Nov 5, 2013
Executives
Maximilian Schoeberl – Senior Vice President-Corporate Affairs Norbert Reithofer – Chairman Friedrich Eichiner – Finance
Analysts
Kristina Church – Barclays Capital Jose Asumendi – JPMorgan Charles Winston – Redburn Partners Laura Lembke – Morgan Stanley Philip Watkins – Citigroup Max Warburton – Sanford C. Bernstein & Co., LLC Fraser Hill – Bank of America Merrill Lynch Horst Schneider – HSBC Jochen Gehrke – Deutsche Bank Arndt Ellinghorst – ISI Group
Maximilian Schoeberl
Good afternoon ladies and gentlemen, this is Maximilian Schoeberl, Director of Corporate Affairs. I would like to welcome you to our Telephone Conference for the Third Quarter and First Nine Months 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 nine months of 2013. Dr.
Eichiner will then take you through our financial results for the third quarter and the first nine months of the year as well. Afterwards we will have time for our Q&A session.
Mr. Reithofer, please go ahead.
Norbert Reithofer
Good afternoon ladies and gentlemen. We remain on track to achieve our targets for the business year 2013, a new sales record at Group level, our pre-tax profit similar to last year, this is assuming that the economic and political conditions do not worsen significantly where do we stand after the first nine months.
Worldwide we sold more than 1.4 million cars that’s a new BMW Group sales record. Our Group pre-tax profits was more than €6 million which is around the same high level we achieved in the same period last year.
Group net profit stood at more than €4 billion which is slightly higher than last year, and the EBIT margin in our Automotive segment was 9.5% which is at the upper end of the target range we set ourselves for profitability, we achieved this despite the continued decline in total market sales in Europe. Buyer hesitation in Southern Europe seems to have extended to Central Europe.
But as a global company, we continue to profit from an approach based on the balanced worldwide growth, between January and September we achieved growth on nearly every continent. In Europe, in Asia, and China, in Americas and in the USA, the BMW Group remains the market leader in the Global Premium segment.
Every one of our core series vehicles is segment leader to BMW 1 Series the 3, 5 and 7 Series, so 6 series and the X1. Many of you came to see us at the Frankfurt Motor Show.
There we showed you the strength of the product portfolio of the BMW Group. And as an important multi-brand automotive company, our focus remains only on the Premium sector.
That’s what our BMW, MINI and Rolls-Royce automobiles and our BMW Motorrad motorcycle stands for. In Frankfurt, we also showed customers what they can expect from us in the not too distant future.
So BMW 4 Series Coupé, the third-generation BMW X5 and the Rolls-Royce Wraith are just a few examples. In the year 2013, we will have launched a total of 14 new models.
We are offering our customers a young, attractive product portfolio. Further attractive models will be introduced in 2014, including several high-performance M models.
At the same time, we are breaking new brand in technology. We are setting new milestones in our Company’s history.
So BMW brand will introduce front-wheel drive, and a new range of three-cylinder engines is set to power the new MINI. With our BMW i8, we are launching a real brand-shaper for plug-in hybrid technology.
Plug-in hybrid technology can also reduce fuel consumption in Sports Activity Vehicles. The BMW Concept X5 eDrive demonstrates this, using just 3.8 litres of fuel per 100 kilometres.
BMW Motorrad will also enter the world of electric mobility with the launch of the C evolution in 2014. In just a few days from now, on the 16 of November, we will launch the all-electric BMW i3.
The radical approach behind this car makes it an enabler and pace-setter in the consistent application of lightweight construction. Our BMW i brand is opening up new opportunities for carbon technologies in the series production of conventional vehicles.
Not only does carbon assist in bringing CO2 emissions down even further, it is also making vehicles safer. With regard to the future, a few areas of focus are: developing new technologies; investing in our facilities and production plants; creating innovative mobility services and offering the right training for our associates.
We are making these investments from a position of strength. And we are making them early.
This is consistent with the long-term focus of the BMW Group. Despite these extensive advance investments in our future, and despite the volatility of the markets, we want to remain profitable.
That means an EBIT margin in the automotive segment of between 8% and 10%. The business segments BMW Motorrad and our Financial Services will also contribute to the Group’s success.
Last month, BMW Motorrad celebrated its 90 anniversary. As you know, it’s the first ever BMW built back in 1923 was not a car, but a motorcycle.
Since that time, BMW Motorrad has sold more than 2.8 million motorcycles to customers around the world. And in perfect time for its anniversary celebration, BMW Motorrad is at the top of its game.
Sales figures for the first nine months are at new record levels, totalling more than 93,000 units. We achieved this despite the fact that the motorcycle markets relevant to us have continued to decline.
Our Motorrad business will continue to grow profitably and it remains an integral part of the BMW Group. Another issue in securing our future is the need for appropriately qualified employees.
First and foremost, we need engineers, experts and specialists, as well as upcoming generations of young associates. In the third quarter of this year some 1,400 apprentices begin their carrier with the BMW Group, of those 1,200 work at locations in Germany.
At the end of the third quarter, employee numbers have risen by 5% to reach more than 109,000 associates worldwide. Ladies and gentlemen, no matter where the BMW Group operates, we take our role of a responsible corporate citizen seriously.
This holds true for the 140 countries in which we sell our cars. It is also true for every one of our 28 production plants in 13 countries.
As the leading player in the automotive industries premium sector, we will continue to shape, not only our future, but rest of our industry. Through this, we will continue to strengthen the global reputation of Made in Germany.
Thank you very much.
Maximilian Schoeberl
Thank you very much Mr. Reithofer.
Mr. Eichiner, please go ahead.
Friedrich Eichiner
Ladies and gentlemen, good afternoon from my side as well; the BMW Group once again performed well in the third quarter, we are on the right track both strategically and operationally. We will continue our efforts on preparing the Company for the future.
Our target is to assure the long-term competitiveness of the BMW Group. That is more important than short-term profit.
The Group’s profitability is fully in line with expectations. Our EBIT margin of 10.6% for the third quarter was on par with that of last year.
The Automotive Segment achieved an EBIT margin of 9% for the third quarter and 9.5% for the first nine months. Sound profitability forms the basis for our extensive upfront investments.
Our business environment has remained challenging, with the situation in the European markets no less difficult than before. With a few exceptions, the Western Europe auto market continues to decline, resulting in intense competition.
In Europe, BMW Group sales remained stable from last year, while our major U.S. and Chinese markets, and many emerging markets, reported double-digit growth.
Thanks to our balanced global presence, the BMW Group was able to achieve healthy volume growth. Our retail sales of 1.436 million vehicles in the year to the end of September represent an increase of 7.5%, over the same period last year.
At €18.75 billion, third quarter Group revenues were almost at the same level as the previous year. Growth in the new leasing business led to higher inter-segment revenue eliminations, which caused revenue development to lag behind sales growth.
More intense competition and negative currency conversion effects also curtailed revenues. Adjusted for currency effects, revenues were 4.4% higher year-on-year.
Group pre-tax earnings stood at €1.989 billion in the third quarter and reached €6.024 billion after the first nine months. While this is unchanged from the previous year, the same period of 2012 benefitted from a positive one-off effect of €124 million in the Financial Services Segment.
The early preparation has served us well in the past, our efficient dynamics package has earned us a competitive edge since its introduction in 2007, back then we were the first car company to voluntarily implement efficiency measures across the Fleet S standard. In line with our strategy we are also investing in expanding our production network and improving process efficiency.
Strengthening our brands and sort of enhancing customer care are also continuously in focus. These areas require additional upfront investments of around €1 billion this year; this will remain effect the Automotive segment and impact the first quarter to a significant extent.
R&D expenditure for the first 9 months rose to €3.2 billion, this represents an increase of 14% over the previous year, the R&D ratio for the year to the end of September stood at 5.8% of Group revenues just above our target range of 5% to 5.5%. The R&D ratio for the full year will also be above this targeted range and the BMW Group’s capital expenditure for the first 9 months totaled €4.3 billion.
Most of this sum was invested in capacity expansion, new technologies and model ramp-ups. The CapEx ratio for the first nine months stood at 7.8% of revenues as previously announced we will exceed our CapEx ratio of below 7% of revenues over the full year.
This will enable the BMW Group to enhance its future competitiveness and secure its business model through the targeted investments in this Premium brands, its products and technologies. Investment levels in R&D expenditure will remain high next year, we expect 2013 and 2014 to be the peak years with significant upfront investments in future projects.
For the year to the end of September 2013 Group liquidity totaled more than €10.7 billion giving us a solid financial position. Now let’s move on to the Automotive segment which brought the lion’s share of the upfront investments in future projects and the challenging conditions in the European markets I referred to before.
Into that quarter segment revenues reached nearly €17.2 billion and remain almost unchanged year-on-year. Also currency conversion effects dampened the revenue development.
EBIT for the Automotive segment totaled almost €1.55 billion a decrease of 6% compared with the same period of last year. Despite the high level of investment in future project and despite persistent challenges in the European markets we still expect EBIT margins for the full year to remain within our target range of 8% to 10%.
The first quarter is traditionally impacted by higher costs and CapEx with many projects built at the end of the year, this effect will be significant in 2013 and feeds through to the segments profitability, in addition we’ll see ramp up in marketing expenses for the new models set to boost sales next year. After nine months the positive business trends within the segment are reflected in the strong operating cash flow and a free cash flow of €2.45 billion.
Despite the high level of capital expenditure in the fourth quarter we still expect to generate a free cash flow below €3 billion for the full year. As per the end of September net financial assets in the Automotive segment amounted to €12.4 billion and therefore remain at a very healthy level.
Ladies and gentlemen, the Financial Services segment continues to benefit from strong new business and attractive refinancing conditions. However, we are seeing slightly narrow our margins due to increasing competition.
The strong demand for Financial Services and our positive operating performance have largely continued in the third quarter. For the same period pre-tax profit amounted to €398 million a decrease of 6.4% year-on-year.
The third quarter of 2012, benefited from a positive effect of €46 million from end of lease business. Adjusted for this effect quarterly earnings would have increased by 5%.
Financial Services leased or financed 45% of new BMW Group vehicles in the first nine months of 2013. This higher penetration rate is essentially due to growth in new business in the United States, where the premium segment continues to expand at a dynamic rate.
The risk situation in the segment is largely unchanged from the previous quarter, credit risk remains stable, and also the situation at Southern European markets remains challenging. There are no signs of further deterioration, there has been little change in residual value risk, user car prices remains stable in Americas and Europe while the Southern European markets have stabilized at a low level, our proactive risk management makes necessary provisions to cover potential market risks.
Let’s take a look at our Motorcycle segment. BMW Motorrad continue to defend its position in a declining market, while the motorcycle market contracted by 4.3% worldwide to segment retail sales for the year to the end of September climbed 8.4% to 93,154 units.
New models in particular, such as the F 800 GT and the R 1200 GS, contributed to this sales growth. Segment revenues year to September rose 1.6% to reach a total of €1.23 billion.
The Motorcycle segment achieved an EBIT of €93 million for the first nine months, an increase of 13.4% from the previous year. Ladies and gentlemen, we expect Group sales development to remain largely positive for the rest of the year and are targeting single digit sales growth for 2013 despite weak Western European markets.
Of course we cannot rule out the possibility of a global downturn the associated risks for our business. The Group is still targeting pre-tax earnings for the full year on a similar scale to that is reported in 2012.
In the Automotive segment EBIT margin is likely to remain within our targets range of 8% to 10%. So target for the Financial Services segment is a return on equity of at least 18%.
We also expect the positive business development in the Motorcycle segment to continue. The BMW Group is creating necessary conditions to sustain a successful business.
We are able to confirm our guidance for the full year assuming that economic and political conditions do not worsen significantly. As already mentioned the first quarter will be impacted to a great extent by CapEx and costs.
The BMW Group is in excellent position for 2014. Our young and attractive product portfolio will provide new momentum in sales.
Over the coming year, we will introduce quite a number of brand new models. We also expect this year’s new launches to generate growth in the first full-year on the market.
There is currently no substantial improvement in operational environment in site. The economic forecasts for the Euro-zone is cautiously positive also the situation in parts of Europe will remain challenging.
Growth forecasts for the major emerging markets of Brazil, Russia and India has been lower slightly. We remain confident about China and the U.S.
We will continue on our strategic course working to strengthen our earning power and our competitiveness and stemming profitability targets. At the same time we are making the high upfront investments immediate to prepare the BMW Group successfully for the challenges of the future.
We will continue to take actions and set new standards and we will continue to expand our leading position in the Premium segment. Thank you.
Maximilian Schoeberl
Thank you very much Mr. Eichiner, ladies and gentlemen the line will shortly be open for 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
Yes hello, it’s Kristina Church, thank you for taking my questions, my first question just relates to CapEx and I know you’re saying that 2013 and 2014 peak years will 2014 be as higher level of CapEx item in 2013 or will that be some step down and then related to that capitalization rate of CapEx as I understood at the spending for the i Brand was expensed upfront, should we expect the high level of capitalization still in Q3 continue going forward. Then my second question is on cash and what level of cash you see as being required for your underlying business into service your financial services business as well.
I’m trying to get a view your relationship with the dividend policy and what sort of pay outs you will look to be able to achieve in the medium-term and then my final question is more housekeeping in terms of effects if you could give some update on how much hedging you have in place for 2014, thank you.
Maximilian Schoeberl
Thank you very much Kristina, your question will be answered by Mr. Eichiner, please.
Friedrich Eichiner
Well, Kristina. First your question about the CapEx where we expect 2014 to be another year of higher CapEx and we will definitely exceed our target range of 7% in 2014.
But having said this, our budgeting process is not yet finalized. So we don’t have fixed final number and taken the decision and 2013 and 2014 should be the peak years.
So we expect then from 2015 onwards to manage CapEx down in below the target range of 7%. So that’s actually how we look at it.
In our capitalization, that is driven by the product portfolio and should be within our range of 30% to 40% next year as well, and then the I Brand, you’re absolutely right. All the upfront R&D spendings were not capitalized.
So that is already adjusted. And your last question, sort of two questions one is about the cash.
We feel confident with a level of around €10 billion, maybe a bit more going forward. This is for us the right level of cash to protect our business and our rating and the final update on exchange hedging.
Now you know that we are not disclosing a numbers but I can’t give you much confidence that we have a solid purchase decision for 2014.
Kristina Church – Barclays Capital
Thank you very much.
Maximilian Schoeberl
Thank you very much, Mr. Eichiner.
Next question please.
Operator
The next question comes from Mr. Jose Asumendi from JPMorgan.
Please go ahead, sir.
Jose Asumendi – JPMorgan
Hi, it’s Jose, JPMorgan. A couple of items please.
The first one, could you please clarify if the 8% to 10% margin guidance is excluding currency headwinds and sort to come back again to future one cost and currency. But could you please clarify what could be the additional headwinds on the profit bridge for 2014?
And the final one on CapEx, actually, there must be some one-offs in Q3 CapEx wise, then we’re going to be repeat it next year. So maybe could you please quantify what kind of one-offs have we seen in Q3 and also if you could please guide on Q4 CapEx is it going to be higher on a year-on-year basis?
And last question for Dr. Reithofer please.
On the electrical strategy, you kind of help just noted in the German peers are not developing a new brand for electric cars. So I guess my question is when you took the stability decision to development a new brand, what drove you to take this decision and if you think about the business two to three years on the road, could you turn around the strategy and could you start offering your current offering based on electric wise platforms?
Thank you.
Maximilian Schoeberl
Okay, thank you very much Jose. I think we start with Mr.
Reithofer and then Mr. Eichiner.
Mr. Reithofer, please.
Norbert Reithofer
Look for us, the reason behind decision was in principal we have in our Group on the BMW side two book ends. One book end is a BMW M brand for high performance vehicles.
And on the other side, if BMW I for let me say, very sustainable cars with electric drive, few electric vehicles and so on. As we said and in the middle is our core brand BMW and both book ends, BMW M and BMW I, let me say will move up our core brand BMW.
So that was the reason behind and what other companies are doing, they have to decide that was our decision.
Jose Asumendi – JPMorgan
Okay.
Maximilian Schoeberl
Thank you very much. Mr.
Eichiner?
Friedrich Eichiner
Yeah, so your first question about the 8% to 10% margin and the context to with the FX. We don’t see that FX headwind will jeopardize the margin this year.
In fact that I mean you know that we are calculating with the more or less balanced rate that is based on buying power equilibrium and as long as the rates are not going too far away from this benchmark. I think that the 8% to 10% should be achievable, we are getting in a really consideration, but the Europe would be very, very strong than and we definitely has to look at it in a different way, but I don’t see that, don’t foresee that for 2014 and now 2013.
Now what the impact are we expecting of 2014, well as I said we are not finalized our budget plans, but basically having the action position in mind that should not be a big headwind coming, but also not a big tailwind. It will be a smaller impact and it’s the same in 2013.
So FX overall could have a small negative feedback kind of headwind in a lower two digit million number. So best at least what we could expect for this year to overall no strong headwind or tailwind this year and the same expectation for next year.
Question about the CapEx, so looking at our numbers, so the CapEx was 29% on the third quarter of the CapEx that we spend so far. I mean it has a lot to do, it’s not a one-off.
It has to do with the ramp up of capacity with the launch of the new models with the preparations of our plants, for the new technology. It’s a plant that will lead us to higher CapEx ratios this year and next year.
We are aware this and we disclosed it and it’s now coming and we should expect more to come in the fourth quarter as we disclosed.
Jose Asumendi – JPMorgan
So we should have thinking about more than € 7 billion this on next year CapEx wise?
Friedrich Eichiner
As I said we have no finalized budget. We can’t do the number now.
But as I aid, the ratio will be above 7% next year. That is what we expect.
Jose Asumendi – JPMorgan
Okay. There was another little one on future one cost, if you have in mind figure for next year, if you have any is fine, but if you have a figure tell some additional costs?
Friedrich Eichiner
Not yet quantified, there could be some incremental. But I don’t expect the same order of magnitude we seen this year on the incremental side.
Jose Asumendi – JPMorgan
Okay, thank you.
Maximilian Schoeberl
Good, thank you very much gentleman. And next question please.
Operator
The next question comes from Charles Winston from Redburn. Please go ahead, sir.
Charles Winston – Redburn Partners
Yeah, hi it’s Charles Winston from Redburn. I just wanted to look at the cash moves on the balance sheet.
It looks to me as if you have free cash flows just around €600 million. The amount of the cash on the balance sheet fell about €800 million.
So just seen there was a chance elsewhere in the Group, I understand to the holding company level. I guess a few question, I mean is that price is correct, if so I can’t find any cash in other entities fits the balance sheet.
So just wondering how much cash you now have in the holding company levels that where it’s gone to. And what’s it for in other words what’s the thinking of pulling that cash out of the automotive division, into elsewhere into the Group.
And then so therefore what how much more might we see in other words this is a one-off item or is this something if we might see more of and what sort of the ideal position of cash for they sold bit of the balance sheet of the holding company level if you could just help me understand those sorts of transfers of the release. Thanks a lot.
Norbert Reithofer
Thank you very much Todd, good question. By the way and I give to Mr.
Eichiner
Friedrich Eichiner
While the segment of the entities primarily posted figures for our holding companies in drastic standards whose primary task is to efficiently allocate funds within a group. Therefore it is logical to transfer funds, including equity sourced funds to these entities when the funds are needed for the operational business not needed for the operational business sector such as our national sales companies in the Automotive segment.
So we are using it for flexible financing approach in the Group that’s what we are doing basically and that’s the reason why we are flexibly transferring those cash funds. And that’s a whole story about the other entities and the reason why we have them.
Charles Winston – Redburn Partners
So just to talk about that potential given that we can’t see them in the other entities balance sheets the cash figure adjusted earnings about €50 million or something at the end of the period. Could you tell us how much that now is at the holding company level and what the ideal position would be in other words once they leave the Automotives division it’s very difficult for those which is outside the group to track where they go and what they use for and as you know sort of cash holdings and just sort of uses of cash is this already quite important to investors.
If you could just perhaps could give me a little bit more idea of is to sort of how much funds there are now sitting outside the Automotives group that will be very useful. Thank you.
Friedrich Eichiner
While the net financial assets position of the other entities segments is relatively insignificant that’s what I can say and as that it’s our internal financing what we are managing that way and nothing else.
Charles Winston – Redburn Partners
I’m really sorry for lot of it but therefore the €1.4 billion is the net financial asset relatively insignificant where is that €1.4 billion gone is that now instrumental services?
Friedrich Eichiner
Exactly, okay.
Maximilian Schoeberl
Charles, thank you very much. Next question please.
Operator
The next question comes from Ms. Laura Lembke from Morgan Stanley.
Please go ahead Madam.
Laura Lembke – Morgan Stanley
Yeah, good afternoon and also thank you for taking my questions. I have two or three please and the first one would be on pricing maybe you could just give us a quick update and how Q3 compared both to Q2 and also on a year-on-year basis and then also my question related to that was that obviously your key competitor Mercedes now has a much more attractive product portfolio and in the past they’ve been the ones that have maybe exerted a little bit more pressure on your segment overall, So I’m just wondering what the net effect is between Mercedes probably becoming more disciplined in pricing but on the other hand more competitive on the product side just for you really and is that a net positive effect is it neutral, or negative and then is the second question I have directionally on Brilliance on your joint-venture partner because when I look at the communication of the management there it seems that there have been quite a little bit more ambitious really on the JV and what the plans or so.
So I think if I remember correctly that basically target 600,000 units of capacity by 2015 year-end and also more than 600 dealers and this is what they communicating quite openly in the market. So I’m just wondering it’s what you think about this and also if you could basically remind us of what exactly your targets are for the next couple of years especially in terms of the capacity and then my last question is actually on cash flow, you’ve had quite a big move in the other line and I was just wondering if you could explain what exactly this includes, thank you very much.
Friedrich Eichiner
Thank you very much Laura. First of all Mr.
Reithofer will start with some messages about our products from BMW, Mr. Reithofer please.
Norbert Reithofer
I mean as Mr. Eichiner mentioned the BMW Group is in an excellent position for 2014, I mean he said we have the young and attractive product portfolio and our costs it will provide new momentum in sales.
Let me give you figures, we will launch 14 new models, five models with our predecessor with predecessor 2 Series Coupé. 2 Series Convertible, 4 Series Convertible, X6, X3, Facelift, MINI H, M3 Sedan, M3 Coupé, M3 Convertible, no predecessor i8 4 Series Coupé as a 5-door X4 Compact Activity [indiscernible] and MINI as a 5-door, I cannot see a disadvantage for us compared to Mercedes.
Maximilian Schoeberl
Thank you very much. Mr.
Eichiner then. Please go ahead.
Friedrich Eichiner
Well the first question about the pricing, so overall I think this year we’re expecting another headwind of 100 basis points for the whole year, if you compare Q3 against Q3 2012 it’s a burden of roughly 50 basis points and it’s only a very incremental slight deterioration compared to the second quarter, so that’s the overall picture, the reasons are still the same, it’s an issue in the European markets, it’s not so much an issue in all the other markets around the world. So it has to do with the crisis, definitely the crisis in Europe that was your first question and then the third one BBA management while basically we know what we’ve invested so far our decision is, so actually we have invested in [Indiscernible] plants and the maximum capacity is lies at 400,000 units.
So that’s what is implemented so far and the further expansions are not yet decided but it’s something that has to be negotiated with the partner within our Board of Directors meetings and it’s not yet decided. So that’s what I can say at this point in time.
I mean looking backwards you could be optimistic if you think about the development in China in the same way but that’s the line of thinking and it could come in a different way as well but I would just want to make you know where we are actually the maximum capacity is at 400,000 units and not more and we have to take decisions to go further they are not yet taken. That was this point and then your question about the cash flow movement in other items, so basically other items comprised various items deriving from the liabilities area and such as provisions for deal up almost is liabilities deriving from service agreements, all those elements bringing the numbers up and that’s basically the background of the increase.
Laura Lembke – Morgan Stanley
Okay, thank you.
Maximilian Schoeberl
Thank you very much. Next question please.
Operator
The next question comes from Mr. Philip Watkins from Citi.
Please go ahead, sir.
Philip Watkins – Citigroup
Good afternoon. Thanks for taking my questions as well.
The first one was on the eliminations line. I was just wondering where that might come in for this year?
And I think I might heard this right. So you mentioned that so the leasing business is becoming a little bit more competitive and what does that mean then for eliminations going forward into next year, because that rise again.
And then so that is next question actually on Financial Services as well. In terms of sort of the capitalization of that business, [indiscernible] and kind of an impact clearly, is there any for more capitalization in Financial Services going forward because of that?
Thank you.
Maximilian Schoeberl
Thank you, Philip. Mr.
Eichiner?
Friedrich Eichiner
Well, basically in where we have two controversial effects. One that would cause higher eliminations that is increasing leasing business and it has to do with our activities in the United States, where we see that the market is picking up more and more leasing now.
The other and that is a positive and it’s an offsetting effect is that we are now getting more and more into a phase where we have a very profitable portfolio within Financial Services. So all the contracts of 2009 are now running out and we are benefiting now from the higher profitability of our cars started at 2010.
Those portfolio overall is more profitable and as the elimination, profit elimination per car was higher. Now we get the benefits from this elimination back in this column.
And as it offsets, the growing leasing business where we end up with the positive effect and that is what you can see here on the eliminations. Then capitalization of Financial Services business, actually we have a very healthy equity ratio of 8.9%.
We think that Financial Services business is strong enough to generate enough profit in order to support the equity we need to underlay the business going forward. So that’s our position from today’s perspective.
Philip Watkins – Citigroup
Thank you very much. Does that also needs eliminations line will stay relatively steady next year?
Friedrich Eichiner
Well that’s more or less our expectation on the underlying trend that we are benefiting from a very profitable leasing portfolio will be in place next year as well. The second question is, how much leasing should we expect next year?
This question is still a bit open that we are not finalized our budget plans and it has a lot to do with the business development in the United States. So one trend very clear, the other still a bit open I would say.
Philip Watkins – Citigroup
Right, that’s great. Thank you.
Maximilian Schoeberl
Thank you very much. Next question please.
Operator
The next question comes from Mr. Max Warburton from Bernstein.
Please go ahead, sir.
Max Warburton – Sanford C. Bernstein & Co., LLC
Yeah, hi, good afternoon. Two questions from my side, please.
The first one is actually coming back to Charles Winston’s point about the cash has been channeled into the treasury function and then apparently relocated to Financial Services. Could you help us understand just a bit better in your description and explanation of the net financial assets in the Automotive Segment, you do have a very substantial item this is classified as intergroup net financial assets which however was understood to be money that’s been lend to the Fincorp [ph] that can be easily recovered.
What is the difference about the money that’s gone across for instance in Q3 and seems to disappear compared to the number that’s disclosed as a loan to financial services is that something different about this structure. I mean the second question is on China your rival in Stuttgart is on track to by 12% of its partner in China and it seems that the Chinese politicians including the MDLC are publicly talking about the changing the 50:50 JV rule is it naturally something that BMW would be interested in pursuing I mean EG would you consider overtaking a stake your Chinese partner?
Thanks.
Maximilian Schoeberl
Thank you very much, Max. Mr Eichiner.
Friedrich Eichiner
Well your question about the treasury functioning and within the net financial assets we have the money that we are lending to financial services, and the money you are looking for is paid by dividends right. So the dividend payment to the other entities and that’s basically the difference then your second question about Brilliance so far our vision is to taken a decision to do that and if you had we wouldn’t disclosed it now.
Norbert Reithofer
Okay, thank you very much next question please.
Operator
The next question comes from Mr. Fraser Hill from Bank of America.
Please go ahead sir.
Fraser Hill – Bank of America Merrill Lynch
Hi, good afternoon it’s Fraser Hill from Bank of America I just wanted to come back again on this cash transfer from auto to other entities should I take from what you’ve said today and this is going to be all else being equal vehicle if you assume the business its performing in a equivalent level going forward, it is going to be an annual effect should we now assume that this will take place, Broadly speaking once a year obviously with the magnitude would that be a fair assumption and then falling on from that is there implication for your dividend thoughts. As we transfer this money out of the auto business into our treasure is that completely unaffected because the dividends views more from a group perspective?
Thank you.
Friedrich Eichiner
So well now we are going to get into deeper and deeper into this matter so, basically I would skew to follow it up with IR team because we have all the detailed information and it makes more sense from our perspective and we are we we’ll give you the information that is available of course and then just want to clarify this as nothing to do with our dividend payment right that’s a internal financing nothing else as we said and all the mechanics behind that we are quite happy to explain it to yourself and again I ask you to contact our IR team.
Maximilian Schoeberl
I think it’s a very good proposal. Please contact Mr.
[indiscernible] then afterwards our telephone conference. Thank you very much, next question please.
Operator
The next question comes from Mr. Horst Schneider from HSBC.
Please go ahead, sir
Horst Schneider – HSBC
Yes, good afternoon its Horst from HSBC two questions have been left and first of all regarding thoughts on depreciation and we seen how the CapEx increasing but we have not yet seen the depreciation really coming up so I want to know especially with regard to 2014, to which extend should we expect depreciation going up and would you classify this depreciation increase also as one future expenses and then the second question that I have prefers to the production level that we should expect for the fourth quarter I mean I want to know how much can at all produce in the fourth quarter. We have got a very high comparison base from a year ago?
And I want to know should we work with assumption that you have slightly increased capacity again? So that also gives us the second quarter of this year, the production could increase further?
Thank you.
Maximilian Schoeberl
Thank you very much. So we start with the CapEx, Mr.
Eichiner?
Friedrich Eichiner
Well, CapEx is ramping up nice. As we said we had a low number in the first half of the year and the lion’s share is not coming in the second half of the year and consequently then the deterioration would go up, so there will be definite increase in deterioration in 2014 and going forward, derive from our investment activities we explained to you.
But this is not included into future expenses, right, and as we define it. So it’s started took the consequence now from our CapEx activities from our investment activities.
So that was one question. The other is production on our level.
So quarter four will be below quarter three when it comes down to our production rate.
Horst Schneider – HSBC
Okay, [indiscernible] so is it fair to assume €340 billion increase next year?
Friedrich Eichiner
It will be a low three digit million number. That’s right.
Horst Schneider – HSBC
Okay.
Friedrich Eichiner
This year.
Horst Schneider – HSBC
This year, sorry…
Friedrich Eichiner
This year, I’m talking still about 2013.
Horst Schneider – HSBC
Okay.
Friedrich Eichiner
Yeah, I’m talking about 2013 and will be a little – will be definitely a little bit higher number next year as the activities are going further and we are still ramping up CapEx in the first quarter.
Horst Schneider – HSBC
Okay, thank you.
Maximilian Schoeberl
Okay, thank you very much. Next question please.
Operator
The next question comes from Mr. Jochen Gehrke from Deutsche Bank.
Please go ahead, sir.
Jochen Gehrke – Deutsche Bank
Yes, good afternoon. Just two quick ones, first of all on your ASP development, obviously the third quarter was impacted by Forex.
But could you let us know on the wholesale basis. Was this somewhere between your retail and production basis or is there anything specifically that would explain other than Forex and potential product mix that substantial drop in average selling price?
And then secondly for Mr. Reithofer, obviously we have the German government trying to persuade the yield to somewhat water down this year two targets with [indiscernible] 2020 is very prominently in the press.
What is BMW’s position? Do you want to have the 95 gram in 2020?
Would you see it as a phase in as a realistic outcome of negotiation with EU through the 2024 as it in the press and how should we be thinking about rolling out new technologies of BMW in the light of what at least from the outside still looks to be a rather uncertain regulatory framework? Thank you.
Maximilian Schoeberl
Thank you very much, Jochen. We would start with CO2 question and Mr.
Reithofer.
Norbert Reithofer
I mean under the current circumstances, it is difficult question, but I’ll try my very best. The BMW Group I would like really to highlight had no issue with 95 gram per kilometer target average.
For all manufacturers was in the EU however the implementation of the targets and the consequences at manufacturers and vehicle level are still subject of the current legislative discussions. That is where we’re at the moment.
And as far as we know, we are in a final stage and that is my comment for today, if we have a solution on the table you will get our comments.
Maximilian Schoeberl
Okay, thank you very much. Then second part Mr.
Eichiner.
Friedrich Eichiner
Your question about average selling prices, so clearly FX was one effect on that, but we had another effect coming from the mix, especially regional mix, then a third one from BVA production was quite high this year. They have a fresh product portfolio and in 2013 this makes difference over the growth in the Chinese market was mainly driven by the BVA and not so much by the NFC and that was a little effect derived from the wholesale offset as well.
Those are the major four reasons for the average selling price.
Jochen Gehrke – Deutsche Bank
Thank you.
Maximilian Schoeberl
Thank you very much. Next question please.
Operator
Next question comes from Mr. Arndt Ellinghorst from ISI.
Please go ahead, sir.
Arndt Ellinghorst – ISI Group
Yes, thank you and good afternoon everyone. And as I hope the Company, the mood in the Company is in Munich is better than the mood on this call amongst analysts.
And so let me just ask you one question here. Do you think moving into next year, you’re going to be in a better position when it comes to your product set up compared to this year?
That’s the first one. And then following on to Jochen’s question on CO2, how should we conceptionally think about the 95 gram industry average target compared to the 2015 target of 130 gram, which you’re already meeting by the way?
And are the costs to comply with 95 gram completely different to the costs that you had in mind to comply with 130 grams? Thank you very much.
Maximilian Schoeberl
So I think we start with a strategic overview with Mr. Reithofer and then Mr.
Eichiner.
Norbert Reithofer
I mean first of all Mr. Ellinghorst, I said this already we will launch 14 new models, 5 models with our predecessor.
That means in 2014, we have a very young, let me highlight that again, a very young and attractive product portfolio. And I would like to mention again, the models with no predecessor.
It’s the BMW i8, a 4 Series Coupé in a 5-door version. It’s the brand new X4.
It’s the brand new Compact Activity Tour. It’s the brand new MINI 5-doors.
So and again with predecessors and new 2 Series Coupé, a new 2 Series Convertible and new 4 Series Convertible and new X6 and X3 facelift and Mini H and new one M3 Sedan and so on and so forth. We are optimistic if it comes to our product portfolio for 2014.
Maximilian Schoeberl
Okay, thank you. Mr.
Eichiner?
Friedrich Eichiner
So and your question about CO2, actually I mean basically 130 gram what we achieved so far that was done by a conventional technology improvements more or less, improvements all around the combustion engine, drive so on and so forth; going down to 95 grams that’s not the possible with conventional improvement. So now we need to implement very advanced technologies like light weight construction and electrification plug-in hybrid solution.
This is not necessarily in order to drive further down. And of course we are looking forward to hopefully very successful introduction of the i3 because battery electric vehicles would have a lot.
So we need to improve the existing and combustion engine further, so we cannot rule it out, it’s one thing that we are looking for the introduction of recent indentation for example and the same point in time that we go for the electrification stuff and light construction, and this has costs and that’s all factored in into our guidance. That’s the reason why CapEx has to be ramped up, that’s the reason why R&D has to be ramped up now into 2013 and 2014 in order to be ready for serious production in 2020 that’s a background of the whole story more or less.
Arndt Ellinghorst – ISI Group
But the reason I’m asking the question is because when we listened to other companies calls these days. Ramp up in CapEx, R&D and all this isn’t the big topic and when I listened to this call or basically the debate of BMW all of this year it seems to be the by far dominant figure, do you think you’re in a different position compared to others, or do you just want to be so far ahead of the curve?
Friedrich Eichiner
Well basically what I can say for us is we take the 95 grams seriously. As we did with our topic for 2008 and as we did for the topics of 2015 we don’t know what the others are thinking about us but if you take it seriously from me I cannot imagine how you could really achieve this ambitious target without investments in R&D and CapEx and new technologies.
That’s at least our point of view may be they know better how to do it but we think that’s the other way forward.
Arndt Ellinghorst – ISI Group
All right, thank you.
Maximilian Schoeberl
Thank you very much ladies and gentlemen. Thank you for joining in our call today and for your question on behalf of the BMW Group team.
I wish you all a pleasant afternoon. Thank you very much and bye-bye.