DBRS Confirms Ratings of BMW AG at “A,” Trend Changed to Positive

DBRS Limited (DBRS) has today confirmed the long-term rating of BMW AG (BMW or the Company) and its subsidiary BMW Canada Inc. (based on the guarantee of the parent) at “A.” The rating action reflects BMW’s consistently strong earnings performance, as the Company has generated record vehicle sales for four consecutive years, with Automotive EBIT margins being firmly entrenched at high single-digit levels, (which is very solid for the industry). The trend on the ratings has been changed to Positive from Stable, as DBRS expects BMW’s sales and earnings momentum to continue amid industry conditions that, in aggregate, are likely to remain somewhat favourable. Moreover, the Company’s future financial performance is also likely to benefit from its increasing geographic and product diversification, in line with the recent (and ongoing) introduction of new models/nameplates. BMW’s financial risk profile is also robust, reflecting the Company’s conservative financial policy amid the consistent earnings performance/cash flow generation, with credit metrics accordingly being very solid for (and in some cases exceeding) the current ratings.

BMW’s strong business profile reflects its status as the world’s leading automotive manufacturer in the premium vehicle segment, which not only affords typically higher margins but has also historically proven to be more resilient to cyclical downturns vis-à-vis the mass market vehicle segment. Additionally, the Company’s geographic sales diversification is solid, with BMW having a well-established presence in emerging markets, which are expected to represent the majority of global industry growth going forward, (with the premium segment in turn also likely to undergo faster growth vis-à-vis the overall industry).

BMW’s total vehicle sales in 2014 amounted to roughly 2.1 million units, with volumes of each of the BMW brands – BMW, MINI and Rolls-Royce Motor Cars (Rolls-Royce) – achieving year-over-year increases. The progressive sales growth reflects market conditions that, on balance, remain rather favourable. Moreover, sales have been further bolstered by the Company’s favourable product cadence and diversification, with some of BMW’s new models competing in vehicle segments not previously represented by the Company. Going forward, DBRS expects BMW’s sales and earnings momentum to persist, with conditions in the United States remaining solid, growth in China likely persisting (albeit to a substantially lesser degree than in the early decade) and Europe finally developing positively after a protracted downturn. Moreover, the Company is continuing its product offensive, with several new/additional models slated to be released in 2015, including (among others) a facelift of the BMW 1 Series, new models in the BMW 2 Series range and various models across the BMW 6 Series range.

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 margins, although the Company has thus far demonstrated its ability to mitigate such challenges through various means, notably BMW’s firm pricing power.

The Positive trend reflects DBRS’s opinion that BMW’s robust financial performance will likely persist going forward. While the Company’s capital expenditures have 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. Should BMW maintain its leading position in the premium automotive segment and sales continue to improve, this would likely lead to an upgrade in the ratings. Conversely, in the event that automotive conditions deteriorate sharply, such that amid ongoing substantial R&D and capex programs, BMW incurs significantly negative free cash flow, negative rating pressures could result, although DBRS considers this scenario unlikely.

Notes:
The Senior Unsecured Debt Rating of BMW Canada Inc. is based on the guarantee of BMW AG.

All figures are in euros unless otherwise noted.

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 applicable methodologies are DBRS Criteria: Guarantees and Other Forms of Explicit Support and Rating Companies in the Automotive Manufacturing Industry, which can be found on our website under Methodologies.

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