Nov 4, 2014
Executives
Maximilian Schöberl - Norbert Reithofer - Chairman of Board of Management Friedrich Eichiner - Chief Financial Officer and Member of Board of Management
Analysts
Kristina Church - Barclays Capital, Research Division Fraser Hill - BofA Merrill Lynch, Research Division Stuart Pearson - Exane BNP Paribas, Research Division Philippe Houchois - UBS Investment Bank, Research Division Charles Winston - Redburn Partners LLP, Research Division Adam Hull - Berenberg, Research Division Jochen Gehrke - Deutsche Bank AG, Research Division Jose M. Asumendi - JP Morgan Chase & Co, Research Division Arndt Alexander Ellinghorst - Evercore ISI, Research Division
Maximilian Schöberl
Good afternoon, ladies and gentlemen. I would like to welcome you to our Telephone Conference for the Third Quarter and First 9 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 9 months of 2014. Dr.
Eichiner will then take you through our financial results for the third quarter and the first 9 months of the year as well. Afterwards, we will have time for our Q&A session.
Mr. Reithofer, please go ahead.
Norbert Reithofer
Ladies and gentlemen, today, I will focus on 5 points: first, the volatility and the development of the automotive markets; second, our investments in new plants; third, our profitability; fourth, our brands and new products; and fifth, our forecast for the business year 2014. Our business environment is, and will remain, affected by uncertainties.
Political regulations continue to require further investment to reduce carbon emissions. Economies in the EU as well as Japan still have high public debt.
In China, the overcapacities in the economy remain a risk for further development, primarily real estate. And it is clear that global conflict affects the overall economic and business situation.
At the same time, worldwide automotive markets are developing differently in the first 9 months of 2014. The U.S.
economy is still -- is stable right now. This means vehicle sales are continuing to go up.
In Europe, new car registrations have also increased from the previous year. In Spain and Portugal, the car markets are picking up strongly, however, they still have a long way to go before matching the 2007 level.
Growth in the U.K. continues at a high level.
Germany, France and Italy, on the other hand, are only gaining slightly. In Asia, both Japan and China are currently seeing an increase in new car registrations.
In Japan, the growth rate stands at almost 6% despite the recent VAT increase. China's car sales are benefiting from the high demand from private customers, however, due to certain policies, the world's largest car market is on its way toward normalization.
Some emerging markets are seeing consumer restraint. This, of course, affects everyone.
By the end of September, our BMW Group sales declined by about 13% in Russia and by about 17% in India. In Brazil, we sold almost as many BMWs and MINIs as during the same period last year.
In countries like Malaysia, Indonesia and Turkey, our sales volumes are developing very positively. Despite the various challenges we face, our strategic focus will remain unchanged.
We will continue to strive for a balanced sales distribution between the major world markets. Let me move to my second point.
We have always followed the strategy, production follows the market. In Mexico, we will open new production site, a new production site in 2019, and our new BMW plant in Brazil recently started production, with the first BMW rolling off the assembly line on October 9.
Building a new plant always requires long-term planning. In 1994, we opened our U.S.
plant in Spartanburg. Since then, our sales in the country have quadrupled.
In 2003, we started production in China, in Shenyang. Since then, our sales in the country have increased by a factor of 20.
Our decision to further expand the plants in the U.S. and China was actively taken during the economic and financial crisis.
This underscores our willingness to take calculated risks and invest in our future. And our new plants in Brazil and Mexico are going to add to the strength of our global production network in the long term as well, which brings me to my third point, profitability.
As you know, we operate under clear key performance indicators. The most important one is our EBIT margin in the Automotive segment.
Our target in this segment is within a range of 8% to 10%. For the first 9 months of the current business year, the EBIT margin in the Automotive segment actually stood slightly above our target range for profitability.
In the first 9 months, we recorded a pretax group profit of over EUR 6.8 billion. This is 13.5% up from the same period last year.
The group net profit increased to more than EUR 4.5 billion. These key figures are based on the high demand for our vehicles all over the world.
And now to my fourth point, we have strong premium brands BMW, MINI, Rolls-Royce. Proof of sales strength are once again our sales figures for the period of January to September 2014.
Over 1.5 million customers decided to buy a vehicle made by the BMW Group, more than ever before. The BMW brand has maintained its leading position in the premium segment.
The same is true of the BMW X5, as well as the BMW 3, 4 and 5 Series in their respective segments. In July, we launched the new BMW X4 and the model update of the BMW X3.
The new BMW 2 Series Active Tourer and the M variant of the BMW 4 Series Convertible followed in September. Rolls-Royce has begun delivery of the Ghost Series II.
At MINI, the model updates of the Countryman and Paceman came out in July. 55 years after the first MINI rolled off the assembly line, MINI is now offering a 5-door model as well.
Less than 2 weeks ago, the new MINI Hatch 5 door arrived at the dealerships. So MINI has now set out to conquer the growing segment of 5-door hatchback as well, a factor about double the size of the 3-door compact segment.
All of these models are going to have a positive impact on our sales figures in the months to come. And at the Paris Motor Show, we displayed that we are going to offer a young and attractive portfolio in 2015 as well.
The versatility of our brands and products reflects the desires and tastes of our customers all over the world. The range includes the BMW X6, as well as the new BMW 2 Series Convertible.
We will introduce an over-the-air update for the navigation system in our 2 Series Convertible. With BMW ConnectedDrive, navigation maps are automatically updated up to 4 times a year.
This means more convenience for our customers. Our BMW i vehicles prove that we are innovative pioneers in sustainable mobility.
In the past 9 months of this year, we sold close to 10,200 units of our fully-electric BMW i3. Since September, the i3 has now also been available in China.
We delivered 341 units of our plug-in hybrid BMW i8 to customers between June and September. And we are seeing a surge in deliveries from month-to-month.
The gradual electrification of our vehicle fleet will allow us to continue to meet the tough CO2 emission targets in Europe and around the world in the future. This year, we will reduce our European fleet carbon emission slightly from the previous year's level.
Ladies and gentlemen, we view the changes in the markets, trends and regulatory requirements as part of our business. These are challenges which spur us on, and keep us more competitive.
This also applies to new competitors from other sectors that considers a car as a platform for their own business models. To my last point, our forecast targets for the current business year.
First, we aim to deliver over 2 million vehicles to our customers. Second, we aim to achieve a pretax group profit significantly above the previous year.
Third, and we aim to achieve an EBIT margin in the Automotive segment in the range of 8% to 10%. This, of course, depends on a positive development of the global economy and the global car market, and a further stabilization of the economic situation in Europe.
The fact is, we will continue to invest in our future, in our global production network, in our people and in future technologies, both in the car and in the industrialization process. These are all elements of our Strategy Number ONE that lead up to the year 2020.
This will lead to profitable growth in the long term. This is what we expect of ourselves as the leader in our industry.
For 2014, our forecast remains unchanged to deliver on our targets. Thank you very much.
Maximilian Schöberl
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 is on course to reach its targets for 2014.
We are committed to profitable long-term growth. The global market environment and positive business development are confirming our expectations.
In Europe, the slight recovery of the first 6 months has continued. The BMW Group posted solid sales growth of 6% in the third quarter.
The company sold more than 217,000 vehicles in the region. In Americas, quarterly sales were up 4.3% year-on-year and reached more than 116,000 units.
U.S. auto market, in particular, again reported healthy growth.
Third quarter sales climbed 5.5% to more than 94,000 units. Dynamic growth continues in Asia and especially in China.
By the end of September, the BMW Group posted a sales increase of almost 18% over the previous year in the world's largest auto market. The company delivered more than 336,000 premium vehicles to customers.
This retail sales growth also benefited from our young and attractive model lineup. The economic situation remains volatile in a number of growth markets.
Thanks to our balanced global presence, we are able to take advantage of sizable opportunities in the Americas, Europe and Asia. Our global presence and flexibility also enable us to manage fluctuations in demand in individual markets at short notice.
Group revenues for the first 9 months reached EUR 57.74 billion, an increase of 3.4% compared with the same period of 2013. Group pretax profit for the year to the end of September increased significantly, climbing 13.5% to EUR 6.84 billion.
Third quarter pretax profit was slightly higher year-on-year at EUR 2.01 billion. The EBIT margin for the quarter stood at 10.3%.
The BMW Group is pursuing its corporate strategy for long-term profitable growth and future competitiveness. We are selectively expanding our global capacity and extending our product portfolio.
The BMW Group is maintaining its high level of capital expenditure and research and development to strengthen the company's future competitiveness. In the first 9 months of the year, we invested a total of EUR 3.99 billion in new products, plant and equipment.
This includes investment in our new plant in Brazil, contract manufacturing at net car in the Netherlands, expansion of our U.S. plant in Spartanburg and MINI production in the U.K.
Capital expenditure was 8% lower year-on-year. The CapEx ratio for the first 9 months of the year stood at 6.9%.
The CapEx ratio for the full year 2014 is likely to exceed our target of below 7%. It should however, be lower than the previous year's figure of 8.8%.
The BMW Group spent a total of EUR 1.01 billion on research and development in the third quarter. This figure is on par with the same period of last year.
Research and development expenses for the year to the end of September totaled EUR 2.99 billion. These were focused on new technologies in the areas of lightweight construction, connectivity and alternative drivetrains, which we regard as success factors for our future business.
Further R&D expenditure was mostly earmarked for vehicle projects in the middle and upper middle range. Expanding vehicle architectures for our compact models and larger vehicle classes was another priority.
The R&D ratio for the first 9 months of 2014 stood at 5.5%. Since R&D costs generally rise towards the end of the year, we expect the R&D ratio for the full year to exceed our target range, but still be lower than the previous year's 6.3%.
Group liquidity remained at a high level in the third quarter. At the end of the quarter, liquid assets and securities totaled EUR 11.3 billion.
The company continues to make a strong liquidity position a priority. Let's move on to the Automotive segment.
Our Automotive business continued to perform well in the third quarter. Over 509,000 vehicles were delivered to customers during this period, an increase of 5.8%.
BMW in particular, the world's leading premium brand, reported its best-ever third quarter with more than 433,000 deliveries. MINI sales reached more than 75,000 units, in line with last year's figure despite the model changeover.
Between January and the end of September, total sales grew by a solid 6.5% to almost 1.53 million vehicles. BMW brand sales were particularly dynamic.
The year-on-year growth of 9.1% reached nearly 1.32 million units. Segment revenues for the third quarter stood at EUR 18.14 billion.
This is an increase of 5.5% compared with the same period of last year. Automotive segment EBIT for the same period reached almost EUR 1.7 billion, an increase of 9.7% over the previous year.
Earnings profited from sales growth and a high-value product mix, the large share of BMW vehicles. The mix was slightly better in the first half of the year, however.
In the first 9 months of the year, our attractive new models benefited from a slight improvement in the price situation in Europe. Overall, the global pricing environment appears slightly more positive than last year.
On the cost side, segment earnings were impacted by higher personnel costs and depreciation. The strategic focus on future projects and expanding global capacity resulted in higher personnel expenses.
For example, new staff were hired for our plants in Spartanburg and Leipzig, as well as for the new plant in Brazil. Higher capital expenditure after commissioning of new equipment and after production ramp-up of new models lead to higher depreciation than the same period of last year.
The Automotive segment achieved an EBIT margin of 9.4% over the third quarter. After the first 9 months, EBIT for the Automotive segment stands at 5.44 billion with an EBIT margin of 10.2%.
In the first quarter, we expect to see a further increase in sales with corresponding effects on revenue and earnings. Costs are also forecast to rise as various product and technology projects are concluded at the end of the year.
Additional costs will be incurred for a major upgrade of our IT infrastructure and the refinement of our sales and marketing activities. In this way, the BMW Group is laying the foundation for continued global growth and the first development of its business areas.
We will also face marketing and ramp-up costs this year for the latest models such as the X6, the new 2 Series Convertible, the X4 and the Active Tourer will be launched in overseas markets in the coming months, as well as the new 5-door MINI and the new Rolls-Royce Ghost. The current product offensive caused a peak in production in the first 9 months of the year.
By the end of September, it is nearly 1.619 million vehicles, well over 96,000 more than in the same period of last year. Capacity utilization remains high at our plants worldwide, which will manage a total of 16 model ramp ups this year.
The growing importance of overseas markets means longer vehicle lead times. Our expanded product portfolio and vehicle transfer times resulted in a working capital increase of almost 2 billion.
The split of working capital led to a lower free cash flow year-on-year. Free cash flow stood at EUR 1.31 billion at the end of the 9-month period.
The sales volumes plan for the rest of the year, we expect to see a corresponding decrease in working capital in fourth quarter. This will also have a positive impact on free cash flow for the full year.
At the end of September, net financial assets in the Automotive segment totaled EUR 12.1 billion. Ladies and gentlemen, let's take a look at our Financial Services segment.
Despite sustained competitive pressure, BMW Group Financial Services performed well in the third quarter. The segment is rigorously pursuing strategy of profitable balanced growth and makes a vital contribution to the BMW group's earnings performance.
During the third quarter, over 382,000 new contracts were concluded with customers, an increase of 1.8% year-on-year. The Asia-Pacific region once again saw the strongest growth as Chinese customers in particular took advantage of financing options.
The service portfolio totaled more than 4.26 million contracts as of 30 of September. This represents an increase of 5.2% over the previous year.
The segment penetration rate, the percentage of new vehicles financed or leased by Financial Services was lower than for the first 9 months of 2013. It stood at 41.8%, compared with 45% for the same period of last year.
This again reflects increased competition across the industry. Financial Services reported pretax earnings of EUR 455 million for the first quarter -- for the third quarter, an increase of 14.3%, compared with the previous year.
Segment earnings before tax for the first 9 months were 4.5% higher year-on-year at EUR 1.37 billion. The risk situation developed in line with expectations during the first 9 months, so credit risks are likely to remain stable for the rest of the year.
A positive trend is emerging in individual dozen [ph] European markets. Pricing on the international used car markets was largely unchanged.
We also expect residual values for our off-lease vehicles in Europe and Asia to remain stable. However, in North America, prices for used cars could trend downwards slightly.
The Motorcycles segment reported a new sales high for the third quarter, selling more than 100,000 motorcycles in 9 months for the first time. Over 29,000 units were delivered to customers in the third quarter, an increase of 3.6% over the previous year.
BMW Motorrad benefited from the growth in the market segments above 500 cc. In first 3 quarters, the global market grew by 4.6% and BMW Motorrad was able to increase sales by 7.6%.
BMW Motorrad reported solid growth in a number of European markets and the U.S. in particular.
Revenues and segment earnings mirrored this positive development. Revenues for the first 9 months climbed 10.9% to EUR 1.37 billion.
The segment achieved an EBIT of EUR 146 million for the same period, an increase of 57%. The recently launched models, new versions of the S 1000 RR, R 1200 R and R 1200 RS will be available for the start of the motorcycle season in the spring.
Ladies and gentlemen, assuming that economic conditions remain unchanged, the BMW Group will meet its profit target for the full year. Our business is on track so far.
We expect to achieve high sales in the first quarter, and all 3 brands will have new models available. Achieving this sales growth will depend on stable European markets and sustained positive development in overseas markets.
In view of the global economic and political risks, we expect our business environment to remain volatile for the rest of the year. At group level, we anticipate a significant increase in pretax earnings for 2014 compared to the previous year.
Despite current uncertainties in China, Russia and some other emerging markets, our strong product momentum and sales opportunities in the Automotive segment make us confident. In China, we expect our strong sales to continue.
Growth will be driven in particular by our locally produced joint venture vehicles. In the next 2 months, retail sales of imported cars will be impacted by product life cycle effects of imported vehicles.
Also, base effects to last year's capacity constraints in local production will weigh on the respective growth rates. Globally, we continue to focus on profitability and expect a sales increase to more than 2 million vehicles for the full year.
In the first quarter, deliveries are likely to increase at a higher rate than the 6.5% of the first 9 months. Not only in sales, but also in revenues we forecast a solid increase for 2014.
Also, currency translation effects could dampen this increase. For the full year, we expect the EBIT margin to remain within our target range of 8% to 10%.
The positive business development in the Financial Services segment looks set to continue. The main financial indicator for the segment, return on equity, should be slightly lower than last year but exceed our target of at least 18% for the full year.
This is due to higher competitive pressure in our markets. Adequate risk provisions have been made for our Financial Services activities.
From today's perspective, assuming that conditions remain stable, BMW Motorrad will also continue its positive business development. Motorcycling markets worldwide have performed better than forecast.
BMW Motorrad deliveries should benefit from this in 2014 with solid year-on-year growth. Our forecast for the year is based, as already mentioned, on stable political and macroeconomic conditions.
Any changes in the political or economic climate could affect our guidance. Ladies and gentlemen, our strategy is focused on long-term competitiveness and profitable growth.
The BMW Group is therefore using its financial strengths to invest in the future and secure its innovation leadership. The company is expanding its capacity worldwide and enhancing efficiency across operating areas.
This will consolidate its global leadership of the premium segment. Thank you.
Maximilian Schöberl
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.
Kristina Church - Barclays Capital, Research Division
Kristina Church from Barclays. I've got 3 questions.
Apologies if they were asked this morning on the press call, but I couldn't listen to all of it. The first question relates to China, and I was just wondering what you think the dynamic going forward will be between imports and local production.
What's your constraint in terms of capacity on the coproduction for 2015? The second question relates to pricing, and if you could just give an update on what you're seeing in Europe in particular.
I know the guidance at the beginning of the year for 100 basis points doesn't look so likely now. Just wondering what you think is likely to progress as you go into 2015 with your product lineup.
And then the final question is a little bit longer term in terms of CO2 costs, and if you've heard any more from the regulators regarding beyond 2020, where you think the direction of those targets might go, and whether you think there'll be need for incremental spending from here for more technologies as we get closer to those regulations.
Maximilian Schöberl
Thank you very much, Kristina. So we start with pricing first, and this will be answered by Mr.
Eichiner.
Friedrich Eichiner
So talking about pricing, you mentioned our target of 100 basis points. So far, this target is not yet met.
We see improvements on the pricing side, but they are minor. It has to be seen whether we can really make a difference in the fourth quarter with all the new models that are launched now and that should help us to get to a better and improved pricing position.
That's where we are today.
Maximilian Schöberl
Okay, thank you very much. The second part of the question, it was China and CO2, will be answered by Mr.
Reithofer. Mr.
Reithofer, please.
Norbert Reithofer
I would like to give you an answer as well on the long term if it comes to China. I mean, if you see that over the next 2 years, production capacity at both plants will be expanded from 300,000 units currently to 400,000 units, then you can see we are ramping up local production step-by-step.
And our long-term strategic target is about 70% local production and 30% imported cars into China. That is our long-term strategic view.
So -- and when it comes to the number of imported vehicles, we have to see as well that motorcycle effects and basis effects due to capacity constraints in local production played a role as well in 2013. So we have to see that as well.
So, and if you see motorcycle effects, the X6 will be renewed later this year. The 7 Series is also moving towards the end of its product life cycle.
And in order to prepare for the changeover of these models, we are especially focused on the pricing aspects of the business to build a good foundation for the success of models. That is very important for us.
And therefore, volume additions are only a second priority as well if it comes to imported cars. More important is to have a good pricing for the successors of our current models.
I mentioned X6 and 7 Series, and again, I would like to highlight our strategic view is in future to have 70% local production and 30% imported vehicles. And we will ramp up production from 300,000 units currently to 400,000 units.
So -- and you can see we are ramping up step-by-step local production. So -- and CO2, I mean, in principle, a short answer would be no news, because the targets for 2020 are a fact we have to achieve as an industry about 95 grams CO2 per kilometer.
So for the BMW Group that means roughly 100 grams CO2 per kilometer, and we will achieve it. That is crystal clear, our target.
And if you have in mind, we have a kind of a phase in period. In the first year, in the year 2020, about 95% of the vehicles are affected, 5% not yet.
In the year 2021, of course, 100% are affected and in the first 3 years, we are allowed to have 7.5 grams CO2 per kilometer coming from electric vehicles. And what is very important as well that we can use on an annual basis, about 7 grams CO2 per kilometer, we call it eco-innovations.
So -- and that is how we see for 2020 a good package and 2025, I mean, it's pure speculation. It's looking into a crystal ball.
It's too early to talk about it.
Operator
The next question comes from Mr. Fraser Hill from Bank of America.
Fraser Hill - BofA Merrill Lynch, Research Division
Fraser Hill from Bank of America. A couple of questions.
Back to China, you talked something quite clearly about the base being impacted and making it tough in terms of your imports. But when exactly do you think you're going to hit a comparison base if it is a little bit more normal?
When should we look at the year [ph] numbers as something of a cleaner read on the direction of your imports business into China? And then second question on your CapEx.
I mean, it looks like it's probably going to be down quite significantly this year. Is that right?
Probably thinking down EUR 100 million to EUR 200 million this year? And should we continue to expect that to decline beyond 2014, which I think was my prior understanding?
Maximilian Schöberl
Thank you very much, Fraser. This will be answered by Mr.
Eichiner.
Friedrich Eichiner
I think -- I would say a reliable significant base to compare would be reached after the second -- after the first quarter 2015, and we should have for the import measurement, again, a volume in the market that is a base we are looking to going forward. So your question about CapEx, yes, indeed, we already told you that 2013 was a peak, and our target is to bring it down into those ratios.
We will take a significant step this year, but not yet being there. So the target is R&D between 5 to 5.5 and CapEx below 7% of revenue.
That is the target, and then on the CapEx side, it should be possible to achieve it next year. That's at least our assumption.
Not having yet finalized all the planning for next year. This what I have to mention as well, but it's a strategic target.
Operator
The next question comes from Mr. Stuart Pearson from Exane BNP Paribas.
Stuart Pearson - Exane BNP Paribas, Research Division
So I've got 2 questions. Firstly, just I guess staying on China for a second.
Could you just update as where you are on dealer openings this year, and what's gone well and what hasn't gone well in that respect and perhaps, why? And then the second question just coming to the other cost or the future cost as I guess we used to refer to them.
I think you've been guiding for over the -- I think it was EUR 476 million last year. Is that still the case?
How much have we seen in the first 9 months? And how confident are you on that guidance that whatever the full year number is now given I guess the number changed quite a lot during Q4 last year?
Maximilian Schöberl
Thank you very much, Stuart. This will be answered both question China and future costs from Mr.
Eichiner.
Friedrich Eichiner
Well, talking about the dealers in China, we actually have 441 dealers for the BMW brand franchise, and we opened 21 dealers in the course of 2014 so far. So that is what we -- that's the actual number.
And of course, this will continue because we see potentials in the third and fourth tier cities going forward and we are looking for further growth on the dealer network in the course of next year. Now your question about the future cost, future cost occurred up to the end of September at a low 3-digit million euro amount.
That is the number I can give you.
Stuart Pearson - Exane BNP Paribas, Research Division
And for the full year, can you confirm that it's still above last year's number or is that likely to be lower now?
Friedrich Eichiner
It will be a little bit higher. So we are expecting a more cost coming in, in the fourth quarter because then we reach -- many, many projects will be finalized at the end of the year, and we always have an effect of a few hundred millions on top of the average in the fourth quarter.
And this will occur this time as well.
Stuart Pearson - Exane BNP Paribas, Research Division
Okay. And so one last thing.
Do you have any visibility on that for '15 yet? Or is it too early in the year for budgeting process?
Friedrich Eichiner
I'm sorry to say it's too early. We have not yet decided about the final budget for 2015, so I cannot give you a number now.
Operator
The next question comes from Mr. Philippe Houchois from UBS.
Philippe Houchois - UBS Investment Bank, Research Division
I have a slightly longer-term question. We've seen a lot of recalls in the industry lately and including yourself with TAKATA and the quarterly [ph] problem seem to kind of spread because of the sharing of suppliers.
We've always kind of looked at earned lease [ph] of the amount of provisioning you take and whether it's excess provisioning, no reducing profits or not. In light of what's been happening in the industry, do you think that the level of provisioning in the industry has been right?
Or do you think there is a risk that as an industry and BMW in particular, you need to raise the level of provisioning to prepare yourself or protect yourself from these going quality issues?
Maximilian Schöberl
Mr. Eichiner?
Friedrich Eichiner
We think, of course, we think that the level of provisioning is right. I mean, we have statistic procedures to calculate all of this and all the latest developments are incorporated.
So that's how we handle it. Of course, there's some uncertainty out there how the authorities in the respective countries are handling recalls, and if you get major changes on this side then maybe you have a different picture.
But what we see in those so far, talking about BMW should be provisioned.
Operator
The next question comes from Mr. Charles Winston from Redburn Partners.
Charles Winston - Redburn Partners LLP, Research Division
Charles from Redburn. Just 2 for me as well, please.
The first one, just on phasing of depreciation cost. There was -- you were quite clear that obviously with the increased CapEx, we would see depreciation rise.
But the year-on-year change in the third quarter was very marked indeed. Is that a bit of a one-off?
And therefore, growth rates going forward is going to be lower? Or is that sort of a new run rate we should expect for perhaps a year or a couple of quarters?
And the second question just going back to Stuart's question on the dealer openings in China. You say it's 21 year-to-date.
My understanding is earlier on in the year, you were expecting something perhaps in the area of 40 to 50, so it looks as though you might be a little bit below target on that. Is that understanding correct?
And if so, could you perhaps talk a little bit about why you're not quite as you hoped?
Maximilian Schöberl
Thank you very much, Charles. Mr.
Eichiner?
Friedrich Eichiner
Starting with the CapEx and the associated depreciation effect, you have to see the common was running for quite a couple of years at a level of roughly EUR 4 billion CapEx. Now we increased to over 6 -- more than 50%.
And this increase is due to the expansion of our product portfolio to the development of new plants. And of course, as a consequence, the depreciation will increase as well.
So that is the general picture. And then looking at the different quarters, of course, that is, as always, to do with the life cycle of power projects, and this is driving the incremental depreciation number.
And basically for the totals of 2014, we anticipate a mid -- a low 3-digit million euro negative impact coming from depreciation. So your second question about the dealers, well, that's right.
Our target is to add more dealers to the network, but that is the -- how the number stands at the end of September. We are prepared to bring more -- to add more dealers in the course of 2014's fourth quarter, and we have to see what the outcome is.
If it's another 15 or another 18, this has to be seen. We check them.
We have to make the right decision. It's not just chasing a fixed number.
We have to select the right dealers, that's a priority.
Operator
The next question comes from Mr. Adam Hull from Berenberg.
Adam Hull - Berenberg, Research Division
From Berenberg. Three questions.
Just firstly, on free cash flow and working capital. You mentioned that the cash flow so far was EUR 1.3 billion.
I think your target was more than EUR 2.5 billion. You've obviously had a big working capital outflow.
Just maybe give us a feel for not just Q4 but into sort of '15 and '16, I mean, should we be thinking in broad terms of EUR 1 billion or towards EUR 1 billion of working capital outflow, is that the sort of normal level? I know in 12 'and '13, you had big inflows, but is it EUR 1 billion or so a normal level?
Secondly, in terms of conditions in Germany, I think you're saying you've got some increases in the price in Europe in Q3, maybe you could quantify that and give us just a little bit more of a feel for this sort of competitive environment, particularly in Germany but maybe Europe as a whole. And then finally, on the model mix, I presume at the moment your model mix is reasonably good.
Is that right? Is it positive year-on-year?
And how should we look at that going into 2015?
Maximilian Schöberl
Thank you very much, Adam. This will be answered by Mr.
Eichiner.
Friedrich Eichiner
So free cash flow. Well, I would like to talk about 2014 first.
So we still confirm our target that the free cash flow should be above last year's EUR 2.5 billion. That's still a target and that means that we have to make more than EUR 1.2 billion in the fourth quarter.
Why are we confident? Because the production is now available.
It's all new product. It's out in the markets, and we are expecting that inventory level will now be driven down heavily in the fourth quarter with a very positive effect on working capital and on free cash flow.
That's at the end of the day, the story behind it. Now going forward, I cannot give you a number for 2015 and '16.
As I said, we've not yet finalized our budget planning for 2015, but the general view is that the company will strive for a strong free cash flow. That's absolutely clear.
But to give you a precise number is a bit too early. And I have to ask you to wait until our budgets are finalized.
Then the question about the pricing. Well, we said in Europe, we see a slightly improvement on the pricing side.
Don't forget that pricing was heavily under pressure in the course of the euro crisis, and now we see the first signs of recovery. It's not a strong sign, I said slightly, so we are talking not 100 basis points, we're talking even less than 50 basis points.
That's what I can tell you. And now the question is how the fourth quarter of 2014 will develop in terms of pricing, and of course, the start of 2015.
This has to be seen. Our target is still to improve more.
Model mix, talking about model mix, we have to see that if we exclude the currency effect and exclude the BBA effect, then the revenue per car is stronger than the revenue per car the year before. And that's demonstrating that, in essence, the mix was better in our business so far.
Now in the fourth quarter, we have to see that after the launch has now finally occurred that get many MINI's coming to the markets, and we get the 2 Series coming to the market, so both are products in the lower segments. So we have to see how this works out, but our expectation is that the mix in the fourth quarter will not be as strong as it was so far.
Operator
The next question comes from Mr. Marc Tonn from Warburg Research[ph].
Unknown Analyst
Just 2 questions from my side. One would be on the equity contribution from the Chinese joint ventures, which I think remain pretty strong in the third quarter and that you could give us some more insight on what you're expecting for the fourth quarter.
I think it was already pretty close to 0 last year. What was the expectation would be for that?
And the second one would be on the eliminations and reconciliation line, which was, I think, surprisingly positive in the third quarter this year. I suppose that is due to the fact that some of these high-margin cars, which went into the leasing business in the past are now coming back, but if you could give us some feeling on where this figure might end in the fourth quarter, and also going forward into 2015.
Maximilian Schöberl
Thank you very much. Mr.
Eichiner?
Friedrich Eichiner
Well, first of all, well, I have to confirm that we have a very positive development in our joint venture in China. So they have a strong profit growth there, good business.
That's what we intending to achieve, and that's coming now with very attractive products. Having said that, in the second half, we always have a higher cost share than in the first half, and the reason is that many projects -- product projects are finalized in the second quarter and then the cost comes in as well.
So that is the reason why we are expecting a lower quarterly result than in the first 2 quarters of 2014, especially in the last quarter. But it will be definitely a positive result.
That's what I can confirm from our side as well. So that's the story behind it.
And talking about the eliminations, now the basic effect, you touched it, it's about the leasing business. The new leasing power business was not as strong due to the geographical mix.
And so the effects coming out of the portfolio where we have highly profitable products in are overcompensating the negative effect of the profit elimination that is caused by the new leasing business and the result is this positive effect you see in the P&L.
Operator
The next question comes from Mr. Jochen Gehrke from Deutsche Bank.
Jochen Gehrke - Deutsche Bank AG, Research Division
Just 2 follow-ups. First of all, again, coming to the pricing thing, and more focusing on the North American market.
And obviously, the yen has moved very significantly in recent days. You have contact [ph] pressure, fuel prices are coming down.
What is your expectation? Also, you said it, I think, early on the call that you're expecting a slight moderation of used-car prices.
Do you think that next year the competitive environment in the U.S. will now change, compared to what you faced in the last, I think, 3 to 4 years which were pretty benign?
And then secondly, coming back to the China at equity result, what sort of dividend is BMW expecting to receive from China? Is that too early in the light of the capacity ramp?
And should we be thinking of a dividend payout ratio in the 80%, 90% camp that some of your peers have, once the expansion project is completed by the end of next year?
Maximilian Schöberl
Thank you very much, Jochen. Mr.
Eichiner?
Friedrich Eichiner
Well, your question about pricing in U.S., Jochen, so far, it's fairly stable. That's what we can see.
Our assumption is looking at the used car segment, looking at also at the many maturities coming back next year, that because of this higher volume, there could be a slight pressure on the prices in used car segment. In the new car segment, it has, of course, a lot to do with the competition as well.
I mean, this is something we have to see so far. We don't see that Japanese competitors are driving price down heavily as they did in the '90s with the tailwind of the currency.
That's not visible up today, but it has to be closely watched when we're going into 2015. Now in China, at equity, I mean, you touched it.
We paid a dividend this year out of the joint venture at a low 3-digit million euro number. So this is already done.
Now looking into the future, I think the cash will be needed in order to support all the investments going forward, especially the localization of 3 products, which needs investment into plants, equipment, and so on and so forth. So that's my expectation going forward.
Operator
The next question comes from Mr. Jose Asumendi from JP Morgan.
Jose M. Asumendi - JP Morgan Chase & Co, Research Division
Jose, JP Morgan. A couple of items.
The first one on China, could you please share the outcome of the Chinese investigation, which measures have you taken so far across spare parts and imports? And if at all there's anything coming by year-end?
Second item on China, if you could give us some sense of the imports in the fourth quarter, the current run rate, is it higher than Q3 or lower or in line? Second item, please for Mr.
Reithofer. Thank you for your comments before around the CO2 targets.
I was just wondering if you could maybe just elaborate a bit more around the proportion of EVs, hybrids and compact cars that you need in your portfolio to meet the 2020 CO2 targets. If you plan to launch any additional electric cars going forward, and what is your sense in terms of how many years will it take your battery partners to double the range of your battery?
Final one, final item please on working capital. I got the message, but basically I'm just trying to ask if the working capital is likely to be a neutral impact at year-end.
That will be much appreciated.
Maximilian Schöberl
So we start with Mr. Reithofer in CO2, and then Mr.
Eichiner.
Norbert Reithofer
I mean, it's a difficult question to look into the year 2020. I can tell you where we are at the moment.
I mean, in the year 2014, it's now really rough figures. It can be that the World Market is about 2.2 million, 2.3 million electrified cars, roughly 1.7 million, 1.8 million hybrid electric vehicles, roughly 100,000 to 120,000 plug-in electric hybrid vehicles, and the same figure for battery electric vehicles, about 120,000.
That is the current situation where we are. If it comes to now, let me say, in a broader sense, electric vehicles, including, as I said, hybrid electric vehicles -- plug-in hybrid electric vehicles and battery electric vehicles.
I mean, at the moment the growth rate of battery electric vehicles and plug-in hybrids is between 40% and 50% compared to 2013. The growth rates of hybrid electric vehicles is, I can say, slowing down.
So that is where we are at the moment. If it comes to the year 2020, I mean, we have to do a lot of things.
I mean, we have to introduce compact cars with 3 and 4 cylinder engines, 2 Series Active Tourer, 1 Series BMWs, 2 Series BMWs. MINIs also different derivatives.
And as I said with 3 cylinder and 4 cylinder engines, we have to introduce more and more plug-in hybrid electric vehicles. But to say a figure at the moment, it's difficult because we don't know what the customer would like to have in the year 2020.
And I mean, if it comes to CO2 targets in the year 2020, a lot of people sometimes forget the customer, if you know what I mean. So -- and I cannot make a -- cannot give you an answer what the customer would like to have in the year 2020.
But for us, it's true, we have to do a lot of things to be able to get there. So that is regarding CO2 targets.
Jose M. Asumendi - JP Morgan Chase & Co, Research Division
Regarding electric cars, you plan to launch new cars over the next 2 years? And how long is it going to take [indiscernible] to double the range, please?
Norbert Reithofer
I mean what we have to do is, we have introduce plug-in hybrid vehicles, for example, in X5. Of course, we will introduce our 7 Series as plug-in hybrid.
We are in the introduction phase of our BMW 5 Series in China as a plug-in hybrid electric vehicle by the way, with a electric range of 50 kilometers, as you have to do it in China. So -- and we will introduce, for example, a plug-in hybrid electric vehicles, our 3 Series Sedan.
And we will do it step-by-step because our BMW i3 and the BMW i8, if you can imagine, will not be enough to achieve the CO2 targets in the year 2020. But as I mentioned it, I mean, with the phase in 2020, 2021 that you can use 7.5 grams CO2 per kilometer if you introduce battery electric vehicles, and you have 7 grams CO2 per kilometer for eco-innovation.
I mean, that can mean that 2020, 2021 and 2022, the BMW Group has to achieve then roughly 110 grams if you include eco-innovations, if you include 2.5 grams, if you split the 7.5, 2.5 in 2020, '21 and '22. So that is where we are at the moment.
So -- and we are on our way, because we have to introduce all these technologies. We have no other choice.
Maximilian Schöberl
So the second part of the question will be answered by Mr. Eichiner.
Friedrich Eichiner
The question was about China and investigation that took place there. So basically, we were in close contact with authorities there with the NDRC and started early on in the beginning of 2014 to act accordingly.
So there were some price measures already done in the first half of the year on the spare parts side. And in the meantime, what we see is that now the noise is leveling out and we are coming back to more or less of a kind of a normal business.
And we -- I think we've done what was necessary, but we've not overdone it, and that was the right approach to it. Now it has to be seen how this goes forward.
You're -- another question was about the imports. Now in order to understand the number we first have to adjust it a bit, because we had a base effect last year where the localized capacity for 3 Series and X1 was not fully available, and we took -- we came to an agreement with a JV to fill the gap by importing those type of vehicles for a short period of time.
If we take them out now and adjust the basis, then the import business will grow this year. If you let them in the basis, then it will be slightly lower.
That is what I can tell you about the import. And it's heavily -- of course, heavily driven by life cycles like the X models, X6, X5 and 7 Series, of course.
So the last question were concerning working capital. Well, as we already discussed today, we now have the production available for many new cars.
Cars without any predecessors. So the X4, for example, the Active Tourer and many others.
Now they will be sold in the fourth quarter and our expectation is that it should be possible to significantly reduce inventory and this should lead to a very positive effect on working capital and on the free cash flow. Having said that, we still confirm our guidance for the free cash flow of more than EUR 2.5 billion.
Maximilian Schöberl
I think we have time for a quick last question. Do we have another question?
Operator
We have one last question from Mr. Arndt Ellinghorst from Evercore ISI.
Arndt Alexander Ellinghorst - Evercore ISI, Research Division
It's me, it's Arndt from Evercore ISI. Well, I just have one observation really.
Listening to everything you're saying and also to the industry data and what others are reporting. It feels a little bit that the world is getting tougher, and that pricing in most regions is getting tougher.
You're really working hard, you're trying hard, you take volumes out of China and you have your measures, but your pricing is not really coming through. So I mean, what's your message to us?
Would you say it's fair to prepare for a tougher industry environment overall moving into next year? Or would you still be confident enough to say, structurally, the industry should be in better shape next year than it is right now?
Maximilian Schöberl
It was a very good last question, Mr. Ellinghorst.
I give it to Mr. Eichiner.
Friedrich Eichiner
Just want to give you a short answer. So my view is that pricing is tough, you're right.
But at the same point in time, we see the first signs of improvement in European markets. And it all depends on the recovery of the economy, especially in Europe.
I don't think that in China, with the exemption of a few specific models, we really have a huge discounting problem, because all the JV products are sold with very low discounts, still a good business, a low cost of retail and satisfying what's going on there and is by the way, reflected in the at equity results. So that is my view on that, so it really depends a lot what's going on in Europe.
It's still a European disease. We see first signs of recovery, but we are still significantly away from our long-term target when it comes down to pricing in Europe.
So that's the view[ph], and we're working hard in the fourth quarter to do a bit more better than we did up to the third quarter so far.
Arndt Alexander Ellinghorst - Evercore ISI, Research Division
So but then the question is, if European macro indicators are turning more negative as they did over the last couple of months, why should the auto industry or pricing in the auto industry be better in such an environment?
Friedrich Eichiner
That's what I said, I mean, we're still expecting a positive growth scenario in Europe next year. If this is not coming and we're falling back in a kind of recession, then the pressure comes back even worse than it is today.
I absolutely agree with you, so that's the basic question. But, having said that, it's still a European issue, and it's not a worldwide issue.
Other markets, bigger markets around the world are in better shape, but we still have the problem in Europe.
Maximilian Schöberl
Thank you very much, Arndt Ellinghorst. Ladies and gentlemen, thank you very much for your questions.
On behalf of the BMW Group team, I wish you all a pleasant afternoon. Thank you very much and bye-bye.