DBRS Confirms BMW at “A,” Trend Remains Stable

DBRS has today confirmed the Issuer Rating of BMW AG (BMW or the Company) and the Senior Unsecured Debt rating of its subsidiary BMW Canada Inc. (based on the guarantee of the parent) at “A.” The confirmation reflects the Company’s solid business risk profile as the globally leading original equipment manufacturer (OEM) of premium automotive vehicles. DBRS notes that BMW’s financial risk profile is very solid also as credit metrics are well commensurate with (and in some cases exceed) the assigned ratings. The trend on the ratings is Stable as DBRS expects the Company’s earnings performance to remain solid over the near to medium term amid global automotive industry conditions that in aggregate are expected to remain rather favourable, (notwithstanding some ongoing headwinds in certain markets).

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 who can afford their model of choice regardless of prevailing economic conditions. Moreover, DBRS notes that in terms of sales, BMW’s country mix is also favourable, with the Company exporting more than half of its total volumes outside its native Europe, which has allowed BMW to remain relatively unaffected by the continent’s protracted automotive downturn. DBRS also 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.

BMW has been continuously implementing and deriving positive results from its Strategy Number ONE (unveiled in 2007), which focuses on core areas, including, among others, growth, profitability and access to technology and customers. The Company’s 2013 performance was very solid, with BMW continuing to achieve record sales volumes, although revenues were slightly lower year over year as a function of adverse foreign exchange developments. Similarly, while profit of the Automotive segment was moderately weaker, (primarily reflecting cost increases, including higher research and development expenses in support of BMW’s technology offensive, as well as aforementioned foreign exchange headwinds), the segment’s EBIT margin was 9.4%, well within the Company’s target range of 8% to 10%, while ranking very favourably within the automotive industry.
Volumes of each of the BMW brands -- BMW, MINI and Rolls-Royce Motor Cars -- were higher year over year, with total auto sales increasing by 6.4% vis-à-vis 2012 to 1.96 million units. In geographic terms, while sales in Europe contracted nominally (i.e., by less than 1%), the contraction was more than offset by material gains in the Americas and Asia; China, which had already emerged as the Company’s single-largest market in 2012, continued to represent BMW’s highest source of sales growth at 20% year over year and as such remained very strong (notwithstanding that this growth rate was materially short of the exorbitant growth rate of 40% achieved the prior year).

In line with the above, BMW’s dependence on its native European market has lessened appreciably in recent years, with the Company’s global sales being well diversified; Europe accounted for 44% of the Company’s total automotive sales in 2013 (versus 60% in 2008), with such sales being effectively offset (on a combined basis) by the Americas and China, which represented 24% and 20% of 2013 sales, respectively. Also in line with the above, BMW is progressively changing its global manufacturing footprint. While Germany still represents the largest source of production (through its four production plants) by a considerable margin, the Company is undertaking significant investments to increase production capacity in the United States and China (in line with the increasing sales prominence of these markets), while also having begun construction on a new assembly plant in Brazil.

Similarly, the Company has also made progress in recent years in terms of product diversification, with BMW’s core 3 Series accounting for 25% of total unit sales in 2013, relative to 33% in 2008. Volume in the BMW 5 Series and BMW’s X family of vehicles grew significantly during that timeframe. Additionally, increasing application of its modular strategy and associated growing parts commonality are enabling BMW to shorten development cycles and further diversify its product portfolio. Regarding its powertrain strategy, the Company is adopting a three-pronged approach consisting of the internal combustion engine, hybrids and electric vehicles. The BMW i3, the Company’s first electrically powered vehicle, was launched in November 2013, with the forthcoming BMW i8 expected to be available later this year.

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 and having a substantial net cash position, along with very strong income- and cash flow-based coverage measures. While the Company’s capex has persisted at elevated levels 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 industry in Europe is likely to resume nominal growth this year after a protracted downturn, the continent’s market conditions remain challenging. However, the Company expects to benefit from ongoing increases in its two largest markets, namely China, where growth (notwithstanding considerable moderation relative to recent years) will still likely remain in the low double-digit percentage range (year over year), and the United States. DBRS also notes that BMW expects research and development expenses, which in recent years persisted at elevated levels in support of technology and product development, to moderate somewhat, further bolstering earnings. While the Company’s ratings could be subject to negative rating pressures in the event that automotive conditions deteriorate sharply, such that amid ongoing substantial R&D and capex programs, BMW’s incurs significantly negative free cash flow, DBRS considers this unlikely.

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, especially 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.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

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

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