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Edited Transcript of BMW.DE earnings conference call or presentation 6-Nov-19 1:00pm GMT

Q3 2019 Bayerische Motoren Werke AG Earnings Call

Munich Nov 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Bayerische Motoren Werke AG earnings conference call or presentation Wednesday, November 6, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Maximilian Schöberl

Bayerische Motoren Werke Aktiengesellschaft - EVP of Corporate & Governmental Affairs

* Nicolas Peter

Bayerische Motoren Werke Aktiengesellschaft - CFO & Member of Management Board

* Oliver Zipse

Bayerische Motoren Werke Aktiengesellschaft - Chairman of Management Board & CEO

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Conference Call Participants

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* Arndt Alexander Ellinghorst

Evercore ISI Institutional Equities, Research Division - Senior MD & Head of the Global Automotive Research

* Gautam Narayan

RBC Capital Markets, Research Division - Associate VP

* Hanna Dorothee Hellmuth Cresswell

Barclays Bank PLC, Research Division - Research Analyst

* José Maria Asumendi

JP Morgan Chase & Co, Research Division - Head of the European Automotive Team

* Tim Rokossa

Deutsche Bank AG, Research Division - Research Analyst

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Presentation

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Maximilian Schöberl, Bayerische Motoren Werke Aktiengesellschaft - EVP of Corporate & Governmental Affairs [1]

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Good afternoon, ladies and gentlemen. I would like to welcome you all to our telephone conference for the third quarter results. With us today is Oliver Zipse, Chairman of the Board of Management; and Nicolas Peter, our CFO. First, Oliver Zipse will give you an update on the business performance during the third quarter. Nicolas Peter will then take you through our financial results. Afterwards, we will have time for our Q&A session.

Please, Oliver, go ahead.

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Oliver Zipse, Bayerische Motoren Werke Aktiengesellschaft - Chairman of Management Board & CEO [2]

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Good afternoon, ladies and gentlemen. In recent years, much has been written about how car manufacturers need to change their business model. But what isn't talked about enough is the fact that the real transformation is taking place in the vehicle itself, and that is where the real challenge lies. The car is a highly complex product. Therefore, our mission at the BMW Group is to make it fit for the future for our growing customer base worldwide, and this is where we can make full use of our strength.

On the one hand, our business environment remains volatile, dominated by political changes in direction and emotional discussions. On the other hand, there are a number of very stable trends that support our business model. Especially in this environment, we ask ourselves and we operate with a clear focus. "What are our capabilities? How can we make the most of them to benefit the business? What are the really important decisions when it comes to mobility? And what do our customers want? And what do they really need?" These factors form the basis for our strategic actions. We do not see our strategy as a one-off, all-encompassing task but rather as an ongoing process that we need to constantly fine-tune and adapt. Swift, decisive and agile.

Our strategic work is based on a clear competence profile of the BMW Group. Our core expertise lies in premium vehicles, optimized for the desires of our target group and their connectivity needs. Our further development of the vehicle represents a viable, profitable business model now and in the future.

Everything we do starts with the customer. This is key to staying ahead of tough competition in the long run. And it's equally important if you want to succeed in the shift towards climate neutrality called for by politics and society. It is also what we want to achieve. As a company, we are an integral part of society. That has been and always will be a large part of who we are. The same applies to sustainable mobility as to all our products, technologies and innovations. The solution that wins through the end will be the one accepted by customers. Today, we sell our premium vehicles in around 160 countries. This already makes it clear how diverse our customers' needs are. This applies to customers as individuals with their specific everyday mobility needs. It applies more than ever on a regional level in the main regions in the world, Europe, Asia and the Americas. And it is also increasingly true at a local level, where needs differ from one city to the next.

No less diverse are the legal and technical regulations we face worldwide. And as a global company, the BMW Group has already established its own production and value-creation processes in the major regions worldwide. We will now focus -- we will now be focusing even more on this growing differentiation in China, the U.S. and Europe. We are purposely seeking dialogue with local experts to discuss relevant regional requirements and needs. We will be increasing our efforts here substantially. The insights we will gain will be integrated directly into our strategic approach, and this will enable us to offer tailored products, drivetrains, equipment options and services in these regions in the future. At the same time, we are gaining a better understanding of our customers, hence, improving our customer-centric approach. One example of this is China where our customers are significantly younger. Vehicle connectivity is an important purchasing consideration for them.

Continued strong growth and overall prosperity is also affecting the market for premium vehicles. I've already met with Premier Li Keqiang twice, since taking over as CEO, and I had the impression that BMW Group is highly relevant in China. People listen to our opinion and regard us as a sought-after partner. And soon, I will also travel to the United States of America.

Individual mobility will remain a stable, long-term business prospect in all regions of the world. The premium segment is forecast to grow at a higher rate than the total market. Based on this, we aim to make the most of the opportunities in the growing global car market, and our goal is to outperform the premium segment.

In the third quarter of 2019, the BMW Group reported growth in its core markets in all major regions. In Asia and China, despite the model changeover for the BMW 3 Series Long-Wheelbase; in the Americas and the United States despite the stagnant market; and in Europe despite uncertainty over Brexit and in our domestic market, Germany. As a result, our third quarter deliveries rose year-on-year to over 610,000 vehicles, an increase of 3.6%. In other words, we are bucking the trend.

We also achieved a new all-time high in sales in both the third quarter and the first 9 months for BMW and Rolls-Royce. The brand MINI also posted growth. Moreover, BMW Motorrad is also heading for its ninth consecutive record year. In the third quarter, we reported growth of almost 10%. At the EICMA yesterday, we presented 3 new production models for 2020.

Our financial figures for the third quarter were as follows: group earnings before tax, over EUR 2.2 billion, an increase of 23.4% over the same period of last year; net profit, over EUR 1.5 billion, up 11.5%; and the EBIT margin in the Automotive segment was 6.6%. Despite challenging conditions, we aim to achieve our target rate of 8% to 10% in the long term. That remains our underlying goal. It is also what capital markets expect, and we are working systematically on this.

In light of the positive development in the third quarter, we are able to confirm our guidance for the financial year 2019.

Ladies and gentlemen, the biggest model offensive in BMW Group's history continues. As well as attractive models, it also includes different drive technologies and the latest standards in connectivity. We see this as an effective contribution towards limiting climate change and reducing emissions.

If we turn to our customers. They look first and foremost for the vehicle segment that best suits their lifestyle and mobility needs. And only then they think about the best drivetrain that would suit their needs, fully electric or a plug-in hybrid or an efficient combustion engine. Above all, our customers always expect a true BMW, regardless of the drivetrain. We're able to offer customers the model they want, for example, the BMW 5 Series Sedan or the X3, with different drive technologies. That is what we call the power of choice.

For this very purpose, we are designing the next generation of our vehicle platforms from 2021 on, to be flexible, for rear- and front-wheel drive. We can manufacture various drives on 1 architecture and integrate them into our plant structures. But we are also able of integrating vehicles customized for e-mobility such as the iNEXT at plant Dingolfing starting from 2021. For the customer, there is no noticeable difference regarding the vehicle architecture on which the car has been built. We expect e-mobility to make significant advances from 2021 on, once the European Union's new CO2 standards take effect.

We remain strongly committed to meet regulatory requirements in the European Union and worldwide. And we have always complied with the legislation and have been well prepared in advance to implement any necessary changes, for example, with WLTP and RDE I. This now also applies to RDE II and, for example, the NCAP Crash Test. RDE II meets further tightening of the standards for nitrogen oxide emissions. This will apply to new vehicle types from 2020 and all new vehicles registration from 2021. The European NCAP Crash Test requires all vehicle classes to have a whole series of expanded assistance systems from 2022 on. These requirements will increase further in 2024.

Our new fully electric vehicles will be ready for launch right on time for the EU's new CO2 standards: the BMW iX3 from 2020; BMW i4 from 2021; and our new technology flagship, the iNEXT, also from 2021. The biggest market for the iX3 will be China. That is why we will produce it there and export it to the rest of the world.

As you can see, we are certainly benefiting from our experience with electromobility. Our BMW i3 has been available since 2013. It is not just an e-mobility pioneer. Still today, it remains a true game changer and continues to be a benchmark for a sustainable approach. Our customers appreciate this, and i3 sales are climbing from year-to-year. We have already sold more than 160,000 i3s altogether. In the year, through the end of September, sales were up by about 1/5 compared to the same period of 2018. In October, it gained 3.4% year-on-year, and we continue to offer updates that make it even more attractive.

Since 2016, the BMW Group has been market leader in electromobility in Germany. Currently, our market share of electrified vehicles is 21% in our home market. The first fully electric MINI will also be launched before the end of the year. This is an important step for a brand that has always been at home in the urban environment. Customers have been waiting for it, and the number of registered perspective customers reflects this: 78,000 so far.

To step up the pace of electromobility, we're also making headway with battery cell technology. Next week, our new Competence Center for Battery Cells in Munich will begin its operation. There, we will pool and deepen our comprehensive know-how in battery cell technology. For over 10 years already, we have been developing and analyzing battery cells. We are currently working on the cells of the coming decades. This way, we can influence the functional performance and the costs of the battery to our benefit. Already today, we produce prototypes of battery cells. This has the advantage that we can specifically request how the battery cells are to be produced regarding their chemical composition and design. And in addition, we are able to define in detail the associated production processes. This places us in a strong, strategic position. We will then have all options in hand regardless of how the global market for cells develop.

Ladies and gentlemen, the BMW Group is wholeheartedly committed to the aims of the Paris Climate Agreement, and we are taking action. Over the past 20 years, we have lowered the CO2 emissions of our European vehicle fleet by an average of 40%. There will be another slight decrease in our CO2 fleet emissions again this year. This places us in a better position than our competitors.

Over the next few years, we will continue to increase the amount of electrified vehicles in our lineup. In Europe, we are following an ambitious growth logic for our electrified vehicles: 1/4 of our sales volume in 2021, 1/3 in 2025 and half in 2030.

Hydrogen fuel cells also remain an option for us in the future. An offer for this drive technology should be possible by the second half of the next decade, because hydrogen may be relevant as a key element of a renewable energy system.

Over the past years, nearly all of our series have been newly released onto the market or updated as part of our model offensive, from the BMW 1 Series to the 7 Series, from the X1 to the X7. The areas we are currently focusing on are the luxury segment, the compact class, the X family, plug-in hybrids and our M models.

First, the luxury segment. We have further strengthened our position with the BMW brand due to the new 8 Series, 7 Series and all-new X7 models. The 8 Series Gran Coupé has been available since September. It is the best-selling 8 Series model and the more luxurious 4-door sports vehicle BMW has ever built. This puts us in a strong position to meet our goal of doubling our sales in the luxury class between 2018 and 2020.

Second, regarding the compact class. The updated X1 has been on the market since September, along with the new BMW 1 Series, which introduces BMW's new interior and exterior design language to the segment. For the first time, it is based on the BMW front-wheel-drive architecture. This allowed us to develop a 1 Series with even better driving dynamics than its predecessor. We combined the front-wheel-drive architecture with state-of-the-art chassis technology and near-actuator wheel slip limitation. This innovative traction control comes from the BMW i. In this way, the new 1 Series sets the benchmark for agility and precision. Next year, the 2 Series Gran Coupé will introduce the successful 4-door Coupé concept to the premium compact class.

Thirdly, let's take a look at our BMW X models. One of the reasons they remain highly desirable is that they are more efficient than many comparable models in its class. In the year-to-date, the X3 and X4 in particular, posted very strong growth. The X7 has also been well received by customers since its introduction in March. The X3 plug-in hybrid will complete our lineup in December. And already next year, we will also be presenting the battery-electric X3.

By the end of the year, we will have 12 fully electric and plug-in hybrid models on the roads. Customers desire our plug-in hybrids because they can use them as their only vehicle. They don't have to worry about range, and can get to know e-mobility in everyday driving situations. People are a lot less hesitant about buying a plug-in hybrid than a fully-electric vehicle. These cars also have excellent fuel economy. The BMW 3 Series plug-in hybrid has an average petrol consumption of 1.6 to 1.8 liters.

The BMW Group also conducted a full life cycle CO2 certification for the new BMW 330e Sedan, from raw material procurement through the whole supply chain, production and use phase all the way to end-of-cycle recycling. The plug-in hybrid as an advantage of about 60% over the petrol version if charged with clean energy. Even if it is charged to the use phase with the average European electricity mix, the advantage is still over 20%. The 3 Series Touring will also be available as a plug-in hybrid variant next year.

BMW M GmbH is more diversified than ever. With the new X3 M, X4 M and M8 models, the portfolio has been significantly expanded. All new models are now also available for market launch as competition models. In early October, we presented the new X5 M and X6 M. M is once again headed for another very successful year.

Ladies and gentlemen, the car will continue to play an important role in our lives and in society, because it remains relevant to so many people, especially in suburban and rural areas.

We continue to strongly invest in the transformation of individual mobility. At the same time, as a responsible company, we have to ensure the balance is right between expenses and gains. The mobility services and our joint venture with Daimler, YOUR NOW, are being well received. More than 83 million customers use these services. The number of transactions increased to more than 420 million in September. Digitalization adds to the increase in complexity of market and product demands and reflects that our industry is becoming more and more challenging. For many, this challenge represents a problem. We, on the other hand, view this as a real opportunity. Anyone who wants to be successful in the long run must master this growing complexity and, at the same time, be and stay profitable. This is no easy task, and some new players already experience this. And I believe the true strength of the BMW Group has often been underestimated in recent years. Today, we are already a global high-tech company. Thanks to the expertise of tens of thousands of our well-qualified employees, working together in coherent process chains and with our suppliers, every vehicle we build contains a piece of highly advanced technology that benefits our customers. For them, we will continue to take the car to the next level and make it future fit, because we have the technological and financial potential to do so. We also have the necessary integration expertise. It is in our very DNA to manage complexity and combine efficiency with flexibility. We will continue to harness the far-reaching technological change to enhance our business model. For us, the way forward is to drive progress ourselves. That will remain our focus also in the future, and our customers will benefit from this strategic approach. We see this as our role for the future of individual mobility in our society, and we are taking on this responsibility.

Thank you very much for your attention.

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Maximilian Schöberl, Bayerische Motoren Werke Aktiengesellschaft - EVP of Corporate & Governmental Affairs [3]

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Thank you very much, Oliver. Nicolas, please go ahead.

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Nicolas Peter, Bayerische Motoren Werke Aktiengesellschaft - CFO & Member of Management Board [4]

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Ladies and gentlemen, good afternoon. In the first 9 months of the year, business development has so far met our expectations. In the third quarter, all segments are on course for growth as planned. As expected, our financial figures have improved from quarter-to-quarter throughout the year. In a challenging and extremely volatile business environment, we are on track to meet our goals for the full year.

Group revenues for the third quarter showed solid year-on-year growth as expected, reaching EUR 26.67 billion. This reflects, in particular, the strong performance of our young product portfolio as well as positive currency translation effects, among other factors. Specifically, new models like the X3 and X4 are now fully available and proving very popular with customers. We have significantly expanded our lineup in the highly profitable luxury segment with the new 8 Series models, the new 7 Series and X5, as well as the X7.

Overall, our operating business continued to develop in line with our expectations in the third quarter. Thanks to the strong performance of our models in a largely declining market environment, the EBIT margin in the Automotive segment reached 6.6% for the quarter, despite continued high upfront investments. The base effect from the high costs associated with the market turbulence resulting from the transition to the WLTP and warranty issues also had a positive impact compared to 2018.

As expected, the financial result for the first 9 months were significantly lower than the previous year. In the at-equity result, higher BBA earnings were more than offset by the planned current losses of the YOUR NOW companies. However, particularly in the urban areas, we see great potential with YOUR NOW to reach new customers, especially in Europe and Latin America.

Positive valuation effect in connection with last year's acquisition of DriveNow negatively impacted the year-on-year comparison. The net balance of the onetime appreciation effect from pooling our mobility services with Daimler this year and impairment losses due to adjusted business expectations at individual YOUR NOW companies totaled plus EUR 60 million in the year to the end of September. As in the previous quarters, valuation effects from interest rate derivatives significantly dampened the financial result.

Group earnings before tax climbed 23.4% in the third quarter to around EUR 2.25 billion. Due to the effects from the previous year I already mentioned and the overall positive business development, the EBT margin increased year-on-year to 8.4%, despite significantly higher expenses for the development of new technologies.

Third quarter research and development costs according to IFRS were 14.2% higher than the previous year. In the 9 months to the end of September, they were already up nearly EUR 370 million on 2018. The R&D ratio for the same period was slightly below the previous year's figures at 5.9%.

Capital expenditure also increased significantly from January to September, reaching EUR 3.31 billion. At 4.4%, the CapEx ratio for the year-to-date was slightly higher than it was last year.

In addition to upfront investments for new models, such as the 1 Series, 3 Series and 4 Series, our main focus was on electrification topics and development activities for next-generation highly automated driving systems.

The production of the MINI electric began in Oxford this month. The fifth generation of our electric drivetrain, which we developed in-house, will also be on the market next year beginning with the iX3. We made further upfront investments for the development of new technologies for the iNEXT and our next-generation infotainment systems.

Despite headwinds from our many future projects, the lower financial result as expected and costs related to the European Commission's antitrust proceedings, pretax earnings for the first 9 months totaled EUR 5.06 billion. The EBT margin stood at 6.8%. This is still a high level in comparison with our competitors and considering the difficult conditions our business is facing.

Ladies and gentlemen, however, we aspire to more than that, because upfront investments in future technologies and e-mobility have to be paid for. That is why we continue to work systematically on those matters that lie in our own hands.

Through Performance > NEXT, we have been continuously implementing measures to further improve our efficiency for the past 2 years. We intend to realize potential of at least EUR 12 billion across the company in this way by 2022. Around half of this amount will be realized through measures on the sales side, specifically even more systematic data-based sales management all the way to dealership level, and indirect purchasing topics, including synergies from bundling contracts more widely. Another focus area with significant leverage is the reduction of complexity in the development of new product, as I had talked about in more detail on other occasions.

The full impact of these results will come into effect with the respective model launches. We are also striving to lower personnel costs, direct material costs and capital expenditure. Many of these measures have already been implemented.

We are also optimizing our use of capital through targeted collaborations and partnerships. This will not only have a positive impact on our cost structures, it will also allow us to pool expertise and make us much faster. Our partnerships with Daimler on autonomous driving and mobility services are good examples of this.

Ladies and gentlemen, let's move on to the individual segments. In the Automotive segment, revenues for the first 9 months were slightly higher than the previous year at EUR 64.85 billion. Third quarter revenues, benefiting mainly from positive mix effects from new models such as the 8 Series and X7 as well as currency tailwinds, posted solid growth of 9.0%. Boosted by the dynamic development in sales, the segment's operating earnings for the third quarter climbed to EUR 1.52 billion.

The previous year's earnings have been substantially impacted by the market turbulence resulting from the transition to the WLTP and higher provisions for quality issues. Consequently, the EBIT margin was higher than the previous year at 6.6%. As already mentioned, further upfront investments for our ongoing model offensive and electrification dampened earnings. Including the provision we made in the first quarter in connection with the antitrust allegations by the European Commission, EBIT for the year to the end of September totaled EUR 2.67 billion with a margin of 4.1%. This means we are on course for our adjusted target range of 4.5% to 6.5% for 2019.

Pretax earnings for the third quarter climbed to EUR 1.53 billion in line with the positive business development.

Impacted by the planned decrease in the financial result and the provision made in the first quarter in connection with the antitrust allegations by the European Commission, earnings for January to September were significantly lower year-on-year at EUR 2.99 billion. As previously announced, currency and commodity headwinds also dampened earnings.

At the end of the first 9 months, free cash flow in the Automotive segment totaled EUR 1.024 billion, mainly due to lower earnings and the higher inventory buildup than last year for the introduction of new models. Due to the factors I talked about, we expect free cash flow for the full year to come to around EUR 2 billion.

Ladies and gentlemen, let's move on to the Financial Services segment, which once again delivered strong performance in the third quarter. In addition to healthy portfolio growth, currency tailwinds also had a positive impact. The risk situation also remained very stable. As of 30th September, the segment managed a portfolio of around 5.4 million retail contracts. More than 500,000 new contracts with retail customers were concluded in the third quarter alone. This positive business development is also reflected in segment earnings before tax, which rose by 8.7% during the same period to almost EUR 600 million. In the year to the end of September, pretax earnings climbed 5.4% to just under EUR 1.8 billion.

The Motorcycles segment also had a successful third quarter. With sales growth of 9.9%, the operating result also increased to EUR 35 million. In the year to the end of September, almost 137,000 motorcycles were delivered to customers. Segment earnings before financial result were up 8.7% to EUR 226 million. Accordingly, the EBIT margin was 6.3% for the quarter and 12.1% for the first 9 months.

Ladies and gentlemen, we expect this stable business development to continue in all segments throughout the remaining months of the year. We are, therefore, able to confirm our guidance for 2019, assuming that political and economic conditions do not deteriorate significantly.

One risk that remains is the uncertainty surrounding the U.K.'s planned withdrawal from the European Union. There is also a possibility the global trade dispute could escalate further, adversely affecting business in the final quarter of the year and beyond.

In the Automotive segment, we expect a slight increase in deliveries. This development will be driven by our product momentum from new models of the X family like the X7, the new 1 Series and the high-volume 3 Series Sedan and Touring.

In Europe, development in the first 3 quarters has not been as robust as forecast at the start of the year. We have, therefore, adjusted our volume planning on an ongoing basis over the course of the year to reflect current market developments. During the remaining month of the year, we will maintain a clear focus on earnings quality.

Thanks to our flexible production network, we are able to respond quickly to changes in our business environment. China, on the other hand, is currently experiencing stronger growth than predicted. However, this is only partly reflected in our operating results since it is mostly taking place at our BBA joint venture. We expect the segment's EBIT margin for the full year to be within our suggested target range of 4.5% to 6.5%. Without the effect of the provision we recognized in connection with the antitrust allegations by the European Commission, the margin would be within our original guidance range of 6% to 8%.

In the Motorcycles segment, we are planning for a solid increase in deliveries. The EBIT margin should remain within our target range of 8% to 10%.

In the Financial Services segment, return on equity should be on par with last year and above our target figure of 14%. As anticipated, the financial results decreased significantly. Therefore, we still expect group earnings before tax to be significantly lower year-on-year also as a result of the provision recognized in the first quarter.

Despite all the challenges in our current business environment, we find ourselves in a strong competitive position. We have ambitious goals. We are working hard to improve our earnings and profitability. This mindset is deeply rooted in our company. We continue to chart our own course, step by step and with a clear, strategic direction. This remains our approach also and especially in a volatile environment.

Thank you.

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Maximilian Schöberl, Bayerische Motoren Werke Aktiengesellschaft - EVP of Corporate & Governmental Affairs [5]

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Thank you very much, Nicolas. Ladies and gentlemen, the line will shortly be open for questions. Please wait for some technical advice.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

And the first question is from Tim Rokossa with Deutsche Bank.

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Tim Rokossa, Deutsche Bank AG, Research Division - Research Analyst [2]

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It's Tim Rokossa, Deutsche Bank. I'd like to start with the CO2 point, specifically looking into 2020. You always said very clearly that you will meet these targets. You seem to be a lot better on track than, for example, Daimler. 3 points on that. Firstly, how much costs shall we assume for CO2 compliance next year? Will generation 5 already help you on the cost side next year? And how many of your cars in Europe need to be EVs next year?

And the second question block, Oliver, maybe to you. You are now CEO for a few months. And listening to your speech, it sounds very much to me as if you don't really intend to make any material changes to the strategy and to the positioning of the brand and company. Is that a fair interpretation? Or what do you consider to be your key priorities looking out?

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Maximilian Schöberl, Bayerische Motoren Werke Aktiengesellschaft - EVP of Corporate & Governmental Affairs [3]

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Okay. Thank you very much, Tim. I think we start with Oliver.

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Oliver Zipse, Bayerische Motoren Werke Aktiengesellschaft - Chairman of Management Board & CEO [4]

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Yes. Tim, thank you very much for your question. Your question was what are our -- what are my personal indication on our strategy. I think looking at the business environment, and we're not only starting today to look at the business environment. The car itself and the system integration of the car is a completely underestimated challenge. If you look at our environment, there are many players around who struggle with that very challenge, to integrate all technological components to meet fuel efficiency requirements, to meet digitalization requirements and customer expectations overall. And that is our very core concentration where we would like to concentrate on. And we, regardless, is a very, very profitable future outlook. And that is not an easy task to select the more important things of system integration and the-not-so-important things around the vehicle. And I think this is a change to our focus we had before. But it's not a complete 180-degree turnaround, because we have been working on this very strategy for the past 5 years already. And you mentioned quite well that we will -- next year and the year after, we will beat our emission targets. And that is the very result of that strategy to integrate all requirement into the product and stay profitable at the same time. And with that, we are quite confident that we will have quite positive years ahead.

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Maximilian Schöberl, Bayerische Motoren Werke Aktiengesellschaft - EVP of Corporate & Governmental Affairs [5]

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Okay. Thank you very much. So second question was about CO2 cost for next year. Nicolas?

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Nicolas Peter, Bayerische Motoren Werke Aktiengesellschaft - CFO & Member of Management Board [6]

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Tim, maybe to start to with a very clear general statement that fines are definitely not a strategic option for the BMW Group. And we are in a strong position, in particular, also to meet the European 2020 targets. Why? Because we've started ahead of most of our competitors.

In 2019, we will sell between 145,000 and 150,000 cars worldwide, nearly 90,000 cars in Europe. We are -- as we speak, we are launching the new 3 Series plug-in hybrid car, very popular in many European markets. Maybe just as an interesting information. If you look at our 2 Series Active Tourer in Europe, the plug-in hybrid version is the most sold engine variant. We are launching the new X5 plug-in hybrid, and we are planning to grow based, in particular, on those very strong portfolio, which puts us in positive, compared to our competitors' strong position. We are definitely on track to achieve the CO2 target. Is this completely for free? Of course not. Of course not. There is a cost related to it. We've discussed many, many times that cars with combustion engines have a contribution per unit, which is higher compared to plug-in hybrids of electric-powered cars. However, we are systematically working, on one hand side, on the reduction of the electric drivetrains. And on the other hand side, with our Performance > NEXT program in order to improve profitability across the country -- the company.

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Tim Rokossa, Deutsche Bank AG, Research Division - Research Analyst [7]

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Okay. Don't want to -- can I just follow up on this? Nicolas, if you don't want to give us a detailed number on how much it will cost next year, let me rephrase this. Will the cost -- will the burden on the cost side next year be substantially higher than this year for you? Or is that roughly the same?

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Nicolas Peter, Bayerische Motoren Werke Aktiengesellschaft - CFO & Member of Management Board [8]

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Tim, roughly the same wide cost. We have, compared to others, we have a stronger base, yes? We have sold, as I said, 145,000 to 150,000 cars this year, nearly 90,000 in Europe. The mix will also help us to achieve those targets. We are in the process to launch the new 1 Series. 1 Series, very popular car in Europe. Of course, with lower emissions compared to the previous model. 3 Series Touring, very popular in Europe as well. Of course, with lower CO2 emissions compared to the previous model. So yes, there are costs related to it, but this is something we have very well under control.

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Operator [9]

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The next question is from José Asumendi, JPMorgan.

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José Maria Asumendi, JP Morgan Chase & Co, Research Division - Head of the European Automotive Team [10]

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Just following up on 2 topics, please. On CO2, could you please just maybe quantify when you look at the 3 different options in cars, which is 48-volt, hybrid and the electric? Which technologies are you finding, right now, in the market are easier to pass on incremental cost to consumers?

And also on the CO2 topic, can you share your thoughts, please, on the 7.5 grams of super credits? Is this something you can actually achieve next year, which will definitely help to meet the emission targets?

And then the final question, please, for Oliver. As you think about your business and you think about the share of SUVs within the individual regions, do you think you can push the share of SUVs maybe in the 5% to 10% over the next 12 to 24 months, which will be a key benefit for you as you are probably ahead of other carmakers in terms of beating the CO2 emission standards? And you can also actually push SUV share higher in the next 12 to 16 months. If you could share us your thoughts on share of SUV series, please?

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Maximilian Schöberl, Bayerische Motoren Werke Aktiengesellschaft - EVP of Corporate & Governmental Affairs [11]

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Okay. Thank you very much, José. We start with what is easier to sell, I think, the right question for the CEO. Oliver, please.

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Oliver Zipse, Bayerische Motoren Werke Aktiengesellschaft - Chairman of Management Board & CEO [12]

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Yes. I think selling is always important. What -- the actual question is what kind of electrification concept will be more successful than the other one. And our question is all 3 of them. First of all, 48 volts is important for the, let's call them, traditional combustion engines. We will have a big rollout for 48-volt components into all our vehicles. So that's the base requirement. So it will be sold in any case.

Now the question PHEV for us or EV, the hurdle towards electrification is smaller with PHEV. That means 2/3 -- this year, 2/3 of our vehicle are PHEVs. And 3/4, so 75% are PHEVs, and 25% are BEVs. And I think that mix would go more toward EVs over the time, but the PHEVs, for the next 5 years, a dominant figure. And that is why we are also quite confident that we will reach our emission targets in 2022 and 2021.

We also think that the entry-level is easier to reach with the PHEV in the second step, people might move easier from combustion over PHEV to the purely electrified vehicles. But I think all 3 electrification principles will have a future relevance.

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Maximilian Schöberl, Bayerische Motoren Werke Aktiengesellschaft - EVP of Corporate & Governmental Affairs [13]

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Okay. Thank you very much. The second, for -- the second part of the question was about your super credits to the health to meet targets and the share of SUVs. Oliver -- Nicolas?

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Nicolas Peter, Bayerische Motoren Werke Aktiengesellschaft - CFO & Member of Management Board [14]

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José, of course, super credits will be used in 2020, 2021. They will support our target achievement as well as the 95% target achievement in 2020.

The share of SUVs in various regions, to be very clear, we don't have to push SUVs. SUVs are in very, very high demand in all major sales regions. We have probably the most complete portfolio of SUVs X models in the industry after the launch of the X5 and the X7. And if we look at the trend in the U.S. and in Europe and in China, yes, the share of SUV is growing.

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Operator [15]

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The next question is from Tom Narayan, RBC Capital Markets.

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Gautam Narayan, RBC Capital Markets, Research Division - Associate VP [16]

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Yes. Tom Narayan, RBC. But first, actually, I wanted to know what is behind your confidence that you will achieve the EUR 2 billion cash flow target for the year. It sounds like a lot of coming in, in Q4.

And then secondly, if I look at the LMC data over the past 5 years, globally, on a unit sales basis, the premium category has been growing nicely, but BMW brand has not seemed to keep up to the overall category growth. Your closest rival, Mercedes, has, however, along with others. And 1 Series been positive, the premium category has perhaps broadened towards SUVs geographically and, perhaps, a different demographic. I know Mercedes was earlier to SUVs, and perhaps, this hasn't played into BMW's strengths. Another theory is that Mercedes has more model variance than BMW, so maybe this has been benefiting them as the premium category has broadened. Could you comment, perhaps, on what's been happening over the past 5 years there? Appreciating this is a backwards-looking question, but I think it's important one to address to assess whether something will continue or it will be reversed.

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Maximilian Schöberl, Bayerische Motoren Werke Aktiengesellschaft - EVP of Corporate & Governmental Affairs [17]

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So thank you very much, Tom. We start with the question premium market growth with Oliver.

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Oliver Zipse, Bayerische Motoren Werke Aktiengesellschaft - Chairman of Management Board & CEO [18]

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Yes. Thank you very much for your questions, Tom. I think if you look at the wider perspective, the overall market has been shrinking for the last 2.5 years. But despite that trend, the premium market has been growing, which gets to the current position that BMW Group has 2.9% market share worldwide. And that trend, we don't see any indications that this trend will change. That premium -- the premium segment is not growing anymore or at least not growing bigger than the base segment. That's the first observation.

The second observation, and that retains to your question about the SUVs, we have life cycles of about 7 years. So there will be always someone who is quicker with this specific time in its life cycles than the other competitor. I think with our SUV overall strategy, we are well positioned. We have all cars between X1 and X7 in the market. The X7 is very successful, specifically for families with more kids. And that is an overall societal trend worldwide that families have more kids again. So we believe the results actually go right into that trend. It's not so much a trend of individualization but a mode and a trend of practicability. And the U in SUV stands for utility. So that trend of having utilized cars for bigger families is a very strong trend worldwide, and we are riding exactly on that trend. And I think I wouldn't comment too much on the -- on direct competitors. I think we are very successful on the SUV trend, and we don't see any reason whether to change specifically, because we would also electrify that very segment.

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Maximilian Schöberl, Bayerische Motoren Werke Aktiengesellschaft - EVP of Corporate & Governmental Affairs [19]

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Okay. Thank you very much, Oliver. And one on free cash flow.

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Nicolas Peter, Bayerische Motoren Werke Aktiengesellschaft - CFO & Member of Management Board [20]

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Tom, free cash flow, why we are very confident to be at around EUR 2 billion by year-end. Two main reasons. One, CapEx will be, in Q4, in absolute terms, below Q4 2018, a few hundred million euros. And of course, the planned reduction of working capital inventory reduction, at least 80,000 cars reduction between Q3 and Q4. So this will support, from our performance -- from our perspective, another strong free cash flow in the -- in Q4.

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Operator [21]

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The next question is from Arndt Ellinghorst, Evercore.

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Arndt Alexander Ellinghorst, Evercore ISI Institutional Equities, Research Division - Senior MD & Head of the Global Automotive Research [22]

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Yes. Nicolas, just one quick question to clarify on the CO2 cost. If I understood you correctly, so far, in the discussions, you've been pointing towards something in the area of EUR 700 million to EUR 800 million incremental content cost this year. So if we assume about 80,000 to 90,000 additional electrified vehicles in Europe next year, that would leave me with something in the area of about EUR 300 million to EUR 400 million on top sort of incremental, next year. Are we ballparked in the same range here?

And also on CO2, could you give us your current footprint year-to-date and your CO2 emission number? I think you were at 129 in 2018.

And then secondly, for Oliver, please. You said in your speech that the strength of the BMW Group has been underestimated in the past years. So what exactly are you referring to? Do you refer to the stock market, the shoppers' performance or the press, the general public? And then more importantly, and also to Tim's question at the beginning, what will you do different to improve that perception?

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Maximilian Schöberl, Bayerische Motoren Werke Aktiengesellschaft - EVP of Corporate & Governmental Affairs [23]

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Yes. Good. Thank you very much. The right questions. We start with the CEO.

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Oliver Zipse, Bayerische Motoren Werke Aktiengesellschaft - Chairman of Management Board & CEO [24]

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Right. Thank you very much, Arndt Ellinghorst, for your questions. I would give a twofold answer. The first one is about the business environment and our growth perspective. I think it was not so clear that the car industry is a growth segment. And by looking very closely to our stature in the past but even more in the future, we are quite firm that we are in the segment which is growing faster than the average car industry. That's our first finding.

And the second question was on clarity of what if the actual business model of the car industry is there's something outside of the car, meaning the car becomes a commodity, and platforms will have more successful business models. I think having a closer look and also doing a lot of strategic work on the future of these specific business models around the car, we found that the most profitable segment is the car itself, because the car itself is undergoing massive changes, and that will be a very competitive field where we will have survivors and competitors, which will have more difficulty with doing that. And we are adamant that we will belong to the survivor part because it will be a technological integration challenge. So the challenge is not about single components, which lead to battery-electric vehicles, which leads to automated or autonomous cars, active or passive safety system. It's the integration of all these cars to make out of that system, a car for customers, which are easy to use and, at the same time, to have costs under control to stay profitable. And this integration is the extra challenge we are having, and I think focusing on that very challenge is a very safe prospect for the future.

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Maximilian Schöberl, Bayerische Motoren Werke Aktiengesellschaft - EVP of Corporate & Governmental Affairs [25]

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Okay. Thank you very much, Oliver. Nicolas?

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Nicolas Peter, Bayerische Motoren Werke Aktiengesellschaft - CFO & Member of Management Board [26]

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Arndt, coming to your CO2 topic. Number one, as I've said, electrification of the industry is [now popular] and you are relatively precise was your -- the numbers you've mentioned, EUR 300 million to EUR 400 million on top incremental costs in 2020. Having said this, we are -- as I've outlined, we are working hard in other areas to offset those impacts in the framework of our Performance > NEXT program. Based on our young product portfolio, we see some mix opportunities in the quarters ahead. We are definitely striving also as far as gaining segment share in the following quarters. And of course, on the measures we implement on the cost side, are quarter-by-quarter delivering results. And this is why, at the end of the day, clearly, we have step-by-step to offset those negative impact coming from electrification.

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Maximilian Schöberl, Bayerische Motoren Werke Aktiengesellschaft - EVP of Corporate & Governmental Affairs [27]

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Okay. Arndt, thank you very much.

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Arndt Alexander Ellinghorst, Evercore ISI Institutional Equities, Research Division - Senior MD & Head of the Global Automotive Research [28]

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And your CO2 number, I guess, your...

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Nicolas Peter, Bayerische Motoren Werke Aktiengesellschaft - CFO & Member of Management Board [29]

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Yes. Sorry, Arndt. CO2 number, 128 grams in 2018. We planned a slight decrease in 2019.

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Operator [30]

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The next question is from Dorothee Cresswell, Barclays.

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Hanna Dorothee Hellmuth Cresswell, Barclays Bank PLC, Research Division - Research Analyst [31]

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It's Dorothee Cresswell from Barclays. First, could I just come back to your comments on cost-cutting. And obviously, it sounds like you're making decent progress on efficiency improvements. And I think in the past, you indicated that, that would benefit earnings by 3-digit million amount in 2019. Could you just confirm that and perhaps tell us if we're right assume that there is going to be a significant step-up in 2020?

And then my second question is just around China. I think the guidance for the volume growth this year, there is obviously 10% or a little higher, and I know that's unusually strong. But if we look to the coming years, presumably the prospects remains very good. Is it too aggressive to assume the growth in the mid- to high single-digit range is possible there, and if we assume the market sort of stabilizes going forward tax?

And then finally, on the Chinese tariffs that I think are due to come in on December 15. And if that happens, does that accelerate your localization strategy?

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Maximilian Schöberl, Bayerische Motoren Werke Aktiengesellschaft - EVP of Corporate & Governmental Affairs [32]

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Okay. Thank you very much. Nicolas?

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Nicolas Peter, Bayerische Motoren Werke Aktiengesellschaft - CFO & Member of Management Board [33]

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Dorothee, efficiencies, yes, we will have a positive impact from efficiencies in 2019 in the mid-3 digit euro area. So that's correct. Definitely growth in China, we are extremely well on track. We forecasted a growth of 5% to 10% in 2019, and we are slightly ahead of this road map, thanks to the strong performance of the localized X3. We are in the process of localizing the X2. We have localized the new 3 Series Long version. So we are optimistic as well for the month's Tourer to come, despite and business environment in the overall car market, which is -- which remains challenging in China. But definitely, we are on a good development. We will localize next year in the iX3 as planned, so we will have an X3 with a combustion engine, PHEV and fully electrified. We have clear plans to -- regarding our localization strategy from today's perspective. There is -- we are -- we have always ambitious plans, so there is no need to accelerate at this point in time anything. We are well on track.

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Hanna Dorothee Hellmuth Cresswell, Barclays Bank PLC, Research Division - Research Analyst [34]

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Can I just come back on the 2020 number? Sorry, because you indicated what it was for 2019. But are we right to assume that those cost-cutting benefits step up next year or not?

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Nicolas Peter, Bayerische Motoren Werke Aktiengesellschaft - CFO & Member of Management Board [35]

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Yes. Yes. Definitely, of course. It's too early to give a clear guidance. We will guide 2020 in a couple of months from now. But of course, we had a very positive impact in 2019, and this will continue. It will definitely continue in 2020 as well. As you are aware, we are -- and we are optimistic we are in good discussions with our social partner to lower personnel costs. So we are well on track also in this area. We hope to be in a position to announce something by end of this year. As this is one area we are well on track also to reduce our CapEx spending without impacting our growth plan. So yes, you will have -- you will see 3-digit positive impact.

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Maximilian Schöberl, Bayerische Motoren Werke Aktiengesellschaft - EVP of Corporate & Governmental Affairs [36]

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Good. Thank you very much, Oliver. Thank you very much, Nicolas. So we have to close our telephone conference. Thank you for joining us today. Bye-bye.

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Operator [37]

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Ladies and gentlemen, thank you for your attendance. This call has been concluded.