DBRS Assigns “A” Rating to BMW, Trend Stable

DBRS has today assigned an Issuer Rating of “A” with a Stable trend to BMW AG (BMW or the Company), as well as a rating of “A” to the Senior Unsecured Debt of subsidiary BMW Canada Inc. (based on the guarantee of BMW AG). The ratings reflect the Company’s solid business risk profile as the globally leading original equipment manufacturer (OEM) of premium automotive vehicles.

In addition to affording typically higher margins, the premium vehicle segment is generally more resistant to economic downturns, as prospective purchasers of premium vehicles are generally affluent consumers that can afford their model of choice regardless of prevailing economic conditions. Moreover, DBRS notes that BMW’s country mix in terms of sales is also favourable, with the Company exporting more than half of its total volumes outside its native Europe. Therefore, while mass-market European OEMs are currently burdened by significant overcapacity which has been exacerbated by the continent’s sovereign debt crisis, BMW’s production network continues to operate at full capacity. Further supporting the ratings is BMW’s very strong financial risk profile, as credit metrics are well commensurate with (and in some cases exceed) the assigned ratings, with the industrial operations enjoying a sizeable net cash position.

BMW has been continuously implementing and deriving positive results from its Strategy Number ONE (unveiled in 2007), which focuses on core areas including, among other items, growth, profitability and access to technology and customers. Five years into Strategy Number ONE, BMW has successfully attained all of its interim targets, achieving sizeable growth in revenues and profits while also making ongoing progress with respect to the fuel efficiency and CO2 emissions of its vehicle fleet.

Accordingly, the Company’s 2012 performance was very solid, with BMW achieving record revenues and earnings for the second consecutive year. Volumes of each of the BMW Group brands – BMW, MINI and Rolls-Royce – were higher year-over-year, with total auto sales increasing by 10.6% vis-à-vis 2011 to 1.85 million units. In geographic terms, while sales in Europe achieved only nominal growth (less than 1%), this was bolstered by material gains in the Americas and Asia, notably China, where volumes increased by a dramatic 40% relative to 2011. In line with the above, BMW’s dependence on its native European market has lessened appreciably in recent years; Europe accounted for 47% of the Company’s total automotive sales in 2012 versus 60% in 2008. Similarly, the Company has also made progress in recent years in terms of product diversification, with BMW’s core 3 Series accounting for 22% of total unit sales in 2012, relative to 33% in 2008. Volume in the 5 Series and BMW’s X family of vehicles grew significantly during that timeframe. DBRS notes that BMW’s motorcycle segment has also been progressively increasing its unit sales to record levels, although the scale of this business is nominal relative to that of the automotive segment, which substantially dominates the Company’s industrial operations.

The Company’s 2012 automotive segment operating margin was strong, at 10.9% (as reported by BMW), which ranks very favourably across the industry and in fact exceeds the Company’s target range of 8% to 10%. Contributing factors to BMW’s strong earnings included, among other items, ongoing gains in volumes / product mix as well as considerable tailwinds with respect to raw material costs and foreign exchange developments (primarily related to the weakening of the euro). While BMW’s production continues to be mainly based in Germany, where the cost of labour is typically high (although DBRS acknowledges that in recent years German labour costs have become quite competitive within Western Europe), this has been effectively offset by the plants running at full capacity, as well as by the Company’s considerable flexibility in utilizing labour relative to demand. BMW’s production network is also expanding, essentially following projected vehicle demand, with capacity increases slated for markets such as China and the United States. The Company is progressively implementing its modular strategy with respect to powertrains and models, thereby significantly reducing product development cycles, which will serve to expand its future product portfolio and increase scale efficiencies, while also effectively boosting assembly plant flexibility.

Regarding its powertrain strategy, the Company is adopting a three-pronged approach consisting of the internal combustion engine, hybrids and electric vehicles; (the latter, in addition to the Company’s capacity expansions, serving to significantly increase BMW’s capital expenditures in the immediately forthcoming years). The BMW i3 is targeted for launch later this year and is the first of several planned urban vehicle models that are to be electrically powered and feature carbon-fibre-reinforced plastic components.

DBRS notes that BMW has historically adopted a conservative financial policy, with the balance sheet of the industrial operations being moderately levered over the past several years, along with very strong income- and cash flow-based coverage measures. While the Company’s capital expenditures have been progressively rising in recent years, such investments, in addition to increasing dividends, have been more than offset by the Company’s strong earnings and cash generation.

The Stable trend reflects DBRS’s opinion that BMW’s robust financial performance will likely persist going forward, in line with industry conditions that should remain somewhat favourable. While the automotive environment in Europe is challenging, and visibility concerning an eventual recovery is very limited, this is likely to be more than offset by strong vehicle sales in the United States, where the recovery of the automotive industry is ongoing. China should also provide an offset, although growth there will likely moderate somewhat vis-à-vis the exceptionally strong growth rate achieved in 2012. Accordingly, while capital expenditures are expected to peak in the 2013-2014 timeframe to support the development of the BMW i electric vehicle family (as well as other model introductions and capacity increases), DBRS expects these outlays to be internally funded, with the Company remaining significantly positive in terms of net free cash flow (i.e., after working capital items).

Over the medium to long term, headwinds do exist, particularly with respect to the ongoing tightening of emissions standards. This could increase development costs while also lowering product mix, thereby potentially adversely affecting the Company on both the revenue side and the cost side. Nevertheless, BMW remains very well positioned to benefit from the ongoing growth of the automotive industry, particularly in light of its increasing presence in emerging markets, where the rate of growth, particularly with respect to the premium vehicle segment, is expected to materially exceed that of the overall industry.

Notes:
The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The rating of BMW Canada Inc. is based on a guarantee from BMW AG.

The applicable methodology is Rating Companies in the Automotive Industry, which can be found on our website under Methodologies.