is visible if you look at the CapEx.
And so those future cost at the end of the day will come down, but there is a remaining effect that we have to expect, still in 2014. But as I said 2015, 2016 then it should be washed out.
So that’s at least our expectation.
Arndt A. Ellinghorst – International Strategy & Investment Ltd.
All right, thanks a lot.
Torsten Schüssler
So, thank you very much, do we have any other questions. No.
then thank you very much I think we are approximately on time, thank you ladies and gentlemen, thank you for joining in our call today and for your questions on behalf of the BMW Group team. I wish you all a pleasant afternoon.
Thank you, very much and bye-bye.