Torsten Schüssler - Head, IR Norbert Reithofer - Chairman Friedrich Eichiner - CFO

Kristina Church - Barclays Marc Tonn - Warburg Research Laura Lembke - Morgan Stanley Horst Schneider - HSBC Mike Dean - Credit Suisse Fraser Hill - Bank of America Charles Winston - Redburn Partners Jochen Gehrke - Deutsche Bank Arndt Ellinghorst - ISI Group

Good afternoon ladies and gentlemen, I would like to welcome you all to the Telephone Conference of BMW AG on the Second Quarter 2014. With me today are Dr.

Norbert Reithofer, Chairman of the Board of Management; and Dr. Friedrich Eichiner, our CFO.

First, Dr. Reithofer will give you all an update on the business performance and Dr.

Eichiner will then take you through our financial results. Afterwards, we will have time for our Q&A session.

Mr. Reithofer, please go ahead.

Good afternoon, ladies and gentlemen. Since July, Europe has a new parliament.

The new European Parliament and Commission have to set the course for the future. Together all the EU countries are facing some enormous challenges: How can the EU keep up its productive efficiency and remain competitive with the other large world regions, Asia and America?

How can the EU keep up a strong industrial base, which is the prerequisite for growth, jobs, and social stability within Europe? How can the EU ensure its innovative lead with regard to key future technologies such as sustainable mobility?

If we are not able to offer viable solutions to all these questions, Europe as a business location will continue to lose ground. In order to hold our own when it comes to global competition, Europe must remain an open market and an advocate of free trade.

This is why the BMW Group is supporting the efforts to conclude a free trade agreement between the EU and the United States. We at the BMW Group are fully convinced that our future lies in a strong and united Europe.

It is the joint task of government, business and society as a whole to develop solutions that are long-lasting. The automotive industry is one of the leading drivers of the European economy.

Thanks to our industry innovative strength, the automotive sector has been able to create around 12 million direct and indirect jobs in Europe. This makes the car industry the EU's largest employer.

It is also the EU's biggest exporter. For the first time since the global financial and economic crisis, car registrations in Europe are expected to pick up again this year compared with the previous year.

In both Spain and Portugal, as well as in the UK, the number of people buying a new car is increasing considerably. For the BMW Group, Europe is much more than just the company's largest sales region.

Europe is where we produce around 70% of our vehicles at 16 sites in four countries, including contract manufacturers. European politicians have set the strictest CO2 requirements for vehicles worldwide.

At the same time, Europe offers very little in terms of incentives to promote sustainable mobility compared with other major economies. We Europeans should seize the opportunity to take the technological lead in the shift towards sustainable mobility.

This is about striking the right balance. We need to restore a balance that will help us master the permanent tug-of-war between ecological requirements, social demands, and industrial policy matters because the world is changing.

There are still tremendous risks to the global economy. These range from public debt to re-flationary monetary policies and political conflicts.

Growth in countries like Japan and major emerging markets is slowing down. Competition is getting tougher and tougher every day and our business environment continues to be extremely volatile.

As the leading premium car company, our goal is to achieve long-term growth. At the same time, we want to be and remain profitable.

For 2014 experts expect: growth in the global economy; growth in the global car market. In the light of these forecasts, we are confident about the business year 2014.

We aim to build on our growth momentum of the past years. Our targets for the business year 2014 are clear.

First, a significant increase in deliveries to a new record high of over two million vehicles; a pre-tax Group result at a level significantly above the previous year; third, an EBIT margin in the Automotive segment in the range of 8% to 10%. Let me give you a brief overview of the key figures for the first six months of 2014.

First, sales. We have sold more cars of our three brands BMW, MINI, and Rolls-Royce in the half-year period than ever before.

And, for the first time, we exceeded the mark of one million cars in mid-year sales. Our core brand BMW also achieved a new record during this period selling more than 866,000 cars.

The BMW 3, 5, and 6 Series, as well as the X5 are clear market leaders in their respective segments. BMW Motorrad also reached a new all-time high for a six-month period as well.

Rolls-Royce recorded the best first half year in its history. At MINI, sales figures were affected by the model update of the Hatch.

Second, pre-tax Group profit. We achieved a result of over €4.8 billion, up significantly from the same period last year.

Group net profit. The net profit increased to more than €3.2 billion.

And fourth, EBIT margin in the Automotive segment. In the first half year of this year, our EBIT margin stood slightly above our target range of 8% to 10% percent.

But we are also aware of the fact that we need to invest further in key future projects, new technologies and new facilities around the world. On top of this, we will have to meet increasingly strict regulatory requirements in reducing our fleet's CO2 emissions.

Nevertheless, our 2014 forecast remains unchanged. We plan to meet our targets for the business year 2014.

An important success factor will be the new models we are offering our customers in the second half of the year. One of our most important launches of the year is the BMW 2 Series Active Tourer.

Featuring front-wheel drive and maximum functionality, this model is a true innovation for BMW. Representatives of the international media recently had a chance to test-drive it, and their initial feedback is the Active Tourer drives like a real BMW.

This is our ambition with every BMW model. And I am positive that our customers will have the same experience come September.

The M variant of the BMW 4 Series Convertible will be launched in September as well. The new BMW X4 and the model revision of the BMW X3 came out in July.

At MINI, the model revisions of the Countryman and the Paceman also arrived at the dealerships in July, to be followed by the five-door Hatch in fall. At Rolls-Royce, deliveries of the Ghost Series II will begin in fall.

Our plug-in hybrid sports car, the BMW i8, has been available since June, and the in-coming orders are extremely high. Following its market launch in Europe, the U.S.

and Japan, the fully electric BMW i3 will be made available in the metropolitan regions of China in the second half of this year. So far, around 5,400 BMW i3 cars have been registered by customers around the world.

As a global player, the BMW Group intends to achieve balanced growth around the world. A balanced distribution of sales increasingly requires a balanced distribution of production.

What this means is, we believe we need to operate production sites in the three large world regions: Europe, Asia, and America. The same can be said of our research and development activities.

Our production follows the market. This approach gives us flexibility.

It helps us offset currency fluctuations. And it allows us to grow globally and to tap into new market opportunities.

Let me give you a few recent examples here. First example, Asia.

In China, we are going to expand our capacities at the plants in Dadong and Tiexi to a total of 400,000 units a year over the course of the next two years. We have extended our cooperation with our joint venture partner Brilliance up to 2028, even before the original agreement had expired.

Our intention is to focus even more strongly on the specific demands of our Chinese customers and on attracting new customers. This is why, in the future, we are going to produce six instead of three BMW models locally.

At the same time, we are adding to our dealership and service network in China. Plus, we are investing in research and development at our R&D Center in Shenyang, which we set up together with Brilliance in 2013, 500 engineers are working on the mobility of the future.

In South Korea, we opened another new R&D Center in July. It is the BMW Group's fifth R&D site outside of Germany.

More and more trends are emerging in Asia in particular. Moreover, we established our first Driving Center in Asia in South Korea.

Previously, these driving experience centers for our customers only existed in Germany and the U.S. Up to 2020, we are investing a total of over US$75 million in South Korea, creating about 100 new jobs.

We have also signed a Memorandum of Understanding with Samsung SDI to expand our supply relationship for battery cells for electric and electrified vehicles. Second, America.

In the United States, we are expanding the production capacity of our Spartanburg plant to 450,000 units annually. The earmarked investment for the years 2014 to 2016 stands at US$1 billion.

In San Luis Potosí, Mexico, we are going to build a new plant in the NAFTA region. The total investment volume also amounts to US$1 billion.

As of 2019, up to 150,000 cars annually can roll off the assembly line of the new production site. All of these examples demonstrate that our international production network is prepared for future growth.

As a global corporation we must always have a 360 degree approach to our corporate strategy. How is our business developing?

What do our customers want today and in the future? And what is happening in the world around us?

By successfully mastering these strategic points, we will continue to fully capitalize on new growth opportunities and further leverage our lead in the premium segment. Thank you very much.

Thank you very much, Norbert Reithofer. Now Friedrich Eichiner please go ahead.

Ladies and gentlemen, good afternoon from my side as well. The positive business development of the first half-year met our expectations.

With more than one million deliveries and retail sales growth of 6.9%, revenues for the first six months were the company's highest ever. Group EBIT also reached a new level with €4.69 billion.

High utilization of our global capacities and a good model and regional mix also had a positive impact. Asia and China, in particular, once again reported double-digit growth in deliveries.

We also made further gains over the previous year in the Americas. The price situation in Europe improved somewhat for the first time in the second quarter.

Deliveries also increased slightly from the first half of 2013. We expect the positive business trend to be sustained throughout the rest of the year.

The momentum in our major overseas markets, in particular, looks set to continue. Group revenues for the second quarter reached €19.91 billion, an increase of 1.8% over the same period of last year.

The slight increase in revenues, relative to sales growth, is the result of currency translation effects. Adjusted for these effects, revenues increased by 5.2%.

Group pre-tax earnings for the second quarter reached €2.66 billion. Compared with the second quarter of 2013, Group earnings before tax were 30.9% higher.

At Group level, the EBIT margin for the same period stood at 13.1%. This underlines how we have enhanced our profitability since last year.

The BMW Group continues to maintain its high level of research and development and capital expenditure, in order to strengthen the company's future competitiveness. In the first six months of the year, we invested a total of €2.58 billion in new products and equipment, including investments in Dingolfing and Regensburg in preparation for production of the upcoming 7 Series and a new compact model.

Total capital expenditure rose by 8% year-on-year. The CapEx ratio for the first six months of the year stood at 6.8%.

The CapEx ratio for the full year 2014 is likely to exceed our target of below 7%, but should be lower than the previous year's figure of 8.8%. The BMW Group spent a total of €991 million on research and development in the second quarter, a 3.5% increase over the same period last year.

Expenditure was mainly earmarked for new products and fields of technology, alternative drive technologies and measures to further reduce CO2 emissions. The R&D ratio for the first half of 2014 stood at 5.4%.

The ratio for the full year is likely to exceed our target range of 5% to 5.5% but will be lower than the previous year's 6.3%. Group liquidity remained largely unchanged in the second quarter.

At the end of the quarter, liquid assets and marketable securities totaled €10.62 billion, thereby maintaining the BMW Group's solid financial position. Now let's move on to the Automotive segment.

In the second quarter, we achieved a new all-time sales high of more than 533,000 deliveries, in spite of lower MINI volumes due to the model changeover. The BMW brand posted sales growth of 8.3% to reach a total of more than 458,000 units.

The new 4 Series models contributed to the sales growth. With the 3 Series, 4 Series, its 5 Series models, the X3, X5, and X6, the BMW brand is the leader in its respective vehicle classes.

The world premiere of the three-door MINI Hatch has been a success. We expect new models to generate additional sales momentum in the second half of the year.

Segment revenues for the second quarter stood at €18.50 billion. The volume-driven increase in revenue was dampened by the depreciation of a number of our main currencies.

EBIT for the same period reached €2.16 billion, an increase of 23.1% over the previous year. Second quarter earnings also benefitted from sales growth and a positive product mix.

Due to the model change, MINI accounted for a lower percentage of sales. This effect will even out over the course of the year, however, once the new models are available to customers.

The positive earnings development also benefitted from a disproportional low costs incurred in the first six months. This effect is likely to be reversed in the latter half of the year, with higher project-related and seasonal costs.

The Automotive segment achieved an EBIT margin of 11.7% for the second quarter. Our target range for the full year remains at 8% to 10%.

After the first six months, EBIT margin stands at 10.7%. We expect segment margins to weaken in the second half of the year.

Market launch and ramp-up costs will have an impact. We are preparing a wide range of product ramp-ups in the second half of the year, including the Active Tourer, the Rolls-Royce Ghost Series II and the five-door MINI.

Further up-front investments in future projects will also result in a dampening effect. Extensive development projects for further reduction of CO2 emissions in the field of alternative drive concepts and lightweight construction, as well as new product projects will lead to higher capital expenditure and development spending in the second half of 2014.

The segment headcount is expected to further increase. Sales projects, such as Future Retail and various IT projects, will similarly lead to higher costs in the course of 2014.

In the first half of the year, changes in currency and raw material prices had a slight negative impact on segment earnings. We are well hedged in the major currencies and raw materials for the full year.

However, we anticipate a charge in the low mid three-digit million euro range from headwinds in this area. Healthy demand and numerous product launches contributed to a new all-time production high of 1.073 million units.

The 4 Series Gran Coupé, the X4, new M3, and M4 models as well as the BMW i vehicles, for instance, will all be released in overseas markets over the coming months. We expect the strong product momentum of the first six months to continue in the second half of the year.

Preparations for this growth resulted in a working capital increase of €1.81 billion at the end of the six-month period. This build-up of working capital impacted free cash flow, which stood at €1.03 billion as per 30 June.

Thanks to continued sales growth and a corresponding reduction in inventories, we still expect free cash flow to be higher than the previous year. However, it will remain below €3 billion.

At the end of the second quarter, net financial assets in the Automotive segment totaled almost €11.49 billion. Ladies and gentlemen, in the Financial Services segment, competition for attractive financing has increased substantially.

BMW Group Financial Services is focusing on profitable new business and a good balance between leasing and financing. The number of new contracts decreased by 1.9% in the second quarter and was therefore slightly lower than the previous year.

During this period, a total of more than 380,800 leasing and financing contracts were concluded with customers. BMW Group Financial Services serviced a portfolio of 4.22 million contracts to the end of June.

This represents an increase of 5.8% over the previous year. At 40.9%, the segment penetration rate, the percentage of new vehicles financed by Financial Services was lower than for the first half of 2013.

The segment reported pre-tax earnings of €918 million for the first half of 2014. This figure is on par with the previous year.

The risk situation developed in line with expectations. The credit risk situation for Financial Services remained stable in the first half of the year.

The segment always makes appropriate provisions for business risks. Pricing on the international used-car markets, including Europe, remained largely unchanged.

In the U.S. prices trended downward slightly.

In the second half of the year, we expect credit risks to remain stable, or improve slightly, in all regions. Residual value risks should remain stable in Europe and Asia.

In North America, prices for used cars are expected to decrease slightly. Overall, the positive business development in Financial Services should continue throughout the rest of the year.

The Motorcycles segment reported a new sales-high for both the second quarter and first half of the year. Almost 71,000 vehicles were delivered to customers in the year to the end of June an increase of 9.3%.

Sales performed well in markets including France, Italy, and the U.S. The R Series, in particular, with the new models R 1200 RT, R 1200 GS Adventure, and R nineT, made strong gains.

In the first half-year, the overall market in the segment above 500 cc showed signs of recovery for the first time worldwide. Over the full year, markets in Germany and Europe should improve on last year.

In the U.S., the total market should be close to 2013 levels. BMW Motorrad will benefit from this trend.

Revenues for the first six months climbed 9.8% to €1 billion. EBIT for the same period reached €119 million, an increase of 22.7% year-on-year.

Despite the strong sales momentum, forecast for the second half of the year, earnings development will be subject to the usual seasonal influences. Ladies and gentlemen, after six months, the BMW Group is right on track, thanks to positive business development in its segments.

The company continues to benefit from its attractive line-up and global presence. We are therefore confident that the BMW Group will achieve its goals for the full year.

The positive business development should continue in the second half of the year. This assumes that conditions remain stable and depends in particular on the continued recovery of the European markets and sustained growth momentum in the overseas markets.

Nevertheless, economic risks will stay high in the second half of the year. The pressure for consolidation of fiscal debt in Europe, the U.S., and Japan remains an issue.

Continued expansive monetary policy also risks creating a price bubble. At the same time, political conflicts in the Middle East and Ukraine could affect prices for fossil fuels, which in turn could have negative impact on the global economy.

As previously announced, we anticipate a significant increase in pre-tax earnings at Group level for 2014 compared to the previous year. In the Automotive segment, deliveries should be significantly higher than the previous year.

We expect to see a solid increase in revenues, despite currency translation effects. For the full year, we expect the EBIT margin to remain within our target range of 8% to 10%.

However, due to aforementioned up-front investments and expenses for ongoing product and technology projects, second half margins will not match the level of the first six months. For our Financial Services segment, we expect a continued positive business development.

The return on equity of the segment will exceed the target of at least 18%. However, it will be slightly lower than last year due to necessary investments.

We have adequate risk provisions for our Financial Services activities. From today's perspective, BMW Motorrad will also meet its targets, assuming conditions remain stable.

Our forecast for the year, as already mentioned, is based on stable political and macroeconomic conditions, and changes in the political or economic climate could affect our guidance. Ladies and gentlemen, the BMW Group is focused on worldwide growth and sustainable profitability.

To achieve this, the company is enhancing its competitiveness and consolidating its leadership in the premium segment. Thank you.

Thank you very much, Dr. Eichiner.

Ladies and gentlemen the line will shortly be opened for your questions please wait for some technical advice.

Hello, hi it's Kristina Church here. Thanks for taking my questions.

My first question is related to mix in terms of the size of your products going forward. I know you mentioned on the press call this morning that you would see a lot more small cars in your mix.

I wonder how that fits with your X7 announcement and to your current mix of SUVs. Do you see that number declining over time or do you expect to keep it -- still be able to sell as many big cars, also selling more at the very low-end, the middle get squeezed a bit?

And then, my second question relates to pricing. Just your guidance or your outlook for the rest of the year in terms of the 100 basis points that you talked about with your full year results, do you see the second half of the year being considerably stronger than the first half or do you think it's a case is waiting to see with new models?

Thank you very much.

Thank you very much. Kristina, I think we start with Mr.

Eichiner direct questions for him. Mr.

Eichiner, please go ahead.

Yes, hi, Kristina.

Hi.

So thank you for your question. So mix and bigger car, smaller car, so we will need all of those different cars in our portfolio.

Because on the one hand side we need to support profitability, on the other hand side we have to achieve a very ambitious CO2 targets especially in Europe. In order to get there we try to find a balanced approach in our portfolio that means on the one hand side we are increasing our range or products in the lower segments but the same point in time we are investing in products like X4, like 4 series, later on X7 in order to balance the profitability in the program and with the right technology for this bigger cars it should be possible to achieve both profitability and CO2 that's the basic idea.

But it remains a challenge going forward. That's what I have to admit because the share of the smaller products will increase over time.

But that's one side of the business. And pricing that's also an uphill battle, I would say, we made the first progress now visible in quarter two but that's only a starting point, we are not yet there.

And it has to be seen whether our target of the 100 basis points could be met at the end of the year or not. As I said it's an uphill battle we have to see I'm hesitating to be too optimistic in this area.

Thank you very much. Next question please?

Yes. Good afternoon.

This is Marc Tonn from Warburg Research. Just one question with regard to the foreign exchange headwind.

It was very limited in the first half and you already indicated might be a little bit of more severe in the second half and as the headwind is much low at you when compared to your competitors perhaps you could also shed some light on what you might expect for next year? Kind of whether you best enjoyed still the very favorable situation this year but things may become worse next year from that side?

And the second question would be with regard to your future investments which you mentioned for the second half as a drain on earnings. Is it just compared to the first half or do you also expect it to be significantly more than the second half of last year?

Thank you.

Thank you very much. Marc, this question will be answered by Mr.

Eichiner again.

Well, as you said, we have seen some headwinds from the currency side in the first half of the year but the influence on the profit was limited because of the good hatching we've got in place. This will be the same going forward for the second half of the year.

But overall we are expecting a low-to-mid-size three digit million euro headwind coming from the currency issues. Going forward into 2015, well, it's hard to say because we're not fully yet fully hatched in 2015 but we have a very solid position for that year.

So our expectation is that depending on where the major currencies like Renminbi and the U.S. Dollar is going that it could be a similar picture to this year I think it's too early to say more about this.

On our future investments, there is more to come in the second half of the year. So all major projects will be concluded in the second half of the year and the associated cost will come in as well.

So we are calculating well on the some headwinds in the size of a mid to at least a mid-size €3 million figure will be the consequence of this.

Thank you very much. Next question please?

Yes. Hello also from side.

I have two questions please. The first one is in China and there is obviously a lot of noise around them antitrust investigation at various of our peers.

So I'm just wondering if you've also been approached already and also how do you plan to handle the situation and what kind of matters, if any, are you planning to take here? And then secondly is on pricing, Dr.

Reithofer, if I'm correct a few months ago you gave an interview I think in the German Automotive News saying that pricing in Europe was still quite tough and that you would need to reassess whether it still makes sense to compete in some of the Southern European markets. And I was just curious to know how would you view the situation right now a few months onwards and what your conclusion is regarding your plan of action in some of these markets.

Thank you.

Thank you very much, Laura. So we start with Mr.

Reithofer and then Mr. Eichiner.

Mr. Reithofer, please?

Look what I had in my mind was I said volume is not everything. We have to have the right balance between volume and pricing.

And we had to realize last year in December that if you reduce your volume you can even have a better profit than with more volume. So and at the moment we are in a thinking process what does it mean for a premium manufacturer like the BMW Group.

And as I said, volume is one think and you need volume growth as a corporation but it has to be in the right balance with pricing. That is what I've said and I have nothing to change.

So and if I see the first six months of 2014 that is exactly what we do in several markets.

Thank you very much. Second part was China investigation Mr.

Eichiner.

Yes, I'm totally speaking so we have a very open discussion with the NDRC on a regular basis and I think we are very transparent about what we doing in the market. And we know that there is a trend that the Chinese market is maturing that means the high prices will slowly come down, competition is increasing, and we had reacted to this development already.

Having said that, we have to see that part of those high prices is driven by duties and luxury taxes as well. And so the prices are not comparable with those in the U.S.

and U.S. is not compared to the average of the world, it's much lower than average of world.

So that's the real picture behind that. But having said that, as I mentioned we are in discussion with them, it's an ongoing process and we regularly compare the prices of our product and services in China with a competition and other elements that are relevant.

So far there is no more information available where this initiative lead to and we have to wait and see.

Thank you very much. Next question please?

Yes. Good afternoon.

It's Horst Schneider from HSBC. I have got a few questions and first of all regarding your guidance on a significant increase in units, it strikes me that I mean we had a quite slow ramp up of the mini-series and I just want to know if you still assume that you can reach as many a new sales record in 2014 which would basically imply that you had a quite strong growth as mainly in H2.

I know that context also because you guide for somewhat lower margins in H2. I want to know if we can assume that higher sales or increase in unit sales would still lead to higher earnings year-on-year or should we expect especially for example for Q4 a negative leverage for which reasons ever?

And then the other question that I have is for your China joint venture. I mean I think we have seen a quite strong result in H1.

I just want to know to which extent you assume that the profitability of the China joint venture will also come down, why should it come down, and maybe there's even a chance that also in China that profitability stays on the same level as in H1. And the last question then to Mr.

Reithofer, I mean, we heard some statements or some fresh articles on cost cutting plans in your company on the long run. All I mean, other car marker should also be loud about new cost cuttings.

I just want to know if you're saying that all these costs savings are still a competitive advantage or is that more something that enables you to standstill, I mean everyone is cutting costs, isn't there a risk that these costs savings need to be passed on to the end customer via lower prices in the end in the long run? Thank you.

Thank you very much, Horst. I think we start with Mr.

Reithofer about cost cutting and then Mr. Eichiner.

Mr. Reithofer, please?

Let me start with your question regarding cost cutting. I mean proactive management means taking timely corrective actions.

And if we see today's profits they are the result of yesterday's decisions but that is not a linear process. And we are already anticipating today what we need to do in for coming years to remain successful in the future.

What does it mean? It is vital to contain rising costs.

I would like to really to say it again it is vital to contain, not to cut, it is vital to contain rising costs, because we will have rising costs but we have to contain rising costs we're not talking about to cut costs. Also because I mentioned it during my speech also because emission legislation here in Europe requires us to invest in expensive technologies and at the same time offer more smaller vehicles you mentioned it or one of your colleagues said it.

I mean if I think, let me say three years, two or three years into the future, then 40% of our cars will be smaller cars that means MINIs, 1 Series, BMWs, vehicles like 2 Series BMW Active Tourer things like that so that means more than 40%. So and we have to prepare the company first touch scenario.

I will say it again, I mean, emissions legislations here in Europe requires us to invest in expensive technologies. And my second point was we have to think what does it mean to have more than 40% smaller cars as part of our product portfolios.

So and these two issues by the way the second issues is as well because of the CO2 Emission Regulations because we need more smaller cars in our portfolio. So and we have to prepare the company and we're not talking about cuttings costs we have to contain rising costs.

Thank you very much, Mr. Reithofer.

The second part of the question will be answered by Mr. Eichiner.

Yes, what's your question about MINI and the guidance for the retail sales? So well basically we confirm our guidance our expectation that we should meet the target of significant increase of unit sales over the full year.

MINI will play a role but not a important role, more important driver this will be the BMW brand. MINI is in the launch phase and it has to be seen where it ends up so it will be at the low output beyond the level of last year that is not really important for the guidance, we have to see how this goes.

But that's more as a brand image driver will be the BMW brands all of the new BMW products that are now available. Now the questions about the margin.

We got it already the margin will be lower in the second half of the year. I think the mix is not really the major driver of this but cost will be an issue.

We are expecting higher cost in the second half of the year driven by many effects like products launches, launch communication then we're ramping up our headcount actually in order to support our growth in the company. This will have an influence as well as new projects in the IT area, for example, where we are investing actually into the digital, well the digital field that the interaction between the customer and our company will be based on our suite of new systems in that field.

So that's one of the examples but there are many more that we see coming in the second half of the year. Knowing that, was the reason when we guided that the second half will be influenced by higher cost leading to lower margins compared to first half of the year.

So then China with BBA it's a bit similar to what I told you about BMW. I mean we announced plans to introduce another three models in HLV.

Well we are planning growth in HLV and Audi. This is driving investments forward.

This is driving development forward. And the part of the cost associated with those products will come into the second half of 2014.

And that is a major reason why the second half will not show the same well profit improvement as we have seen it in the first half of the year.

But we can still work with an -- this sanction of a positive operating leverage, right, but for us that rising shares lead also to rising earnings?

Well just want to remind you our guidance has also that the profit should be increased significantly that is also part of our guidance. And so in this respect I have to say, yes.

Thank you very much. Next question please?

Good afternoon. It's Mike Dean here from Credit Suisse.

Two quick questions. Could you quantify the first half benefit you had from your disproportionately lower costs just so we can normalize the EBIT for the first half.

And then just in terms of other provisions, these declined in the balance sheet by about €130 million quarter-on-quarter and we saw €140 million deduction from profits in the free cash flow, did this have a positive impact on EBIT in the second quarter. Thank you.

Thank you very much, Mike. I think Mr.

Eichiner.

Well, I mean we didn't have a positive influence on our profits coming from provisions. I mean major background of what you've seen in cash flow statement is the payout of the bonuses.

That's always due in the first half of the year. That's a major background on this.

And talking about the cost, in the first half of the year, well, I think it was -- at the end of the day it comes down to a low three digit million euro amount that is well, what where the profit benefited in the first half of the year now compared to an even spread cost allocation over the 12 months, but that's I think a good rationale for you.

Very clear. Thank you.

Thank you very much. Next question please?

It's Fraser Hill from Bank of America. Couple of questions.

On your production versus retail you'll see overproducing we saw that in your inventory build in the second quarter out of your model launches. How should we think about your production versus budgeted retail sales in the second half of the year, do you think we will still be in a dynamic of overproducing or will that be more balanced, or in fact, on the flip side under producing versus your retail.

And then just a bit of housekeeping on CapEx clearly you talked about that in terms of the percentage of sales, it was obviously up a little bit year-on-year in the first half. Will it be still up for the full year or it would be flat or a little bit down as we see it at the end of the year?

Thank you.

Thank you very much. Mr.

Eichiner?

So basically with the inventory buildup something that we've planned because with all the new launches we see and we're talking about 16 launches this year, we have to fill up the pipeline in order to allow the sales later on especially in all the season markets and that was driving the working capital up driving the inventory up. Now, in the first quarter, the inventory would come down.

We are expecting strong sales in the first quarter as well because then the product portfolio will be quite fresh, and this should lead to a reduction of the inventory as well and to a positive effect on the free cash flow side allowing us to fulfill the guidance of below €3 billion free cash flow for 2014. Now, your question about CapEx, well, I think in the second half of the year the majority of the annual investments banks will come in.

And but having said that it will definitely below the ratio of last year, last year we had an 8.8% growth on the CapEx side and it will be definitely be lower but may be slightly above the 7%, which is our long-term guidance.

Thank you very much. Next question please?

Yes, hi, Charles Winston from Redburn thanks for taking my question. I'm sorry to do this and I missed the call this morning.

So forgive me if this has been sort of trodden over before. I just want to go back to the topic of China, clearly it's quite influential on share prices at the moment even perhaps so maybe we are inflating the risk but nevertheless it's definitely a hunting center for many investors.

On that topic I wonder if you could perhaps talk about the proportion of your profit that comes from China. In the past you've talked about a figure of 20% to 30% but obviously since that time China has continued to grow more rapidly than the rest of the business and we've seen cost increases relating to CO2 perhaps in other parts of the world as well.

So could you refresh us on that figure? And the second question would just be even if your business you don't see any necessary required price move from your negotiations with the NDRC, if others need to cut that prices I mean we've just seen Chrysler announcing some cheap price cuts of the cars being going on.

We know that JLR have already made some. Do you think that might impact your business just because others around you are cutting their prices even if you are not required to make any cut?

I know that's a difficult question to ask but I'm just trying to get a handle on sort of your views as to the rest of the business sustainability. Thank you.

Thank you very. Mr.

Eichiner?

Charles, first of all I can confirm that the profit share of the Chinese business is still between 20% and 30% and we keep you informed if this is going to change. Now second question was about how we react on price cuts.

First of all we have to see that we are always observing price developments in the market especially in China and we are adjusting our prices accordingly, and that's something we do in our daily business. So actually we are not expecting now that there is a big need from our side to adjust heavily, but we don't know what the government bringing forward.

That's what we have to admit. And normally we are running our price strategies because we think we got a very strong brand and this strong brand in China is deserving a certain price premium and we try to protect that.

Having said that, it always depends on what competition is doing especially our peers in this market and you cannot runaway too far from your peers that's clear on the other hand as well.

Thank you very much. Next question please?

Yes. Good afternoon.

Two quick follow-ups please. First of all Dr.

Reithofer with regards to your statements around regulation in Europe, how should we interpret the rising caution that you're trying to displace is just really about rising cost in the second half of the decade to mid-2020 or is this some around the current negotiation on the following regulation in Europe, I think you alluded to that in the past meeting another 30% cut CO2 until 2025 or whatever the ultimate number might be will be another increasing challenge. And on that really do you see any change in regulatory environment with that regard or we still in unresolved negotiation territory.

And then secondly just a very quick one, second quarter obviously 11.7% margin in auto was very strong. Was that above your initial planning when you provided the guidance or were you thinking that the year would actually end up to cut down like that with a disproportionate strong H1 and then a bit of a weaker H2.

Thank you.

Okay. Thank you very much.

I think regulation in Europe; we start with Mr. Reithofer and then Mr.

Eichiner.

Mr. Gehrke, I would like to use my heartily my answer from 10 minutes ago.

I mean if we see the Emission Legislation is hitting Europe and that it requires to invest in expensive technologies, and I said at the same time we have to offer more smaller vehicles, of course we would like to have business success with our smaller vehicles, you should not forget that because we need customers as well as to buy the smaller vehicles, that means we need from the customer point of view success as well. So but seeing both points together, I said it already it is vital to contain rising costs, so and what we do since the beginning of last year is to create programs for the time beyond 2015 to contain rising costs.

We know exactly where we are more less, let me say with a range plus, minus 10%, 15%, because it means as well to look from time-to-time into a crystal ball if you have to make comments about the future, especially if you talk the years beyond 2020. But we know that we have to invest in more expensive technologies.

We know what amounts we have to spend in expensive technologies. And it is vital to contain rising costs and we started programs to do so.

Beyond the year 2015 -- and we look into the year 2017, 2018, 2019 and 2020, so -- and we need counteraction. And what does it mean; we have to look into the company where are we able to save costs because we know exactly in recent research and development we have to spend more money that means we have to ask ourselves the question.

I mentioned it already in the year 2017, 2018, 2019, 2020, where can -- where are we able to save costs. And it has to be in the right balance.

And I said we are not talking about cutting costs. We have to contain rising costs because especially the issue of CO2 legislations.

And I mean, you mentioned the year 2025, I mean it's too far away. In my opinion, we are still in a negotiation phase if it comes to 2025 and beyond.

So and it's too early to make a judgment. So that is how you have to seed but we do at the moment inside our company.

Thank you very much. Second part of the question will be answered by Mr.

Eichiner.

Gehrke, well, what I can confirm is because of the expected uneven distribution of the cost over the 12 months of the year, it was clear right in the beginning that the margin in the first half of the year will be a bit higher than in the second half of the year so that's not a surprise to us.

So ladies and gentlemen, its five minutes to three. I think we have time for one more question.

Please?

Yes. Thank you and good afternoon everyone.

Well, this was a really good quarter so congratulations on that. But I still look at your pricing.

And I'm asking myself what does it need for BMW to improve pricing more from an internal perspective rather than pricing just being a matter of new product and market condition? You've been very successful towards the end of last year Dr.

Reithofer, you mentioned that. I just wonder when I look at your pricing it seems that you're still very aggressive in many areas, in the U.S., in Europe, even in Germany, I can buy 1 Series follow-up price, all over leading rate, than a Peugeot.

I just don't understand why it's so difficult to improve pricing as a self help? You seem to be so professional running the business in the production side, in the R&D side, taking out costs but you seem to be less successful when it comes to the more commercial side of the business.

And whether you can share the resistance that you get from your dealers or the organization overall to improve pricing more actively? Thank you.

Okay. Thank you very much.

Mr. Eichiner?

Well basically, despite there is still open target to be fulfilled on the pricing side. I mean, we have to say that the company achieved a very good margin in first half of the year, just wanted to recall out a bit.

But I absolutely agree with you the pricing is not satisfying, not at all. From our perspective it's more or less still European issue.

The U.S. is still competitive and it always was.

And what you can read in the papers, it is partly offset by estimates of ALG for example for our residual values, that we are not sharing completely, that our internal numbers are not as bad as they are showing it up so that's one information. But coming back to Europe, Europe is still far away from the old level, pricing levels we've seen before 2008 that's a fact and we want to come back to that step-by-step.

We made the first improvement in the second quarter but we are not yet there, but it's driving it. Well of course, that is competition.

And you will find in a premium competition always a segment where one competitor is spending more sales allowances than the other. And my opinion is, as long as all three are in such hyper competition it is very hard to drive it down because it needs a lot of differentiation in order to do so and that's not a -- that's not in ablaze overall segment.

So at the end of day, the market participants, major players have to restrict themselves. And I think we announced already our CEO Reithofer said already that profitability is more important than driving the last volume numbers out of the market.

And this is a message into our own organization and this is a message to the competition as well. And we are really decided to drive safe support step-by-step down.

But as I said it's an uphill battle. And we have to see whether we achieve our target this year, I'm talking about the 100 basis points.

I just wonder it sounds a bit like vicious circle here because everyone, every premium maker is offering more smaller cost in the future. Mercedes is coming up with their MSA 2 platform.

Audi is launching more premium cars in the smaller segment. So do you and everyone have to?

And the question is, whether there has to be a bigger fundamental shift in the general premium space to restore or two more actively address pricing in my view?

I think it will come and the reasons are what our CEO explained. Everybody has to fulfill tough recollections going forward.

Everybody will feel the cost pressure coming in with this. And cost pressure on one side and weak pricing on the other side is not healthy.

So well, I think that we will see that they will fight harder going forward for a better price realization as we see in those days. So it's my personal view and otherwise some of the weaker competitors would be really in trouble.

So ladies and gentlemen, thank you very much. I think we are on time, its 3 o'clock.

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 summer time.

Thank you very much. And bye bye.