BMW CEO Discusses Q2 Results - Earnings Call Transcript

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BMW (OTCPK:BAMXY) Q2 Earnings Call August 3, 2010 10:00 AM ET

Maximilian Schoeberl

Good afternoon ladies and gentlemen, this is Maximilian Schoeberl, Director of Corporate Affairs. I'd like to welcome you all to our half year telephone conference at BMW AG in 2010. With me today are, Dr. Norbert Reithofer, Chairman of the Board of Management; and Dr. Friedrich Eichiner, our CFO.

First, Dr. Reithofer will give you all an update on the business performance, then Eichiner will take you through our financial results. Afterwards we will have time for a Q&A session. Mr. Reithofer, please go ahead.

Norbert Reithofer

Good afternoon ladies and gentlemen. Over the first six months of 2010 our business performance has improved to show a positive dynamic development. This is why we raised our forecast for 2010 on July 13. We plan to sell over 1.4 million cars, 10% more than 2009. We aim at improving our pre-tax profit significantly above the 2009 level.

In the automobile segment, we expect to post an EBIT margin of over 5%. Where do we stand following the first six months of the current business year? We have generated a positive profit before tax of €1.8 billion. This result is considerably above the same period in 2008, and about on par with the result achieved in the first two quarters of 2007.

Group net profit stood at €1.1 billion. EBIT in the automobile segment was clearly positive at €1.6 billion. We also generated an adjusted free cash flow in the automobile segment of around €1.2 billion. This year offers a threefold benefit that comes from the following.

First, the economic recovery in some markets; second, the new attractive products that are in great demand; and third, the substance and efficiency enhancements that our company has achieved by continuing to focus on implementing strategy Number ONE.

To the first point: Some key markets like China and North America are growing. The same is true of India, Brazil and several markets in Europe. We have benefited from the economic upswing in these markets. At present, this applies mainly to China. In the first six months of the current business year, we managed to double our sales volume, as the overall Chinese automobile market improved by 50%. China remains a market with potential. It is presently the third most important market for our company in terms of retail.

We are currently building a new plant in Tiexi. The start of production is scheduled for 2012. We are expanding our dealership network, and we will give about 50 MINI E cars to Chinese customers for test purposes this year. With regard to the BMW Group's business, it is nevertheless important to me to emphasize: We are not solely relying on China. We are a company that acts and operates globally. We are active in all relevant markets, and we want to be successful in all these markets.

As the world's leading premium car manufacturer in terms of sales, we are aiming at a balanced business performance between Europe, Asia and the Americas. In other words, we want to grow on all continents in large and small markets alike. Naturally, we are pleased about the additional tailwind the economic upswing in some countries is providing us.

However, as we aim to achieve sound and sustainable growth in an uncertain environment, success will primarily depend on our own performance and our own strengths as a driver of innovation, as a company with an obtainable vision for the future, as a company that offers attractive products.

On to the second point: Our models are attractive more than ever. This applies to all models irrespective of the segment. Let me give you some examples for the first half of the year.

Over 30,700 BMW 7 Series were delivered to customers, making the 7 Series a clear segment leader. The new BMW 5 Series Sedan sold 25,000 units in the three-and-a-half months since its market launch. Over 68,600 customers bought a BMW X5 or X6. More than 46,700 customers chose a new BMW X1. We delivered 199,000 BMW 3 Series and more than 103,000 BMW 1 Series. And we have never sold more Rolls-Royce motor cars in a six-month period than in 2010.

All in all, worldwide sales of BMW, MINI and Rolls-Royce in the first six months of the current business year stood at over 696,000 cars and exceeded last year's period by 13%.

At the same time, BMW Motorrad improved significantly. Sales of the BMW brand rose by 21% to about 57,000 units in the first half of the year, bucking the trend in the motorcycle market because most motorcycle markets are still in decline.

Our Financial Services segment is growing as well. As you know, we have restructured and realigned our financial services division.

Now, a few more highlights about what's to come. In the second half of 2010, we are launching attractive new models. The Chinese market, entry of the new 5 Series Sedan Long version is scheduled for September. The 5 Series with all-wheel-drive will be launched shortly. The 5 Series model range will soon be complemented by the 5 Series Touring.

The second generation of the BMW X3 will be available starting this fall. MINI's new highlight is the Countryman that has just been presented to the international media in Hamburg, and has received positive feedback. With the model update of the MINI Clubman and the MINI convertible, our customers can choose from a newly revised MINI portfolio.

There is one thing we never lose sight of; irrespective of a particular drive system or number of cylinders, we will always offer our customers the best performance with the best engine efficiency. This is what sheer driving pleasure is all about and this is the promise that every customer has with our premium brands.

And finally, my third point. With the implementation of our Strategy Number ONE, we have set the foundation to ensure the successful development of our company over the long term. This is primarily due to our innovative strength. Let me give you two examples; the increased application of modules is bearing fruit. Initial effects has been achieved with the new BMW 5 Series model range, and each new model series will increase the economies of scale.

Our three brands demonstrate our ability to develop and launch premium brands from the small car to the ultra-luxury segment and at the same time to strengthen their respective brand value. You can be sure that we will pursue the same approach with our new sub-brand. And as a new label we will gradually offer a full range of low emission cars, starting with the Megacity vehicle. This is in our DNA as the world's most sustainable care company.

Ladies and gentleman, our key figures for the first six months of the year demonstrate that we have taken a major step toward reaching our profitability targets for the year 2012. However, we are definitely aware of the fact that this is not the time to sit back and relax. We have not yet achieved our target, neither for the business year 2010 nor for the following years.

But be assured, supportive management, as well as the management of employees will stay on track to make our vision for 2020 become a reality. Thank you very much.

Maximilian Schoeberl

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

Friedrich Eichiner

We have had an exceptionally strong second quarter. The BMW Group has greatly improved its profitability. In the first half year, we achieved an EBT margin of 6.5% and an EBIT margin of 6.6% in the auto segment. That puts us on the right track to reach the target range set by Strategy Number ONE for 2012.

We generated an extremely robust Group profit before tax of €1.3 billion in the second quarter. That's a very significant improvement in the Auto Segment profit. We reported a clear increase in our Financial Services earnings. Both resulted from the positive effects of our strategic measures to boost profitability as well as our attractive, new models.

Let us start by taking a look at the individual segments: The Auto Segment in the second quarter posted an EBIT of €1.3 billion euros. EBIT for the first half-year totaled €1.6 billion.

The sales situation has continued to improve. We benefited overall from the global economic recovery with double-digit sales growth in many of our markets. And with the launch of the new 5 Series in Europe, we saw a strong model mix in the second quarter.

Our attractive portfolio also allowed us to maintain a better price position on the markets. As expected, sales incentive levels decreased, thanks to our younger product portfolio and changes in sales management processes.

Our efforts to reduce material costs over recent years also had a positive impact. We expect sales to perform well in the second half of the year. We invested around €410 million in capital markets to fund a further share for our pension obligations in Germany. Adjusted for this amount, free cash flow in the auto segment totaled €1.2 billion for the year to June 30. At €9.7 billion, our group liquidity for the year to the end of June remained high.

Ladies and gentlemen, the Financial Services segment generated a pretax profit of €379 million in the second quarter. For the first half of 2010 as a whole, EBIT totaled €601 million. In the highly profitable second quarter, Financial Services benefited from much better conditions for short and long term funding. Globally, central bank interest were at a historic low.

The used car markets in North America and continental Europe continued to develop heterogeneously in the first half of 2010. Most European markets stabilized at a low level. In northern Europe used car prices failed to recover. In U.S. and U.K. used car prices showed greater stability. Due to this our end of lease business improved. This had an additional impact on the earnings to the end of June of around €100 million.

We initiated measures to optimize process efficiency at a further positive effect, almost 284 new contracts were signed with retail customers in the second quarter and 9.5% more than in the same period last year. In the first half of the year, more than 527,000 new contracts were signed worldwide. New business accounted for €13.1 billion, 9% more than the same period last year.

The percentage of new vehicle leases of lease or financial services dropped slightly to 46.4% of which the leasing business made up 23.8% and financing 22.8%. The service portfolio comprised €76.468 billion. The risk situation in the leasing and loan financing business has continued to improve throughout the economic recovery. The credit loss ratio for the first half of 2010 dropped to 0.59% from 0.74% in the same period last year.

We expect our financing business to face lower default risk from retail customers and dealers in the second half of the year. But any slowdown of the economic recover could potentially weaken this positive trend again.

The Motorcycle segment performed exceptionally well in a difficult market environment. We were able to improve our competitive position significantly as we posted an EBIT of €54 million in the Motorcycle segment in the second quarter. Ladies and gentlemen, our much stronger performance is reflected in higher earnings and our excellent key profitability ratios. Cost improvements and our efforts to push efficiency are yielding results.

Car key ratios are full in line with targets set out in our strategy. We are continuing to work our strategic initiatives and programs and we'll further optimize both the cost and performance side. We'll not rely on the economy continuing to recover at this pace. As far as the second half of the year is concerned, we are planning overall for a good earning situation. However, it would be a mistake to project the strong second quarter earnings onto the full year.

On the one end, we expect smaller increases in sales worldwide in the third quarter, partly as a result of seasonal factors. On the other hand, the launch of new models, the 5 Series Touring and the 5 Series four-wheel-drive Sedan, the X3 and the MINI Countryman will create additional space momentum in the United States and Europe. These market share of sales will increase slightly at the expense of China and other emerging markets. This will dampen earnings in third quarter in particular.

Our forecast cannot generally predict potential fluctuations in the global economy. However, we are aware that the efforts of many countries to consolidate their overextended budgets could put a break on global consumption. This could hinder a further global economic recovery and also impact our business performance.

Ladies and gentlemen, we want to increase our company's earning power sustainably over the long term. We aim to grow all of our brands in the markets worldwide. We announced an EBIT margin of more than 5% in the auto segment for the full 2010 financial year. We are also expanding our target range of an 8% to 10% EBIT margin in Auto segment in 2012. In Financial Services segment, we are aiming for a return on equity of more than 18% for 2010.

The BMW Group is on the right track. With our attractive portfolio, we are profiting from the current growth space. Our increased earnings will have a substantial positive impact on our result for the full financial year.

Also, we are currently satisfied and have no intention of resting on our laurels. We will continue to optimize our efficiency and structures in order to maintain our cost and success moving forward into the future. Thank you.

Maximilian Schoeberl

Thank you very much, Dr. Eichiner. And ladies and gentlemen, now the line will shortly be opened for questions. Please wait for some technical advice.

Question-and-Answer Session


(Operator Instructions) The first question comes from Mr. Ellinghorst of Credit Suisse.

Arndt Ellinghorst - Credit Suisse

It's Arndt Ellinghorst, Credit Suisse. The first question is on China. Can you give us some flavor on how your profitability will develop in China with more cars being locally produced and what that also means for your pricing power in China, because we understand that the Chinese really want to buy your cars that are produced in Germany and not so much the cars that are produced in China?

And secondly, on currency, I estimate you might have $9 billion and renminbi exposure by the end of this year. Could you give us some color on your transaction rates next year if the currencies stay where they are right now? We've heard from Daimler that they see them pretty much flat. It would be interesting to hear how you see your exposure next year.

And then also just briefly on the second quarter, how much of the second quarter performance was already related to the 5 Series and how much was simply currency, raw materials and so on?

Friedrich Eichiner

First of all, we don't see any obvert and coming from higher share of locally produced cars in China. The reason is that we are still delivering many components to China. And the second reason is that the more we produce locally, the more we are able to import. So this is for me a kind of a win-win situation.

Pricing is still strong in China. The (inaudible) level is not comparable to other markets. And of course, overall, there is a trend of price reductions in the country, but starting at a significantly higher level than in many other markets.

Then currency, in the weeks behind us where we had a very favorable exchange rate, for example, in the dollar, we've taken opportunity to build up a very solid position for 2011 and also for 2012. So we are in kind of a flat position, I would say. That is what we achieved. And the idea is we really want to make sure that currency doesn't have a big influence on our 2012 targets. That's the reason behind that.

Talking about the second quarter and the influence of 5 Series and other effects, it's not coming from the exchange rate, because the exchange rate was still a small burden for us in the first half. It's not related to the favorable dollar. It's more related to the pound that overcompensated the positive effect from dollar. So it was a headwind of two-digit million number. So that's more coming out of mix.

And as we always said, the 5 Series makes big difference as well as high volume of 7 Series and X5 and X6s. So this is really now the secret behind the strong quarter that the new cars have really almost no discount, a good margin and help us to really achieve our profitability targets.

Arndt Ellinghorst - Credit Suisse

But you would agree that the 5 is sequentially building up in terms of profit contribution?

Friedrich Eichiner

Of course, yes, it's right.


Our next question comes from Christian of Macquarie.

Christian Breitsprecher - Macquarie

It's Christian Breitsprecher from Macquarie. I have two questions, one related to the other financial result. We had a significant negative swing in the second quarter versus the first quarter. Maybe you can explain a bit what's behind that and what we should expect for the coming quarters.

On the currency impact, could you be a bit more precise on the numbers? Was there in the second quarter still a negative currency impact or only in the first half?

And then also with regard to the transaction rates going forward, did I understand correctly that the transaction rates for you in the dollar in 2011 are going to be unchanged versus 2010, or should we expect a significant positive currency impact to come through in 2011?

Friedrich Eichiner

Well, first of all, the other financial result was mainly influenced by fair values in relation to FX and commodity hedging. So that is the major reason, and it has to do with the development, for example, on the dollar side. That was the influence there.

Now the effect I mentioned was first half year effect overall. So we had a certain headwind in the first half, and we are expecting now some tailwind in the second half, because we will get a better transaction rate. We are expecting now improving transaction rate for the second half, and the result will be as I said a tailwind of a low three-digit million profit number.

This will then lead us over into 2011 where we see also, even in comparison to the actual situation in the first half of '010, a slight improvement more or less on the level of the second half, maybe a bit better. That's the situation there.

Christian Breitsprecher - Macquarie

In the second quarter, was there still a headwind from currencies or was it already a tailwind?

Friedrich Eichiner

Yes, there was a small headwind in the second quarter as well.


Our next question is from Max Warburton of Bernstein.

Max Warburton - Bernstein

Revenue per unit, I know many of us are obsessed about this, but the mix definitely improved. You talk about the mix, Dr. Eichiner, you're talking about 5, 6, 7 Series, et cetera. Why doesn't the revenue per unit go up? Is there something in the accounting that means the lower incentives, the lower marketing spend, appears further down the P&L? Just from an analyst point of view, could you help us think about why this improved mix doesn't drive the topline as much as one might assume as an outsider?

And then just secondly on currency, you say currency was a negative effect in the first half. Could you just clarify? Do you hedge the Chinese sales? Your friends over at Mercedes made it clear they've been surprised by Chinese sales and have not been able to hedge them. I assume implicitly there's a big currency gain on the Chinese sales.

Friedrich Eichiner

First of all, referring to your last question, yes, we are hedging the Chinese currency. But of course you can only hedge for one year in advance. That's all the possibility you have. You cannot do much more.

Now you questioned about revenue per car. The difference is based on the retail number we are reporting, it's a different picture compared to the wholesale number. We took advantage in the second quarter to strengthen our pipeline and to come to a more healthier situation at dealer level. So we cleared dealers stocks further. That's the reason why we have difference between the wholesale number and the retail number.

The wholesale number was significantly below the retail number. And that makes a big difference on the revenue per car. The number I can give you is that the revenue per car increase compared to the first quarter of '09 and first quarter of '010 is roughly around 8% to 9%. That is due to better pricing, due to lower incentive levels, due to a better mix, as explained.


Our next question comes from Daniel Schwarz of Commerzbank.

Daniel Schwarz - Commerzbank

Can you quantify how much the modular strategy contributed in the second quarter, i.e., the positive effects from the 5 Series? Is it rather on the price side, because it's a new model, or rather on the cost side?

You mentioned in the press conference that Q4 profitability may be impacted by significant launch costs. But should that be more or less than, for example, in the first quarter with the important launch of the 5 Series?

Friedrich Eichiner

First of all, the savings coming from a modular strategy, of course that is very relevant for the cost side, because we have economies of scale on modules. We are able to use them in more than one module line. And that gives us a better cost position.

Now you're question about a launch cost, we have now to consider in the fourth quarter that we have in parallel more launches. So we have the 5 Series Touring. We have the X3. And on the MINI side, we have the Countryman. So there is a lot coming, more than only 5 Series. It means we have to carry a higher burden on the launch cost side.


Our next question comes from John Buckland of MF Global.

John Buckland - MF Global

Just going back to the revenue per car question, unless my model is wrong, I've got a 12% rise in revenue per car, but anyway, perhaps you could correct me on that. My main question is concerning, obviously, again the third quarter, and when you compare the costs and the production, pricing, et cetera. Can you give us a clue perhaps in fact some quarter in the past which is similar to, I guess that you're going to produce a better margin than you did in the first quarter, because while there are costs, there are obviously the new models and better pricing, et cetera. And you've got the currency benefiting coming through as well. So I wonder if you can give some clue on exactly how much down you're going to go in the third quarter.

On the Financial Services, and you talked about the used car market being much better, that €100 million, that is the gain on used car sales, I presume, as being €100 million better. There's no suggestion that you've actually been reversing provisions on residual values, is there? And then, just again looking at the foreign exchange, presumably although you are hedging and taking advantage as exchange rates fluctuate, we're clear that in 2012 there will be still a much better transaction rate coming through, because if there isn't it seems very odd how you are hedging forward.

Friedrich Eichiner

Starting with the last question, the transaction rates as you've said already, we are expecting better rates in the second half of the year. And this will be the result of Q4 will be at the same level as we expect the exchange rate to land in the first quarter of 2011. So we will see some improvements compared to the quarter one and two. And this is already hatched.

Now, your question about revenue, it depends on what you referred to. Now, looking at the first quarter of 2010, if you compare the number the numbers to the first quarter as of that based on the figures, the wholesale figures that are really relevant for the revenue, it will be around 9%. So that's the number I can give you. As I said to the improvement especially on the mix side with the new models in the market.

John Buckland - MF Global

Can I just say on that figure of 8%, 9% is a quarter-on-quarter figure, not a year-on-year figure?

Friedrich Eichiner

It's a quarter-on-quarter figure. As we said to you already in our talks about the first quarter, is that first quarter still under pressure and in the second quarter with the new cars coming to the market we should see a better position when it comes down to pricing, revenues per car and things like that. And that's the referring number. Then looking at the cost, I mean we are not expecting our cost of production per unit to decrease quarter-by-quarter, there is nothing we can really expect. We are working on profitability, that's clear. And this is something where year-by-year we achieve improvements of around 5%, 6%, 7%; depends on the particular year, that is the rate going forward.

Now, coming to your question about financial services. Now, from today's perspective, we have recognized an adequate level of risk provisions in both segments. To cover foreseeable residual value risk on the entire contract portfolio. Think we generate the better results on end of lease business. It reflects the stabilization recovery of used car prices. And we've disclosed the one-off effect of €100 million from better used car price realization. But given the divergent and developments of used car markets, we did not make any fundamental adjustments to the level of risk provisions. We are keeping a close look on changes in financial service related risk and will adjust our risk provision as appropriate.

John Buckland - MF Global

Could you say, on the third quarter, is volume actually going to go down year-on-year?

Friedrich Eichiner

Is it the retail volume you are referring to?

John Buckland - MF Global

Yes. Retail, production, whatever volume you'd like to tell us. Is it going to actually be down year on year in the third quarter?

Friedrich Eichiner

Year-on-year, third quarter will be clearly above the 2009 figure. But it will be significantly lower than the Q2 figure. That's the information we are going to give.

John Buckland - MF Global

So with still some growth year-on-year, presumably the seasonal effects will still mean that the margin shouldn't decline dramatically in the third quarter, should it?

Friedrich Eichiner

Well, there will be other effects, for example, the one-off payment we decided to give to our employees. It's too early to really confirm that.


Next question comes from Philippe Barrier of Société Générale.

Philippe Barrier - Société Générale

I'll just come back to the €100 million adjustment in provision in the second quarter. Assuming that the price of used cars will be stable on the coming quarters, going forward do you think that actually each quarter you should see some adjustment in the level of provision regarding the book value of leased cars?

The second question is regarding the fleet business. One of your subsidiaries, BMW Financial Services, saw some decrease in the revenues on the fleet business. Just can you tell us what is the trend today on the fleet business or corporate cars business in Germany and in the rest of the world?

And the last question is regarding the behavior on the premium car market. This morning, you mentioned that the price in China is much higher due to lower discount applied to new cars. What is the trend in the other markets? Can we have a ranking of a price per continent, I would say Europe (technical difficulty)? What is the effective trend today amongst premium car markets? Do you see some change in the behavior of the main players in this market?

Friedrich Eichiner

Well, I don't have a ranking available. You have access to all the retail pricing we have in all markets. It's easy to get it. And if you look at the different retail prices, I think you can find the truth behind it.

Fleet business, it's upwards trend with positive effect, because we suffered during the crisis from residual value losses on this side of our business as well and it's not going out. So this is developing.

On your question about positive effects in the quarters to come out of the Financial Services portfolio, we basically cannot rule it out. It depends on how much the used car prices will improve in the quarters to come, but you have to see. Actually we have not yet reached the level of used car pricing we had before the crisis. We are still not higher than this.

We have some promise markets like the U.K. where we've got the positive effects. But other markets like Germany and many other European markets who are far below our level of used car pricing we had before the crisis.


Our next question comes from Aleksej from BHF Bank.

Aleksej Wunrau - BHF Bank

Just one brief question on your car financing. The car financing efforts increased by the same absolute amount as Group sales, and this trades into a 100% incremental car financing penetration. So my question is whether there have been any FX effects that would explain that, or is it fair to assume that your topline expansion is and will further be boosted by customer average?

Friedrich Eichiner

There is a strong exchange effect on the inflation. That's the reason. Otherwise, it would be a flat development if we would take the same exchange rates we had the quarter before.


Our next question comes from Jochen from Deutsche Bank.

Jochen Gehrke - Deutsche Bank

The first half is characterized by a first quarter that by historical standards is very low and a second quarter that by historical standards is at the peak. Now, you're saying we shouldn't extrapolate H1. Why is that? Why should we not look at Q2 and just take a touch off, but think that Q3, Q4 by historical standards are still going to come in as very high quarters?

And then the second question, related to your wholesale, you alluded already quite a lot about revenue per unit development. Has there been anything like overproduction over wholesale in Q2? And on that point, what was the fixed cost absorption effect in case there was overproduction in the second quarter that might not reoccur in Q3, Q4?

Friedrich Eichiner

Your question about the revenue per unit overproduction over wholesale, clearly the production figure was much higher than the wholesale figure in the second quarter. And the reason is that we are still building up the pipeline for our overseas business with new cars like the new 5. So there is a significant difference between the two numbers. This has an influence on fixed cost absorption as well.

Now, the question, why should you not project the result of the second quarter to the third, we had the same discussion in the first quarter and ask you not to project this result. We had good reasons to do that. Just to mention, we paid a special bonus in this third quarter already, but that has an effect of close to $100 million.

Then as I said, the retail number would be lower, because there are seasonal effects like a week August we have in the car business over the years. And so we are not expecting the same amount of sales in the third quarter as we had in the second quarter. And there is a mixed effect as well, because we're now shifting more from the emerging markets to the more mature markets in Europe and in U.S. in order to support our sales targets and market share targets there. And this has a temporary effect in Q3 as well.

So those are reasons why I'll say please don't project the result.


Our next question comes from Jose of the Royal Bank of Scotland.

Jose Asumendi - Royal Bank of Scotland

Could you please comment on the sharp inventory increase? What kind of regional mix is there within this inventory buildup and what kind of product mix are you seeing there?

Second one, in relation to the cost savings you're planning until 2012, could you give us an update how you're progressing against plan in 2010, and do you have an idea of what kind of cost savings you want to achieve on material costs, specifically in 2010?

The third one, could you give us the split between the cars being imported into China and locally assembled, and do you think you can actually sustain this very high level in 2011?

Friedrich Eichiner

Well, the inventory increase clearly is in line with our planning to support strong sales for the fourth quarter where we have all the new cars available in the market. So the pipeline for the new 5 Series then will be filled up. And other new cars are coming, like for example, face-lifted MINI's like the 5 Series Touring, like the X3 and the MINI Countryman.

There's a lot of new stuff coming to the market. We have to build up the pipeline in order to have a strong momentum then in the fourth quarter and in the first quarter of 2011. That's the reason that this is exactly in line with our production and retail plans.

Now, the next question was about cost savings. I mean, we expect progress, especially on the material cost side, and we expect that the fixed cost will grow but not at the same pace as revenue and profit. So this is the target, and we are well on track with our results, looking forward to our 2012 promises. And we had last year in fact around €600 million to €700 million, and this year we expecting a bit more than this overall.

That is what we see today.

Jose Asumendi - Royal Bank of Scotland

And on China, please?

Friedrich Eichiner

So locally produced cars in China, I mean our plan is to even decrease the number of locally produced cars. That's the reason behind our decision to increase capacity there and to build up a new Greenfield plant. I mean, you have to keep the balance in China. If you are not a local player, you will not be allowed to import cars. So we have to look at this balance.

And as I said, it is advantage for us on both sides. The more locally produced, the more we are able to import.

Jose Asumendi - Royal Bank of Scotland

Yes, but a lot of EBIT contribution comes from the vehicles that you're actually managing to import, no?

Friedrich Eichiner

It's coming from both, because as I said there are many components that we are supplying to China for this production, and that is something that helps us, and of course we have a good mix in the imported cars.

Maximilian Schoeberl

Our next question comes from Ludovic Fava, Natixis.

Ludovic Fava - Natixis

Just a quick question regarding the free cash flow. In March, at the beginning of the year, you said that the adjusted free cash flow should be in 2010 at the same level than in 2009; that is to say, around €1.5 billion. Could you please update the target with your refreshed guidance in terms of earnings?

Friedrich Eichiner

We are expecting free cash flow this year, end of the year, around €2 billion. That's the target.

Maximilian Schoeberl

Our next question comes from Kristina Church of Barclays Capital.

Kristina Church - Barclays Capital

Apologies if I ask something that's been asked already. My first question relates to efficiency savings, and a follow-on from Jose's question. I know you've now talked about 2010 efficiency savings, but I was just wondering what your thinking is at the moment for further savings into '11 and 2012. Are you still thinking about savings being very back-end loaded for modularity, or are you seeing a lot more coming through and expecting more in 2011?

And then I've got a couple of questions. I know everyone's focusing on China, but I just wanted to ask a little bit about Germany, and if you could explain a little bit about the 9% decline in unit sales in Germany. Was that in any way scrappage related, or was there a boost last year in Germany in the same period? And then also, your forecast for the U.S. market, do you expect luxury car sales to grow faster than the overall market in the U.S.? And what are you expecting from the U.S. market?

Friedrich Eichiner

You're asking about efficiency savings on the way forward. I already explained our position on fixed costs; now talking about the variable cost, especially the cost for the material, we are expecting a further improvement with every and each new model to be launched.

So especially next year, with the new 1 Series to come and later on the whole fleet of 3 Series cars, you know we have a better cost position compared to the predecessor. And this will support our efficiency gains on the way forward to our 2010 target.

Maximilian Schoeberl

Mr. Reithofer, you have the chance to work now and give us the answer of the second question.

Norbert Reithofer

Let me start with the United States of America. In 2010, in my opinion, as we all know, we will have approximately 10% increase in the total market from 2009 levels to approximately 11.8 million cars. But still, well below the average volume before the financial crisis. And in my opinion, the premium car segment will increase faster than the mass market in the United States. And Germany, in the year 2009 as we all know, we had the scrappage bonus and because of the scrappage bonus, we have a total market decrease of approximately 25% to approximately 2.8 million units in the year 2010 in Germany.

And if I see a premium, the premium segment will be around 860,000 units. And if I see BMW during the first six months of the year, BMW sold more than 120,000 vehicles in Germany in the first half of 2010 and therefore about 1,300 more units than the previous year. That is our situation. This represents an increase of 1.1%. That is the situation in Germany and in the United States of America.


Our last question comes from John Lawson of Citi.

John Lawson - Citi

Mr. Eichiner, if we move away from this €100 million gain in Financial Services in the second quarter, it does look as though you still achieved something like a 24% return on equity in that business. And I know that you mentioned much cheaper short term and long term funding as one of the reasons for that. But it does seem that those rich contracts could only be quite a small part of the portfolio at this point. And given that you're also looking at risk falling over the next half-year, doesn't this imply that you're actually going to see a period of very substantially above 18% return on equity results in Financial Services for a while?

That's the first question. And secondly, I'd just like to add my piece on China. It does sound as though you're deliberately starving the market, or at least prioritizing U.S. and Europe in the second half, if you're going to remain below 12% of units in China. This is what you're implying, I suppose. And perhaps you could just tell us, is there an inflection point on these joint venture profits coming any time soon? I see your report says that JV profits actually fell in the second quarter.

Friedrich Eichiner

I mean, you're absolutely right that we have actually very strong Financial Services business. Risks seem to be under control so far. So we don't have to provision any further. So that is extraordinary provisioning is not necessary. And credit default are declining. So that is also a very good sign. On the way forward, we have to see two effects. First of all, we are absolutely low interest rates. And this is seasonal in fact and nothing we cannot really project this in fact to the future of the coming years.

That's the first thing I want to say. On the other hand, if you look at equity, as we already announced, we will increase equity as well, because we are on the way to build up our European bank and this will absorb some equity at the same point in time coming from regulatory requirements. So that's the reason why I think there are some adjustments to be made. But after all, for this period of next one to two years, we should see a very strong financial services result and a high level of profitability, possibly better than 18%. That is definitely possible.

Now, China profit, the drop in the BBA results is due to an intra-group profit elimination as a part of reorganization matter in China. And this effect impacts the quarter one result already. So that is the reason behind the joint venture profit. Chinese sales will benefit from the launch of the 5 Series long wheel base now. I think that is a great car; expectation is high. So we see the car in a very favorable position compared to the competition in China. And we are awaiting a strong market performance for this car. And this will of course generate profits in the joint venture.

Maximilian Schoeberl

Thank you very much, Mr. Eichiner. Thank you very much Mr. Reithofer. Ladies and gentlemen, thank you for joining in our call today and for your questions. On behalf of the BMW Group team, I wish you all a very pleasant afternoon. Thank you very much and bye, bye.

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