Morningstar DBRS Confirms BMW AG at A (high), Stable

DBRS Limited (Morningstar DBRS) confirmed the Issuer Rating of BMW AG (BMW or the Company) at A (high) with a Stable trend. Morningstar DBRS also confirmed the Issuer Rating of BMW International Investment B.V.; the Issuer Rating and Senior Unsecured Debt credit rating of BMW Finance N.V.; as well as the Senior Unsecured Debt credit rating of BMW Canada Inc., all at A (high) with Stable trends.

KEY CREDIT RATING CONSIDERATIONS
The credit rating confirmations reflect BMW's solid business risk assessment (BRA) as a leading global original equipment manufacturer (OEM) of premium automotive vehicles. Furthermore, the Company's financial performance has remained strong, which, amid BMW's conservative financial policy, renders its FRA well commensurate with the assigned credit ratings.

CREDIT RATING DRIVERS
Consistent with the Stable trends, Morningstar DBRS expects the credit ratings to remain constant over the near to medium term, with BMW solidly placed at the current credit rating category. Though unlikely, a negative credit rating action could result from a significant and sustained deterioration in operating results, leading to a material weakening in the Company's FRA. Conversely, an upgrade is also unlikely and not anticipated over a similar time horizon in line with the meaningful cost and investments headwinds facing the industry, thereby likely precluding a further strengthening in BMW's FRA to positively affect the credit ratings.

EARNINGS OUTLOOK
The Company's 2024 earnings are estimated to soften year-over-year (YOY; albeit from very solid 2023 levels) amid less favourable industry conditions across some of its key markets. This includes Europe, where demand growth has slowed amid interest rate pressures and high vehicle pricing, with 2024 regional industry volumes now estimated to be essentially flat YOY. Additionally, in China (BMW Brilliance Automotive Ltd. becoming fully consolidated into BMW as of February 2022), slowing demand growth, increasing competition (significantly reflecting the continued emergence of domestic New Energy Vehicle (NEV) manufacturers) and very thin pricing are pressuring BMW's regional performance. In addition to the headwinds in Europe and China, BMW's earnings also stand to be adversely affected by additional warranty costs (in a high three-digit million EUR amount as indicated by the Company) and vehicle supply issues stemming from delivery stops in certain markets, linked to braking systems provided by a supplier. As a function of the above, BMW recently revised its forecast downward, with the Company now expecting 2024 vehicle volumes to be slightly lower YOY and the annual EBIT margin of its core Automotive segment to range from 6% to 7% (as calculated by BMW), relative to the 2023 Automotive EBIT margin of 9.8%. Going forward, over the near to medium term, Morningstar DBRS expect the Company's earnings to remain at sound levels, albeit likely ranging from essentially flat to slightly softer levels (vis-à-vis recent years), given an anticipated slowing of volume growth, moderation in pricing, and ongoing cost/investment headwinds. Morningstar DBRS also notes that BMW's earnings will likely be influenced by the sales progression of electric vehicles (EVs), which continue to generate lower margins vis-à-vis legacy internal combustion engine vehicles.

FINANCIAL OUTLOOK
Morningstar DBRS anticipates BMW's cash flow from operations in 2024 to remain solid, albeit likely decreasing YOY in line with an anticipated softening in earnings. Capital expenditures (capex) are forecast to remain substantial and increase YOY in line with ongoing investments associated with BMW's electrification efforts and expansion into new mobility businesses. Dividend payments in 2024 are projected to moderately decrease YOY, albeit remaining sizable, likely approaching EUR 5 billion (including payments to noncontrolling interests). As a function of the above, Morningstar DBRS expects gross free cash flow (i.e., before working capital items) in 2024 to remain positive. Working capital is estimated to represent a use of cash for the year, with Morningstar DBRS therefore forecasting net free cash flow for the year to be moderately negative.

Going forward, cash flow from operations is projected to remain solid but could potentially decline somewhat over the medium term amid some anticipated earnings pressure. Capex will likely persist at substantial levels for the foreseeable future, notwithstanding some potential moderation (in both absolute and revenue percentage terms) as BMW seeks to attain some efficiency gains in its investments. Dividends are projected to remain sizable, although, likely moderating somewhat in line with an anticipated softening in earnings. Notwithstanding the substantial capex and sizable dividend payments, Morningstar DBRS anticipates BMW's free cash flow to persist at positive levels over the medium term, with the Company's strong financial profile estimated to sufficiently absorb any merger and acquisition activity in connection with its ongoing new mobility business initiatives.

CREDIT RATING RATIONALE
BMW's credit ratings are supported by its favourable market position as the world's leading pure play premium automotive OEM. Morningstar DBRS notes that the premium automotive segment has several advantages over the mass-market segment, including (1) higher profitability; (2) lower cyclicality, as premium customers are less sensitive to economic conditions; and (3) brand loyalty, given that premium customers tend to be more loyal to a particular brand. These aspects provide BMW with additional visibility in regards to earnings/cash flow generation. With respect to its electrification ambitions, BMW appears reasonably well positioned relative to immediate peers, with the Company attaining its target of EVs representing 15% of its total sales volumes in 2023. Despite this, there are several challenges in the EV space, notably including ongoing high product development costs, slowing recent momentum of EV sales, and increasing competition from Chinese NEV manufacturers. BMW's financial services business provides diversification benefits and plays an important role in supporting vehicle sales, with the segment being a source of significant and stable earnings. Finally, the Company's liquidity position is substantial, with the industrial operations having a sizable net cash position.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
ESG Considerations had a relevant effect on the credit analysis.

Environmental (E) Factors
The following Environmental factors had a relevant effect on the credit analysis: Morningstar DBRS considered that the environmental factor, specifically costs relating to carbon and greenhouse gas emissions, represent a relevant factor as BMW is subject to a wide range of compliance requirements relating to (among other factors) carbon dioxide, fuel efficiency, and emissions control. The Company has been actively investing in its vehicle-electrification strategy. By 2030, BMW is targeting an 80% reduction in carbon emissions per vehicle in production, while also targeting at least a 50% reduction in carbon emissions during a vehicle's use phase. In terms of contribution to sales, the Company is focusing on increasing the share of EV sales to at least 50% by 2030 (from the 2021 level of 13%).

There were no Social/Governance factor(s) that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024), https://dbrs.morningstar.com/research/437781.

BRA AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of BRA Factors
In the analysis of BMW, the relative weighting of the BRA factors was approximately equal.

(B) Weighting of FRA Factors
In the analysis of BMW, the relative weighting of the FRA factors was approximately equal.

(C) Weighting of the BRA and the FRA
In the analysis of BMW, the BRA carries greater weight than the FRA.

Notes:
All figures are in euros unless otherwise noted.

Morningstar DBRS applied the following principal methodology:
-- Global Methodology for Rating Companies in the Automotive Manufacturing and Supplier Industries (June 28, 2024), https://dbrs.morningstar.com/research/435216

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (April 15, 2024; https://dbrs.morningstar.com/research/431186), which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodology has also been applied:
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024), https://dbrs.morningstar.com/research/437781.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

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 under Related Documents or by contacting us at info@dbrsmorningstar.com.

The credit ratings were not initiated at the request of the rated entity.

The rated entity or its related entities did not participate in the credit rating process for these credit rating actions.

Morningstar DBRS did not have access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with these credit rating actions.

These are unsolicited credit ratings.

These credit ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom, and by DBRS Ratings GmbH for use in the European Union, respectively. The following additional regulatory disclosures apply to endorsed credit ratings:

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, these are unsolicited credit ratings. These credit ratings were not initiated at the request of the issuer.

With Rated Entity or Related Third Party Participation: NO
With Access to Internal Documents: NO
With Access to Management: NO

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS trends and credit ratings are under regular surveillance.

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

Lead Analyst: Robert Streda, Senior Vice President
Rating Committee Chair: Anke Rindermann, Managing Director
Initial Rating Date: May 10, 2013

Information regarding Morningstar DBRS ratings, including definitions, policies, and methodologies, is available on https://dbrs.morningstar.com or contact us at info@dbrsmorningstar.com.

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