During a recent earnings call, BMW (ETR:BMWG)'s CEO Oliver Zipse and CFO Walter Mertl provided insights into the company's performance and strategies in the face of regulatory challenges and market dynamics. The executives addressed questions on topics ranging from pricing and import tariffs to investments and CO2 legislation.
BMW's focus on complying with CO2 regulations while remaining competitive was highlighted, with Zipse emphasizing the need for a gradual policy evolution. Mertl discussed BMW's pricing trends and the positive net price effects in China, despite increased competition.
The company's commitment to technology openness, particularly in PHEVs, was reaffirmed by Zipse, who noted the stable sales and customer satisfaction with the current range offerings, such as the X5 PHEV. Mertl also provided an optimistic outlook for BMW Financial Services and the company's aim to maintain an EBIT margin above 8% throughout the year.
Key Takeaways
- BMW CEO Oliver Zipse emphasized the importance of competitive products for CO2 compliance and the necessity of gradual evolution in CO2 reduction policies.
- CFO Walter Mertl highlighted positive net price effects in China and the contribution of the localized X5 model to BMW's BEV sales growth in the region.
- BMW aims to keep an EBIT margin above 8% and expects the impact on price mix and volume to be slightly positive.
- The company remains committed to technology openness, with PHEV sales, particularly the X5, remaining stable.
- Manufacturing costs are projected to decrease, while remarketing profits may decline but not as steeply as in Q1.
Company Outlook
- BMW is focused on developing products that comply with CO2 regulations and appeal to customers.
- The company aims for consistent automotive EBIT margins between 8% to 10% in the quarter.
Bearish Highlights
- There are challenges in the Chinese market, including increased competition and pricing pressure.
- Remarketing profits are expected to decline, although not as significantly as in the previous quarter.
Bullish Highlights
- BMW's net price effects in China remain positive, with BMW Financial Services showing growth.
- Sales of BMW's PHEVs, such as the X5, are stable and sell out consistently.
Misses
- No specific misses were highlighted during the call.
Q&A Highlights
- Zipse opposed import tariffs from China, citing mutual dependency and the need for resources for Europe's green deal.
- Mertl discussed investments in Shenyang and the in-sourcing of high-voltage battery components.
- The range of BMW's PHEVs is based on cost-effectiveness, with current offerings meeting customer willingness to pay.
BMW (BMW) remains committed to its strategic approach to regulations, market conditions, and customer satisfaction, as reflected in the discussions during the earnings call. The company's leadership expressed confidence in maintaining positive pricing trends and achieving its financial targets while navigating the complexities of the global automotive industry.
InvestingPro Insights
In light of BMW's recent earnings call, several metrics and tips from InvestingPro shed additional light on the company's financial health and strategic positioning in the industry. BMW (ticker: BMWYY (OTC:BMWYY)) is currently trading at a low earnings multiple, with a P/E ratio of 6.08 and an adjusted P/E ratio for the last twelve months as of Q1 2024 at 5.62. This indicates that the company's stock might be undervalued compared to its earnings, which could be an attractive point for investors seeking value stocks.
Moreover, BMWYY pays a significant dividend to shareholders, boasting a dividend yield of 4.25% as of May 2023. This commitment to returning value to investors is further evidenced by the company's track record of maintaining dividend payments for 33 consecutive years. Such a stable dividend history is often a sign of a company's financial stability and a reliable income stream for investors.
In terms of revenue, BMW has experienced growth, with a 4.68% increase in revenue over the last twelve months as of Q1 2024. This growth, coupled with the company's aim to maintain an EBIT margin above 8%, reflects a positive outlook for BMW's financial performance.
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BMW's emphasis on technology openness, particularly in PHEVs, aligns with the company's stable sales and customer satisfaction highlighted during the earnings call. The InvestingPro Tip pointing out BMW as a prominent player in the Automobiles industry reinforces the company's strategic position and its potential to capitalize on market opportunities.
As BMW navigates the complexities of CO2 regulations and competitive market dynamics, these financial metrics and insights provide investors with a clearer picture of the company's performance and potential.
Full transcript - Bayerische Motoren Werke AG PK (BMWYY) Q1 2024:
Unidentified Company Representative: Our CEO, Oliver Zipse; and our CFO, Walter Mertl, are also back in the room with me. The line will be open shortly for your questions. The operator will first give you some technical instructions. Please go ahead.
Operator: Ladies and gentlemen, we will now begin our Q&A session. [Operator Instructions] Our first question comes from Tim Rokossa at Deutsche Bank (ETR:DBKGn). Please unmute your line.
Tim Rokossa: Yeah. Thank you very much. It's Tim from Deutsche Bank. I'd have two questions, please. The first one is, I think the key element to discuss today is the pricing element of your EBIT bridge. All of your competitors have already reported. We've seen reporting season with very peer clear trends. Volume was generally weak. Pricing was generally very strong for your competitors. For you, that's not the case. Less volume issues clearly speak for your superior supply chain and model cycle management. We love that about you guys. That's great, but the pricing raises a few question marks. So two questions on that. Is all of the negative pricing that we've seen in the bridge in Q1 BEVs? Or do you also see this for ICE? And secondly, will pricing stay as negative, get worse or better over the remainder of the year? And as an add-on question, Oliver, you are always very outspoken in your opinions. All German OEMs are against an import tariff from China. You said it as well again this morning. Why is this probably still coming nonetheless? Does Ursula von der Leyen just like to listen to look at the mirror too much? Or are there key points when you talk to EU politicians that express where that would be the case?
Unidentified Company Representative: We start with Walter and then Oliver. Walter, please?
Walter Mertl: Hello, Tim. Thanks for the first question with respect to pricing. As I mentioned, Q1 is already an exceptional quarter in 2023. And we do know that the softening side on global pricing was happening in Q2, Q3 last year, moving into the Q1 2024. So we are running on the same level. If you have a look for our average revenue, you see that we are constantly maintaining roughly €50,000 a car plus/minus FX. So I think we are quite proud about that we are so disciplined, not just in Europe but also in the US or in China because we can elevate these ones. And of course, we have more BEVs. And of course, we have fantastically good upper segment growth, with more than 20%, which are really helping. So that means, with respect to your question on the EBIT bars, with the €300 million, yeah, that is a softening effect on pricing between Q1 and the later quarters. You won't see this effect in this level anymore if you would compare Q2 with Q2 or Q3 with Q3. That's leveraged then already. And with respect to pricing, it is also an effect, as we all do know how much stock we have on site on dealers. And just having a look on the dealers in the US the average base outstanding in the industry increased by 13 days. So this time in point of year was 35. Now the average industry is 48. We, that's the BMW Group, we also increased from 21 to 28 days, but just 28 days, and only 7 days worse than we've been last year. We are leveraging our FX. Operationally, in my eyes, it's quite good, and that also has an impact straight away on our pricing levels in the field. So I think we're doing an excellent job.
Unidentified Company Representative: Thank you very much, Walter. The second part was the discussion of the political discussion about the tariffs between Europe and China. Oliver, please?
Oliver Zipse: Tim, good morning. Why do you raise import taxes? The only purpose is to protect an industry. We don't think that our industry needs protection. First of all, because we are global market players. Unlike many other countries, we have many players not only BMW who act on a global base and that is an industrial advantage. And you can easily endanger that advantage by introducing import tariffs. That's the first point. The second point is we are currently a strong player in China and also as an export location to Europe. This is quite a different situation for other countries. So that's the current thing. The third point is and maybe that is the most fundamental point, we have bilateral dependencies not on the final product, but on the component side and also on the raw material side. Let's just look at the year 2025. In the year 2025 and that is what we are preparing for and that is mostly forgotten we have the first introduction of the next step of CO2 reduction for European new car fleet by minus 15%. And that is only possible if you increase your level of battery-electric vehicles emission-free vehicles. And most -- there is no single car in the European Union without having components from China in there and if it's only the raw material in the battery. So there is a mutual dependency and I would not risk that dependency just by introducing an import tax on the final product. So we should always have this dependency in mind. In China you cannot compare China with other countries. And that to compare China is like other countries, this is not true. It's quite a single entity and has to be dealt with differently. And there is no green deal in Europe without resources from China. It's impossible. And I'm -- you said I'm outspoken. I say this because afterwards politician will say if I would have known. That's why I say this they know now. And I strictly warn for import tariffs for Chinese products specifically because they're just starting. They're not even here yet. Their market share is very small to this very point. And the rest is about competitiveness and BMW is competitive. Thank you.
Unidentified Company Representative: Thank you very much Tim. Next question please.
Operator: The next question is from José Asumendi of JPMorgan (NYSE:JPM). Please unmute your line.
José Asumendi: Hi. José from JPMorgan. A few questions please. First for Walter, if you can please remind us, you announced recently some investments in Shenyang. Can you elaborate a little bit where the money is going to? Is it capacity expansion? Is it battery? Or -- and which vehicles have been currently being electrified in Shenyang? Also if you could discuss a bit how do you see the share of electric cars in China in 2024 for BMW. Obviously, you are delivering a much higher share of BEV versus your competitors which continues to support that growth on a year-on-year basis. Where do you see it sort of towards the end of 2024? And then for Oliver, I would very much like please to hear your views on -- your competitor seem to be in-sourcing further components within production and assembly of the vehicle. Some examples are gigacasting and also from bumpers across the production line. Do you see any opportunities for BMW to in-source components to be able to reduce further the cost of the car? Thank you.
Unidentified Company Representative: Okay. Thank you very much, José. I think we start with your first part of the questions about investments in Shenyang with Oliver, because he was in Shenyang two weeks ago. Oliver, please?
Oliver Zipse: Yes. Thank you for your questions. I was -- two weeks ago I was in Shenyang and we announced a larger investment into the factory infrastructure in -- up in Shenyang and that is specifically dedicated in the refurbishment of the oldest factory up in Dadong. So we will take that factory there, because it also has production licenses. So China is a country where you need a production license to produce cars. And our mid- to long-term ambition is to keep our market share there, which by the way is substantially higher than the rest of the world. The rest of the world we have about 2.93% for BMW. We already have 3.7% in China. And since the industry in China is growing, we need additional capacity for the future specifically we -- because we currently increase our market share on the BEV side. I repeat that in the first quarter our BEV sales in China grew by 18%. The average market grew only by 15%. So our ambition is there to keep or even increase the market share. And that's why we need these production licenses in that Dadong plant which needs refurbishment. So that's the breakdown of that investment. So, very much in line by the way with our long-term strategy out there. Your question about in-sourcing, let's have a look at what we do in-house on the high-voltage battery side. The high-voltage battery, so that's the element where we make out of single battery cells, which is an external component developed with us but it's delivered from external sources where we make high-voltage battery which is then assembled into the car. This is 100% in-house activity. We're currently building up five factories for these high-voltage batteries one also in Germany, one in Hungary, one in China, one in the United States and one in Mexico. So that's a complete in-house sourcing activity. On the more traditional components like bumpers, we currently see a stable sourcing environment there. We're always looking very closely, are there any changes in our supplier landscape but that is a very -- not robust but there is a lot of multi-sourcing underway that we would always have other options to do. There is no major in-sourcing besides on that -- on the B side. Thank you.
Unidentified Company Representative: Thank you very much, José. Next question, please?
Operator: The next question is from George Galliers at Goldman Sachs (NYSE:GS). Please unmute your line.
George Galliers: Good morning and thanks for taking my question. Oliver, I really had two questions for you, which come back to the comments you made at the full year results and a lot of the conversation this morning around EU fleet CO2 legislation. I mean, firstly, I would probably say thank you to BMW for openly raising this topic. And I think you can raise it because you're in a position of strength with respect to CO2 compliance. However, investors have been asking whether it is now too late to make changes and does changing the legislation not potentially lead to greater uncertainty for both OEMs and the consumer. And therefore, put at risk the fact that there could be incremental challenges for the industry with the transition, and also lower returns on the investments you've already made in your battery electric vehicles versus what might have previously planned. So I don't know what your thoughts are on this. Is it a case that we do need to change it and that changing it can lead to better economics for yourselves and your peers going forward? Or do you actually think change could create risk? And then related to this, what actually do you believe can be changed at this point? Obviously, 2025 is now very close. Is the change you referenced more for the 2026 and onwards time frame? Thank you.
Unidentified Company Representative: Thank you very much, George. Oliver?
Oliver Zipse: Yes. Thank you for that question. I think I tried to circumscribe the framework we are working with. There is a three-step approach. 2025 is the first step with minus 15% on the CO2 fleet. Then in 2030 comes the next step with minus 55%. I think these two will be inevitable, and that has been for the last eight years already. So that's not a new regulation. And all our strategy goes towards having products, which are -- have such a high attraction that they are, at the same time, compliant with the regulation. So what we cannot do to create products, which create a non-compliant situation, but the other thing is also wrong to say the regulation is correct, but you don't have products to comply with. So they go hand in hand, and that's all what this game is about. And that is why we strictly are against taking the competitive element out of this game to say, well, to provide you planning security, we make that regulation. You completely forget customers and products and that is counterproductive to any form of CO2 reduction. You can only do that with markets and not against the markets because in our industry customers always have a choice. They can always keep their old product. That's unlike in the energy industry. They don't have a choice. Our customers always have a choice. They just don't buy new cars. They just keep their old product to the detriment of CO2 reduction, because that's a standstill in further development. And I think that is very important to understand, and BMW does not need planning security, because we told all along that technology openness is the key to profitability and at the same time to be compliant with regulations. Open markets and technology openness is the key to everything. And I cannot comment on what others do, but if you don't follow that principle, you will have a very dire future. I'm absolutely sure about this. You will have -- you might be compliant but you will have a very dire future. And that's why I say, it's never too late to talk about regulations which only come into effect in 2035. You cannot talk about regulation which comes into effect in 2025. We -- and that's not our point. But I think there are better regulations which keep the competitiveness of the European industry and at the same time, do a better service to the environment. There is a solution which I explained earlier, to have first of all, a gradual evolution of CO2 reduction policies; and the second is, to have a similar regime for the Fuel industry at the same time. And I think there is a better solution. And it's never too late to speak up. Thank you.
Nicolas Peter: Thank you, George. Next question, please?
Operator: The next question is from Patrick Hummel at UBS. Please unmute your line.
Patrick Hummel: Yeah. Good morning and thanks for taking my question. Oliver maybe the first one to you regarding the situation in China, if I look at the Q1 bridge and especially in light of the strong performance of the high-end products, I have to assume that the BEVs are very mix dilutive and just looking at pricing in China which keeps getting tougher and tougher for everybody that seems to be the very dilutive part in your bridge. And I'm just wondering, what's your strategy there? Do you want to defend your market share at any price? Because you highlight that you could keep participating in market growth or even grow faster than market but it feels like you're doing that at a significant margin dilution. If you can comment on that please? And the second question relates more to the coming quarters and maybe that's one for Walter. You highlight that this year the quarters will be more evenly distributed in terms of the auto EBIT margin. Nonetheless, from prior years we know that Q4 has the highest skew in terms of cost. So can you just talk about the key building blocks and how you see them moving forward from the first quarter that make you so confident that we won't see a deteriorating margin trend in the coming quarters? Thank you.
Oliver Zipse: Thank you, Patrick. Thank you very much. Both parts of your question will be answered by Walter. Walter, please?
Walter Mertl: Hello, Patrick. Well, with respect to China eventually we -- I have to reiterate two things. Number one, 2023 was not just exceptional for non-China, but also for China with respect to manufacturing costs in principle. But we also have in the quarter one, the 5 Series ramp down in China that happened in non-China already in Q4, but in China in Q1. And the ramp-up of the 5 Series just happens more or less after Chinese New Year. So -- and we're just there in the ramp-up phase. With respect to that, we see still our net price effects positive, because ultimately it all belongs to attractive products. And if we have a look for the BEV market in China, as we discussed last time in New York I think, we have to understand that 90% of the BEV sold in China is under RMB 300,000 which we have touched on from RMB 300,000 and we said yes, that is eventually an effect on the 3 Series on the X3 if not above. So -- and even if we have a look for the next -- between RMB300,000 and RMB400,000, that's further 5%, right? So, again, reiterating also what Oliver mentioned beforehand, we grew on our BEV sales in China by 18%, whilst the total market even with all these lower segments, grew by 15%. And not to forget our localized X5 is also contributing in China for China. So, we are producing it in China. We all have these positive local effects already in not just in now, but also since we build it and produce it. And the prices are really stable on the X5. You can check that out. So, with all that, we are moving even in China ahead. So, in Q1, of course, you see a total sales down by 4%, but that is mainly because of the 5 Series ramp-down and ramp-up. So, I'm not worried about that. And with respect to the quarterly developments of our EBIT margins, yes, in principle, Q1 is always a strong one. But if you have a look for 2022, you can see that we manage it always over 8% and within our strategic corridor. And that is what we guided and that is what we execute. So, we deliver as we promised as I say. Many thanks.
Unidentified Company Representative: Thank you very much Patrick. Next question please?
Operator: The next question is from Daniel Schwarz at Stifel.
Daniel Schwarz: Yes. Thank you for taking my question. I have one question on the Financial Services. Could you say what's driving the increase in penetration in first quarter? I think you mentioned competitive pressure in the past. Is that easing somewhat? Or are you pushing the business a bit more? And with the higher leasing penetration, why did the Elimination line not become more negative? And what's your expectation for the next few quarters? I had just one follow-up question on pricing again. I understand the high base from Q1 last year, the negative effect as you said that's easing in coming quarters. But does it include expectation of improving pricing sequentially from Q1 to Q2 to Q4 this year? Thank you.
Unidentified Company Representative: Okay. Thank you very much Daniel. Walter your turn.
Walter Mertl: Now, to you Financial Services is really turning around. Last year you remember that Q1 and Q2, we shrank compared with the year 2022 and since Q3, we are elevating Q3 2023. And we still do. So that means we had 422,000 new contracts, a growth by 21.5% and that is not just new car business, but also used car business for lease as well as finance. And both new as well as used grew by between 20% and 22%. And with that, we organized good margins for the future with it and the total new contract volume was on a level of €15.6 billion. Mainly Europe and the U.S., but even China grew compared with previous year Q1 in the Financial Services business. So, that is quite positive. On the Elimination, of course, with new business, we have in the Eliminations negative effects. But this is not the only one hitting the elimination segment. We also have to convert, more or less, all the interest subsidies we helped, especially in the US, with the IRA topics. And that, of course, if you help an automobile, you have the positive effect in the consolidation. So I really also assume that interest rate over the course of the year, especially in the second half year, will slightly be reduced. And then, of course, the support can be reduced too. And then the math is ending up in the way you expected. And I think I have to reiterate also our pricing level with respect to the essentials. We mentioned in our guidance that we are leveling it on the same average like previous year, which is roughly €52,000 in average, plus minus FX. And that's the level we presented in Q1. And that will be more or less the same level in Q2. So we assume rather keeping the average of previous year's level rather than having ups and downs over the course of this year.
Unidentified Company Representative: Thank you very much, Walter. And thank you very much, Daniel, for your question. I think we have two more questions. Yes.
Operator: The next question is from Horst Schneider at Bank of America (NYSE:BAC). Please unmute your line.
Horst Schneider: Yes, good morning. I hope you can hear me. I have got two questions left, please. The number one that I have is, I mean, first of all, big compliment to US BMW on production and process. I think you're the only German carmaker not affected by supply shortages. And while that is a compliment and positive, of course, I have got in mind that when the other carmakers basically get rid of their shortages, for example, if Audi can sell again six and eight-cylinder engine vehicles, Mercedes gets rid of the 48-volt shortage, do you envisage the situation basically that there could be some supply pressure in the market, that you get an imbalance of supply and demand? Or how do you think about it that all your competitors talk about it to ramp up volumes to a stronger extent and they get rid of their shortages? That's number one. The number two question that I have is a more structural one for Oliver. It's a question that I ask myself constantly and also ask myself when I was visiting the Beijing Auto Show. We see there are a lot of PHEVs with a range of 200, 250 kilometers, Lee Auto with a special concept in its extended range concept. Why are the German carmakers not doing that respectively? Why is BMW not doing that, just extending the PHEV range? Because my view is on BEVs it's difficult really to, I don't know, to stand out. And on PHEVs with a combustion engine still in, I think it would be a much better offer or not for the German carmakers and BMW. Thank you.
Unidentified Company Representative: Okay, thank you very much, Horst. Oliver?
Oliver Zipse: I don't know what to respond to your first question. We will keep our supply chains intact and we live for the last 100 years in a competitive environment. I cannot give you an answer to that. I don't know what to answer to that. We will keep our supply chains intact. And as we said before, we have a growth ambition for this year. And you see in the first quarter that the strategy works in there. And if we can gain market share with supply chain interruptions at the competitor side we will continue our path. The second one is BMW Group is committed to technology openness. And that of course includes PHEVs. And I think the range of PHEVs this is a very individual discussion. What is right – this is a matter of cost-effectiveness. There is a balance between when do you step into a BEV with a much larger battery. I think there is a limit to the range where it makes sense to offer PHEVs. And our PHEVs which is currently around 100-kilometer speed I think are at the perfect point where the customer says "This is what I would like to pay for." Never forget that the larger the ranges the larger the battery gets. And to have a very large battery plus a combustion engine in there, there is a limit to the financial logic in there. But on the PHEV side we have that offering. They are by the way very stable over the past year. They always linger about 20,0000 units. And especially in the X5 the X5 PHEV is always sold out. So we are quite happy with our offering in that segment. Thank you.
Unidentified Company Representative: Thank you very much Horst. Last question please?
Operator: The last question is from Henning Cosman at Barclays (LON:BARC) Capital. Please open your line by pressing star six and ask your question.
Henning Cosman: Hey, guys. Thank you very much for taking my question as well. I appreciate the comments on pricing. I think we've understood most of the building blocks volume getting a little bit better in the course of the year. Sequentially mix also FX commodity staying positive. So I wanted to perhaps ask you on the other cost changes sequentially. So compared to Q1 2024 do manufacturing cost and remarketing gains? Does that get less negative in the course of the year? And does that help in terms of sequential margin development perhaps into the upper half of the full year range? And then if I can just ask you point blank if you would be prepared at this point to indicate if you hope to be at the upper half or if you think you could be in the lower half of the full year automotive EBIT margin range.
Unidentified Company Representative: Good. Thank you very much. Walter please?
Walter Mertl: Hello, Henning, so of course on the manufacturing cost side if we compare quarter-by-quarter even versus 2023 quarter one, there was the big one-off already in Q1 versus Q2 within 2023. So the runover, the beneficial of the lower cost manufacturing cost from 2022 rather was all in Q1. And since Q2 '23 we are rather running on this inflated manufacturing costs. So that means in comparison, if we compare Q2, this year versus Q2 next year the manufacturing cost will be more or less gone. But with respect to remarketing profits that is still coming down. Now it's just a question we recognized in 2023 already a deterioration of the profits quarter-on-quarter, as we mentioned. And this is going alongside. So with respect to the difference between Q2 and Q2 previous year, it's just a question, how fast it could deteriorate this year. So we have our understanding and expectations, but I would assume that this hit shouldn't be that big anymore as it was already in Q1, because we definitely had an extra supply of new car vehicles from Q2 last year onwards with all these effects which lasted already in the course of last year, Q2, Q3, Q4, still moving on. So from that perspective I think that is the leverage. And with respect to the total impact on price mix and volume, we mentioned that this should be slightly positive. Never forget that the five Series ramp-up is just there. Even in China as I mentioned just since mid-February moving on. And our GKL, our upper segment class also compared with the first half year last year is leveling up. So all that in combination makes me positive that we are in the quarter always between this range of 8 to 10, rather consistently and constantly than we had last year, because Q1 '23 was exceptional. Many thanks.
Unidentified Company Representative: Many thanks. Ladies and gentlemen, we have reached the end of the telephone conference. Thank you for joining us. All the best to you. Bye-bye and [indiscernible] from Munich.
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