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Maximilian Schöberl: Ladies and gentlemen, welcome back to our Q3 call. 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 instruction. Please go ahead.
Operator: [Operator Instructions] The first question is from George Galliers at Goldman Sachs. Please unmute yourself and begin with your question.
George Galliers: Yes. Good morning and thank you for taking my questions. The first question I had was around the underlying profitability of the business. If we add back some – in the region of €800 million for the IBS provisioning, it would imply an auto margin of around 5%. And I think if we also look at your full year guidance, it would seem to suggest a margin in the range of 5% to 7% for the fourth quarter. So is this the right way to think about the underlying level of profitability at BMW today? Or are there still factors related to IBS that are suppressing the margin, both in Q3 and Q4, on an underlying basis? The second question I had was with respect to your North American manufacturing footprint. Obviously, it’s too early in terms of the election and what that might mean for trade and tariffs. But could you just give us some insight into the flexibility you have in the plant in Spartanburg? Can you increase the capacity there? What kind of shift structure are you operating? And would that plant also be capable in theory of producing large sedans in the future? Thank you.
Maximilian Schöberl: Thank you very much, George. We start with Walter and then Oliver. Walter, please.
Walter Mertl: Hello, George. Thank you for analyzing our high 3-digit million warranty provision, which I didn’t mention with these numbers, but quite close. But we shouldn’t forget that more or less 2 weeks, we lost some sales. That’s the reason why sales is down in Q3. Revenue is down and, automatically, also profit. So there is the biggest impact in Q3, which we also stated in September. There is still an impact in Q4, so not everything is fully caught back, but still an impact there. And that’s the reason why your math is absolutely right for the Q4. It must be something between 5% and 7% in the quarter to end up with 6% to 7% year-to-date, 12% as we set our guidance. And we shouldn’t forget also the mix implication in Q3 because most of the IBS cars have been on the upper premium segment. So that will turn back in Q4, also supporting it. But as I mentioned, in the quarter four, we still have some impact of IBS.
Maximilian Schöberl: Thank you very much, Walter. And now we come to the second part of your question, manufacturing footprint in the U.S. Oliver, please.
Oliver Zipse: Good morning, George. Let’s look at 3 things. First of all, we are, since 30 years in the United States, with our own manufacturing facility, more than 50 years in the market as a key player there. Very strong over, more or less, all segments with a very high manufacturing footprint, and that’s my second point. We produce the most demanded vehicles in the United States we produce there. The X3 is brand new, and we’re very confident that this will be a good success in the United States. As well, we also produce the X5, X6, X7, XM. It’s all produced in the United States. So there is some natural cover-up against possible tariffs or whatever. But let’s not speculate whether there are tariffs. It might also only be that this is a variable issue. Let’s look at the results so far this year per October in the United States. We see a growing market for us. We sold more than 290,000 vehicles in the United States, and that’s a growth by almost 7,000 units. So it’s a growing market. And if you look only in October, we gained even more momentum. We sold 36,750 cars, and that’s a growth by more than 20% against the previous year, a plus of 7,300 cars. So the market is working really well for us. We seem to have the right product portfolio on the combustion engine side as well as on the electric side. So in the United States, I would think we almost have a perfect setup for the time to come.
Maximilian Schöberl: Thank you very much, George. Next question, please.
Operator: The next question is from Tim Rokossa at Deutsche Bank. Please unmute yourself and begin with the question.
Tim Rokossa: Yes. Thank you very much, Oliver and Walter. I want to have two quick follow-ups to George’s question. I think what he was trying to get to with the first one is, is this underlying profitability level that we’ve now seen in Q3 pre the provisioning and that we are expecting for Q4, the right number to think about in an environment that we currently have in the world with weak China EV transition and so on and so forth? Or is there scope to improve that from the levels that we’re seeing here? And the second follow-up to that is, Oliver, in your exposure in the U.S., obviously, we can see two things here. We can see a further escalation of the U.S.-China trade tensions. And we can see something, as you said, that may just be rhetorically from him right now on EU into U.S. How many vehicles are you importing into the U.S. currently? How many are you exporting, if you could just update us on the number? And then my actual question is the weakness of the sector that we’re seeing right now is still China. It seems there’s different perceptions of how this will play out. What’s your game plan for China? Is this just a cyclic weakness that the auto industry is used to? We’re seeing this in other markets before. We’ve been in the U.S. We’ve been in Europe. Or did something permanently break when it comes to demand for Western brands? What’s your assessment? Thank you.
Maximilian Schöberl: Okay. Thank you very much, Tim. We start with Walter about Q3 and the game plan for China. Walter, please.
Walter Mertl: Follow, Tim --Well, as I tried to mention, the 5% to 7% math calculated number for Q4, that is rather the point. But going forward, our strategic target is still 8% to 10%. And of course, we can’t do any predictions, which we will do in March, because we also, based on all what’s going on also in the U.S., we have to see. And then we will give the right numbers accordingly, but our strategic numbers, which we are still aiming for, and we also mentioned that the auto guidance is 8% to 10% EBIT margin for our business. And in China, as we mentioned previously, we are growing on the BEV side. We have 15% share of BEVs in the total market. And MINI just has launched. X3 is also going to claim back things because we are in the runout of the X3 in China. It’s just the ordinary business. So we will see momentum also going forward.
Maximilian Schöberl: Okay. Thank you very much, Walter. And now Oliver to the exposure of U.S. vehicle export numbers.
Oliver Zipse: Let’s first not speculate on the outcome of the election and its – and the consequences. Our nationwide footprint in the United States currently consists of about 30 locations in 12 states. So it’s not only Spartanburg. And of course, our largest BMW plant as a single entity sits in the United States. To your question, 65%, so two-thirds of our local U.S. sales are produced in Spartanburg, mainly with the X models. And we are committed to investing further. As we stated before, we will electrify this plant as well, and we are investing there already as we speak with €1.7 billion. The business we have there directly and indirectly provides and supports more than 120,000 jobs, I think this is very important to local politicians, and contributes overall $43 billion to the U.S. economy. So what I mean with that, we have a strong footprint there, which kind of protects us against anything which might happen on the geopolitical side.
Maximilian Schöberl: Thank you very much, Tim. Next question, please.
Operator: The next question is from Horst Schneider at Bank of America. Please unmute yourself and begin with the question.
Horst Schneider: Yes. Hello. Can you hear me?
Maximilian Schöberl: Yes, we hear you. Yes, go ahead, Horst.
Horst Schneider: Okay. Excellent. Great. Yes, yes. Thank you. First question that I have is because you have by now in the quarterly report, you don’t show these numbers anymore. You showed it just in the annual report. Could you maybe tell us what was the amount of warranty provisions that you had at the end of 9 months in the context of these three quarters? And when I think about that, the biggest lever by now for earnings for the future is to bring the warranty costs down. So could you give us maybe a feeling, what measures you have taken in general to bring the cost down and how quick you expect this cost to come down? And what is the normal level of warranty provisions once you got all these issues under control? That will be very helpful. The number two question that I have is, we have got by now several auto companies are saying they need to cut costs. I think in Germany, every auto company is saying that exact deal. But you had also increase of employees in Germany. And I think in Europe, in general, you still opened a plant. Given now the situation that we have that seems to be more difficult to push the sales through, do you see the need to cut more costs? And by when can we expect maybe kind of programs you want to announce? Thank you.
Maximilian Schöberl: Thank you very much, Horst. Walter, please.
Walter Mertl: Horst, so the warranty provision compared with year-end ‘23 is more or less on the same level. Why is that? Yes, we have all new accruals on provisions, so additional warranty costs adjusted in the P&L. But on the other side, we also mentioned already that we pay off all these warranty provisions we added for from the – from last year. So yes, if you have a look for the principal on the warranty side, we have three major topics, which you’re all aware of. We had the airbag some years ago. We had EGR. And currently, we are running on the IBS. So that all gets repaired and paid out. And based on that, we keep the level of provisions currently year-to-date, September. And these one-off effects, they rather last on the P&L side, absolutely right.
Maximilian Schöberl: Okay. Thank you very much, Walter. Then we come to Oliver, please.
Oliver Zipse: Efficiency is a cornerstone of our product strategy. There is a base ratio we put in all to our planning of 4%. And let’s have a look at Europe. This is not a shrinking market for us. Again, if we look at month-to-date figures, we sold in Europe 620,000 cars, which is a considerable chunk of our complete product portfolio, and it grew by almost 50%. That’s more than 7% growth in Europe. So we’re not shrinking here in Europe. And let’s have a look at the figures. Second of all, yes, we are opening a new plant. We opened a plant in Hungary with very, very competitive conditions, and that will strengthen also on the cost side our competitiveness against plants we have here in Germany. So we are – we need capacities to grow, and we do grow, as you see. And of course, the Hungary plant is a fully electric plant. And as we said before, we grow with the BEV overall segments currently. So the current situation does not change our plans at all.
Horst Schneider: Okay. Maybe can you tell us what is the reversal of warranty provisions we may see the next year? Is it just booking you did in Q3? Or I think there should be more to come on top, right? Because as you say, you had basically three warranty cases.
Oliver Zipse: Well, as I mentioned, we are working on the repair of all these warranty cases. That’s the reason why we have such a big amount on the short period disclosed end of last year. And we’re still working on those. Once everyone is getting dealt with and IBS, as we also announced, it is through by ‘25.
Horst Schneider: Okay, thank you.
Maximilian Schöberl: Okay. Good. Horst, thank you very much. Next question, please.
Operator: The next question is from José Asumendi at JPMorgan. The first question is, in order to protect the profitability in China, do you plan to change your powertrain mix, more ICE, less BEV to protect margins in the region? And any other measures you plan to take to protect the earnings and cash flow in the region? And the second question is if global powertrain demand shift more towards BEV and mild hybrid, how is the powertrain portfolio of BMW ready to deal with this transition by 2030?
Maximilian Schöberl: Okay. Yes, yes. We start first part of the question with Walter and then Oliver.
Walter Mertl: So on the powertrain mix in China, we shouldn’t forget that 85% of the volumes sold in China is produced in China. And this will become even more with the new MINI to start, fully electric MINI produced in Zhangjiagang. So that share will increase. And we will also, of course, have all these benefits in China, cost-wise. So it’s straight competitive, and maximum 15% is getting imported from outside China. So that is the reason why we’re still absolutely convinced about that we have a protection of our earnings and, hence, the free cash flow.
Maximilian Schöberl: Oliver?
Oliver Zipse: The strength of BMW lies in its flexibility regarding powertrains, and that is true in all regions of the world, but very specifically in China. Let’s have a look at the figures. Until this month, we sold 38,000 cars in China, which were purely electric, which was a growth of around 5,000 units. So the pure BEV side is growing in China for us. It’s not shrinking. What is shrinking is the complete market. But the majority of the cars we sell in China is still pure ICEs. So to have that flexibility to respond in the market with super-efficient ICEs and, at the same time, take part in the growth of the BEV segment is, I think, our secret. Now your question is looking toward 2030. We will locate the Neue Klasse also in China. So the battery electric-only vehicle segment, we will participate that with that – with the new architecture, and it will be very competitive in that market. It has to do with the new user interface. It has to do with the latest battery technology with round cells, as we have said many times before, of the sixth generation. And it has to do with a very efficient architecture overall and with the newest level of digitalization and connectivity. So, look out to 2030, we are very happy with the flexible approach. And of course, on the plug-in hybrid side, we will have more or less in all segments a plug-in hybrid with the BMW driving dynamics. And let’s not forget the M Division at the end of the day, which is very high regarded in China. And of course, that heritage of M is something competitors don’t have. Also the new players don’t have that. And that gives some strengths to BMW as well, if I look between now and 2030.
Maximilian Schöberl: Thank you very much. Next question, please.
Operator: The next question is from Stephen Reitman at Bernstein. Please un-mute yourself and begin with your question.
Maximilian Schöberl: Stephen, are you with us?
Stephen Reitman: Yes. Good morning. Sorry.
Maximilian Schöberl: Good morning.
Stephen Reitman: Thank you very much. A question about China, really, to get some granularity, really, on what’s going on there as well, please. First of all, obviously, you have got – you mentioned about your BEVs are well accepted there. Could you comment about the reception of the i5, which you priced at the same price as the 525 Li? And secondly, could you comment on the state of your dealers, because obviously, there has been some publicity about some high-profile closures, including a 5S dealership in Beijing, the Beijing Xingdebao, I believe. So, is it about their own financial problems, or is it triggered by specific issues with BMW? Thank you very much.
Maximilian Schöberl: Thank you very much, Stephen. Walter, please.
Walter Mertl: Hello Stephen. Well, I think you are all aware on the pricing situation in China. It’s different than in other regions. That’s the reason why in China, we have to price on the i5 equal to the ICE car. You will find that across our product range. The dealer support you are referring to, that was of course in a three digits million euro position that we supported our dealers on profit as well as on liquidity in order to stabilize the situation. And that is coming straight to your next point, instead of Chinese dealers. If a lot of them are currently in loss, but this is not just facing performance issues, in some cases, this is also a financing issue. That means it’s not just about profitability, but also liquidity. And indeed, GA, German Automotive had an issue announced last week. And we of course care about all of our customers. They are always first priority. That means we are ensuring continuity with other dealers in the area, so that we can still serve the customers with all the products they need.
Maximilian Schöberl: Okay. Thank you very much, Stephen. Next question, please.
Operator: The question is from Philippe Houchois at Jefferies. Please un-mute yourself and begin with your question.
Maximilian Schöberl: Philippe, are you with us? We don’t hear you. Okay. I think we come to another question.
Operator: The next question is from Michael Punzet at DZ Bank. Please un-mute yourself and begin with your question.
Michael Punzet: Yes, Maximilian, good morning. I have one question with regard to your financial results. This was clearly negative in Q3. Could you explain the reasons for that? And is it fair to assume that the big bulk of that will reverse in Q4, take into account the current interest rate levels?
Maximilian Schöberl: Good. Yes. We understand. Thank you very much. The answer will come from Walter, please.
Walter Mertl: Michael, the key reason is the evaluation of the fair value derivative side, the standalone derivatives. And that is a major impact in September. End of September especially, we had decreasing interest ratios, and that had an impact on our portfolio, plus some of the interest derivatives running out in, got matured in Q3 and that is this impact. And reversal in Q4, as you are fully aware of the valuation of these derivatives, interest increasing means we will have additions and positive effects. Increase still going down, we would have a negative effect. Mainly, this is in our other entity segment because this is the funding side for financial services, and they have a hedging strategy to fit with the interest derivatives.
Maximilian Schöberl: Thank you very much, Walter and also, Michael. So, we are coming to our last question.
Operator: Final question is from Henning Cosman at Barclays. Please un-mute yourself and begin with your question.
Henning Cosman: Hey. Good morning. Thanks for taking the question [ph]. I had one on capital returns, please. Walter, you talked about authorization for another 10% over a 5-year timeframe. Classification of your net automotive liquidity, you suggested that you would be paying out a very high percentage of your free cash flow. But it seems like if we are spreading 10% for 5 years and add that to the dividend, that doesn’t quite add up or not remotely mid-term target of around €7 billion free cash flow. So, I just wanted to understand the logic there. Is it possible to accelerate that to accommodate a higher payout ratio of free cash flow? Anything changed since we had this meeting with you about this? That’s the first question, please. Is the benefit from tariffs, I just wanted to understand your logic there? I believe on the media call, you suggested it would be a net beneficiary of the tariffs. I just wanted to understand how you think about that. Did you mean relative to Mercedes and Porsche, or how did you think about that? And final one, housekeeping one, could you kindly break out the volume/price mix by item? I think you usually do that. So it would be great to get that color. Thank you very much.
Maximilian Schöberl: Okay. We will start with Walter and then Oliver.
Walter Mertl: Henning, well, from a legal point of view, we always apply for 10% related to 5 years, that is our legal frame. And so we did in 2022, when we also requested 10% share buybacks for 5 years that would have concluded in ‘27. As I just mentioned, our second program will be concluded by end of April ‘25. And then we would still have €1 billion left. So, it will conclude anywhere earlier than ‘27, that’s the reason why we proposed, I have to say, we proposed, it’s an AGM decision. Ultimately, we proposed to have a further 10% and based on legal question, again, for 5 years. And whether we accelerate or not, it depends of course, on free cash flow. As we always said, free cash flow of automobile is then paid out via dividend, 30% to 40% of our profit and optional by our share buybacks. So, that is still the case. And I just refer to our AGM proposal, which is based on legal things.
Maximilian Schöberl: Thanks Walter. Oliver?
Oliver Zipse: Well, if you are a local producer with a local footprint, you are of course benefiting in case there is something changing on the tariff side. And I think that was meant in the last call that we benefit from these tariffs. And that is true in China, where we produce 85% of the local sales volume and specifically also in the United States, where we have more than two-thirds of our production volume is sold in the United States. And that’s kind of a natural protection you have there.
Maximilian Schöberl: So, thank you very much. Ladies and gentlemen, we have reached the end of the telephone conference – our breakdown of volume/price mix. Sorry, coming back, Walter. It’s the last question for you, breakdown of volume/price mix per item for Q3. Sorry.
Walter Mertl: As I mentioned in my speech, it is all coming down. Volume, of course, heavily impacted because of IBS, which also led to elevated inventory side. That is a key element. Mix is also down because IBS is heavily impacting our upper premium segment cost, meaning MKL, GKL. So, there is this really weighting. And the pricing side is a high three-digit negative quarter-over-quarter Q3 ‘23 versus quarter three this year. And that is rather based on the pressures weight of our results.
Maximilian Schöberl: Good. Thank you very much, Walter. Thank you very much, Oliver. So, we have reached the end of the telephone conference. Thank you for joining us. All the best to you and bye-bye and servus from Munich.