BMW (ETR:BMWG) Group (BMW.DE) has successfully met all its Key Performance Indicators for 2023 and is looking forward to continued growth, especially in the Chinese market where it sold over 100,000 battery electric vehicles (BEVs) in the year.
During the Annual Press Conference 2024, themed "Strong today and strong tomorrow," executives discussed various aspects of the company's performance and future outlook, addressing questions on market conditions in China, emission targets in Europe, and the company's strategies in terms of capital allocation and dividends.
Key Takeaways
- BMW Group met all 2023 KPIs and provided positive guidance for 2024.
- The company outperformed the market in China in 2023, with strong demand for models like the X5 and the 7 Series.
- Over 100,000 BEVs were sold in China in 2023, doubling the sales throughout the year.
- BMW is prepared to meet European emission targets in 2025, with a 20% reduction from 2023 levels.
- Capital allocation strategies and dividends in China were discussed, with a large payout in 2023 due to the previous year's catch-up.
- The company's joint venture in China is stable and contributes to profitability.
- BMW is investing in AI and automation to improve efficiency across various company sectors.
- Upcoming changes in reporting with ESRS starting in 2024 were highlighted.
Company Outlook
- Continued growth expected in the Chinese market for 2024, with a focus on balancing profitability and growth.
- BMW's BEV strategy in China is proving effective, with no loss in market share despite competitive pressure.
- The company plans to make Research and Development (R&D) more efficient through AI utilization.
Bearish Highlights
- Price pressures exist in the lower segments of the BEV market in China.
- The auditor's evaluation of climate considerations in the accounts is limited by German law.
Bullish Highlights
- BMW's sales and growth in China remain strong, with the 5 Series launch contributing to demand.
- The profitability of BMW's joint venture in China provides cost advantages and remains stable.
- The company's preparation to meet emission targets in Europe is ahead of schedule.
Misses
- No detailed breakdown of vehicle values by engine type in financial statements due to regional price differences.
- Provisions for price reductions increased due to higher volumes in Q4.
Q&A Highlights
- BMW sold over 100,000 BEVs in China in 2023, and the number doubled during the year.
- Inventory buildup was attributed to strong demand and had minimal impact from the agency model.
- The company emphasized a positive pricing position in China with a good mix of pricing and dealer support.
- The leasing business and financial services are showing a positive trend with increased penetration ratios.
- BMW does not break down retail volume by engine type in their reporting and uses a portfolio approach.
BMW Group continues to navigate through a dynamic global market environment with a strong focus on innovation and sustainability. The company's commitment to meeting emission targets and expanding its electric vehicle lineup is clear, as is its strategic approach to capital allocation and dividends. As BMW looks to the future, it remains steadfast in its goal of being "strong today and strong tomorrow," with an eye on continued growth and efficiency improvements through AI and automation. An upcoming event in Munich will further showcase BMW's future plans and technology, indicating a forward-thinking approach to the automotive industry's evolving landscape.
InvestingPro Insights
BMW Group's performance in 2023 and its outlook for 2024 is further illuminated by key financial metrics and InvestingPro Tips that highlight the company's market position and investment potential. Here's a closer look at the data and insights from InvestingPro:
InvestingPro Data:
- Market Cap (Adjusted): 69.59B USD
- P/E Ratio: 5.96, indicating a lower valuation compared to industry peers.
- Dividend Yield as of the latest dividend ex-date: 5.91%, showcasing the company's commitment to returning value to shareholders.
InvestingPro Tips:
- BMWYY (OTC:BMWYY) is trading at a low earnings multiple, which could suggest that the stock is undervalued relative to its earnings potential.
- The company has maintained dividend payments for 33 consecutive years, emphasizing its reliability and attractiveness to income-focused investors.
BMW Group's stable and profitable joint venture in China, as well as its successful BEV strategy in the region, align with the InvestingPro Tip that BMW is a prominent player in the Automobiles industry. Additionally, the company's ability to pay a significant dividend to shareholders is supported by its substantial market cap and strong dividend yield.
For readers interested in a deeper analysis and more InvestingPro Tips on BMWYY, visit https://www.investing.com/pro/BMWYY. There are 10 additional tips available, which can provide further insights into BMW's financial health and market performance. To enhance your investing strategy with these insights, use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription.
Full transcript - Bayerische Motoren Werke AG PK (BMWYY) Q4 2023:
Ritu Chandy: Good morning, good afternoon and good evening, ladies and gentlemen, dialing in from across the globe. Strong today and strong tomorrow, that's the theme of our Annual Press Conference 2024. We've delivered in a steadfast manner on all our KPIs for 2023 and provided robust guidance for 2024. My name is Ritu Chandy, Senior Vice President, Treasury and Investor Relations for BMW Group and I'm delighted to be your moderator today. Our CEO, Oliver Zipse; and CFO, Walter Mertl, are now ready to answer your questions.
Ritu Chandy: Without further ado, our first question comes from Dorothee Cresswell, Exane. We will move to the second caller, Jose Asumendi, please. Dorothee, we'll come back to you.
Jose Asumendi: I would like to, please, understand a little bit better the market environment you're seeing in China in the first month of the year. And specifically, when you look at 2024, can you describe a little bit the tailwinds and the headwinds you're seeing in your Chinese business which will impact your profitability in 2024 as well as the product cycle in the region? Second question please relates -- maybe Mr. Zipse can take this one. Would love to hear a little bit more your thoughts with regards to your efforts to beat the initial targets in 2025 in Europe which, by the way, I think you are obviously well on track to hit them. But with regards to the 2030 targets which, in our view, basically convey the message that we need to have at least 50% share of BEV in Europe, how do you see these targets for BMW and overall for the European car industry?
Ritu Chandy: Thank you very much, Jose. Definitely, without further ado, we will start off with the market environment in China, 2024 tailwinds and headwinds and what it means for profitability with Walter. Thank you, Walter.
Walter Mertl: Last year, you do know that in China our business did a very good job because with BMW growing 5.7%, we outperformed even year-to-date December the market. So that was a very good momentum we had. Many of you do know that we had a stutter [ph] in the year and that's the reason why the total overall number is a bit weaker but BMW is growing. That is also based on the X5 volume, for example which we had a full year impact in '23 localized in China. And going forward into the direction of January and February, we see a lot of, I think some would say, irritations, especially in January. But we shouldn't forget that the year before, January '23, there was still COVID on its way in China. So a lot of shops have been closed in January '23. So sometimes you see in some reports 50%-plus year-on-year but that is rather based on the year '23. We, as BMW Group, are still performing well. We are growing also in China across the models and it really helps with all our new or full year available products now to underline this growth. Just think about the 7 Series which we have now fully available since July '23 and hence, we can also grow year-on-year straight.
Ritu Chandy: Thank you, Walter. On the question regarding emissions and targets for 2025 in the EU and 2030, Oliver, please?
Oliver Zipse: Jose, your question is on the spot. What we see in Europe, we have a 3-step approach to CO2 targets for emissions. The first step is in 2025 and we are prepared for that because we are already about 20% below the current target in 2023. We will undercut these targets in 2024 in a similar fashion, preparing ourselves to come down to another 25% reduction target which we will see next year for the car industry. So undercutting today is already preparation for reaching the targets next year. And that helps, of course, that we sell more BEVs this year than past year. We will be around 20% of our global production will be BEV. The next step is in 2030 with minus 55% and that will be even tougher to reach. And that is why we adjust our product offerings very much in line with market conditions we see then that we can reach 50% BEV share global, maybe in Europe a little bit higher. And that's the reason also why we bring the Neue Klasse to the market. With the Neue Klasse, the range anxiety will be more or less gone. People will not -- that will not be the main concern anymore. And then, of course, we have all the advantages of driving emission-free. So we are steadfast on exactly the road. In 2026 and that is very, I think, a perfect point in time to do a review because then we will see what happens to the car industry when you reduce emission targets inside of 1 year by 25%. And as you know, these are fleet emission targets, not individual targets. Then we have a review where we will look at 2035 where we will have minus 100%. Our point here is and has always been we should be very careful to have an exit strategy which minus 100% is an exit strategy, without looking at the corresponding boundary conditions. And boundary conditions is charging environment in all countries of Europe, not only in 5 or 6 countries which are fast to develop and also looking at customer sentiment. And we should have a very, very close look into that. So I think to answer your question, in 2025, we are well prepared. Also for 2030 and 2035, we have to discuss again.
Ritu Chandy: Thank you very much, Oliver. Very clear and concise. We would then move on to our next caller, please, Patrick Hummel from UBS.
Patrick Hummel: I hope you can hear me.
Ritu Chandy: Loud and clear, Patrick.
Patrick Hummel: Okay. Excellent. Two questions, please. The first one is on the capital allocation topic. I would like to ask really from a high level, in light of what competitors have decided to do, you haven't made any formal statements. And you are, as we know, returning quite a lot of cash to shareholders through the dividends and you have the buyback programs in place and quite a bit to execute. But I'm sure you have discussed what your competitors have announced and you obviously decided against formalizing a medium-term capital allocation policy. If you could just share your thought process why you haven't done so and how we should think about capital allocation at BMW in the medium term. That's my first question. And then my second question goes into the same direction, emissions compliance, with a specific focus on the plug-in hybrids. It seems there are some markets where plug-in hybrids are much more than just a short-term bridge technology, possibly even in Europe. But there is the regulatory scrutiny on those plug-in hybrids. Just earlier this week, the EU published a document highlighting that the real-world emissions of plug-in hybrids are 3.5x as high as WLTP. And if you adjust for that, going forward, PHEVs would no longer be a contributor to reducing fleet emissions, if that was the case. And my question here is, do you still bank on plug-in hybrids as part of the European emission compliance trajectory for the medium to long term? Or does it have to be BEV only because PHEV would get such a penalization basically by amendment of regulation so that they are irrelevant from a compliance perspective?
Ritu Chandy: Thank you very much, Patrick. The much awaited question on capital allocation both near term and medium term, I think, Walter, over to you.
Walter Mertl: Patrick, many thanks for this question. And of course, we had a good discussion and we are also observing what others do and have our opinion about it. Well, let me start, first of all, that I think we did a very good job ending with a strong Auto free cash flow of EUR6.9 billion year-end last year despite our combined CapEx and R&D of EUR10.7 billion. So I would say this is an operational robustness check, inclusive working capital increased, right? So -- and with that, 33.7% payout ratio proposed to the AGM is also a good statement because it is the strongest one we had in our history. And on top of that, I would really like to stress that if we take the dividend payments and last year's share buybacks of total EUR5 billion which is related to the AG shareholders and if we compare that one with free cash flow related to our AG shareholders, that is a ratio of 92%. So I would say we pay out a very good ratio, this with respect to the free cash flow. Now topping this and eventually you did this math already, if we check out the last 3 years, we returned to our shareholders more than EUR16.5 billion in dividends or share buyback. I think that was a very good statement we could even underpin. And consistent delivery of returns is, I think, a good story so we continue to utilize our dividend corridor of 30% to 40% plus share buyback flexibly to return to our shareholders and of course, limited by free cash flow. That is still the same and we feel well and [indiscernible]. Many thanks.
Ritu Chandy: Very clear, very concise. Thank you, Walter. And I believe Oliver will take the question on emissions and plug-in hybrids. Oliver, please.
Oliver Zipse: Yes. The PHEVs are a firm constant on our worldwide offering, accompanying pure combustion engine and the BEVs. And they're in the marketplace very stable currently. But your question was towards the role in the EU. They are the entry into electro-mobility for many customers. So they play a very crucial role because people who buy a PHEV will not automatically, if they would not exist, by a BEV but they would buy a combustion engine vehicle. And independent of the actual development of the utility factor and that's what you're talking about, currently we have -- with the newest i5, we have between, depending on the derivative, between 16 and 20 grams CO2 per driven kilometer. Even if you take a different utility factor which increases to, let's say, 40 or 50 or 60 grams, it is still better than a combustion engine. And the market is there for plug-in hybrids. And therefore, independent of actual WLTP development, the PHEVs have a strong market demand in Europe but also of course in the United States. So they are a firm constant. There is no end in sight. And I don't think that this is only a transformational technology in cars. They are here to stay for the foreseeable time, at least for BMW.
Ritu Chandy: Thank you, Patrick. Our next caller, please, Mike Tyndall from HSBC.
Michael Tyndall: Two if I may, one -- both around cash. So the inventory buildup that we saw that you had to flag to us was going to occur, I just wonder if you could potentially tell us how much of that relates to agency, so moving to direct-to-consumer. And what's the return on that incremental capital that you're committing to that inventory? And then the second one is around the China earnings, the dividend. So you paid out EUR1.4 billion [ph] to minorities. So the grossed up dividend would be about EUR5.8 billion. The earnings were EUR3.3 billion [ph]. So you've paid out more than the profit, at least on the numbers we can see. Just wondering, can you do that again this year? And to what degree in your EUR6 billion guidance have you factored in paying out that minority dividend again in China?
Ritu Chandy: Thank you very much, Mike. We'll start, of course, with Walter on both questions: inventory buildup, how much of that relates to the agency model, return on capital plus the dividend from China. Thank you, Walter.
Walter Mertl: With respect to the inventory buildup, that was announced already in August, as you clearly remember and that is because of demand. So of course, we also filled our pipeline for the 5 Series launch in China that's material but also in the country for the country. Because in China, as you are fully aware of, we just launched the 5 Series in February, right? But the key is that we organized in August already to have a good pipeline for the whole demand. And reality has proven us rightly to do so because we also experienced interesting logistic things in the last month of the year. So I think we've been properly prepared for. It was great to do so. And with respect to how much of stock was already there for agency model, that was end of '23, hardly anything. We just started with the agency model in -- freshly in Italy, in Sweden as well as in Poland. But the first car to come being launched was our Countryman which was launched mid of February. And the next cars to come are then in May. So that was hardly any impact end of year '23 with regards to agency models. So I think that is the first question. The next one was with respect to the dividend, right, if my script is all right.
Michael Tyndall: Specifically, China, yes.
Walter Mertl: Yes. Dividend payment in China, we have the pleasure to not just have the dividend payout for the year '22 and '23 but also for '21. So because we didn't pay out any BBA dividend, our joint venture BBA, in the year '22, we caught up in '23. That's the reason why it was that big amount. And this big amount was concluded to be in European accounts in November. That's the reason why you see a big change also in our net liquidity, the asset side, in Q4. That is the big amount.
Ritu Chandy: Thank you very much, Walter. Thank you very much, Mike. Our next caller, please, would be Horst Schneider from Bank of America.
Horst Schneider: I have got a few more boring forecasting questions, maybe. So I see in your annual report this time this line on provisions for bonus and price reductions. It's maybe more a question for Walter. And I see that basically it has increased, these provisions for price reduction, from EUR1.4 billion to EUR1.7 billion. And it says here [indiscernible] in 1 year, EUR1.5 billion. So therefore, I remember, Walter, when we met you last year, you always said now everything has been provisioned in China. It's not an issue; and you have got your math. So therefore, I'm curious to get to know your math, of course, for 2024. So does it imply basically that we're again going to see very little impact from negative pricing in 2024? Or is it rather that this provision position gets topped up in the moment it gets used as well, so that you have got again more reserve for the following years. In that context as well, maybe can you outline the price trends you see at the moment in the various regions, that would be helpful as well. And then really boring forecasting questions. We struggle a lot with this reconciliation line and it was a big benefit in 2023. And I know it is connected basically to the question how much leasing business you do. So if you could give some -- I don't know, some hint what we can expect for 2024 would be great. And on top of that, when do you expect basically the leasing business to pick up again? And the last one is within your profit before tax guidance which financial result assumption have you baked into that?
Ritu Chandy: Thank you very much, Horst. I hope we've got a few more minutes for these answers. We'll start off with -- no, no, no worries at all. We'll start off with your very first question, provisions and price reductions as well as pricing trends. Let's start there, combined pricing trends firstly and then pricing trends leading to provisions. Walter, please?
Walter Mertl: So I hope I got all your questions. Let's start with the first one. So the provision, if you saw that, for the bonus side, we had higher volumes also in Q4, so hence, we have also automatically higher provisions for than compared with Q4 '22. So that's the base story with regards to the bonuses or price bonuses -- provisions. That is the first thing. But with respect to dealer payments, for example, we didn't conclude further bonus or dealer support as we discussed it in August as well as in November. So that is quite clear. With respect to the pricing position, I think we have a very good pricing set. And even if you have a look for the 7 Series, we could even lift up the pricing position compared with previous 7 Series, right? So it's not just a price up but also a mix up in China which is really positive. And from that point of view, product-wise, that is all in sync and the dealer support we have given that was last year in Q1, Q2 and Q3 and the Q3 support was paid out in Q4. No payments in Q1 this year. So I think that is the most relevant for your question number one and two, I assume. With respect to the second one, I think there was already the reconciliation one, right?
Ritu Chandy: Reconciliation and color on leasing, when do we expect leasing?
Walter Mertl: Perfect. So on the reconciliation side, of course, that is absolutely linked, a, with our leasing business. Because if we sell something on the Automotive side, we eliminated in the reconciliation column because in the group, there is nothing clearly happening. And with respect to interest support from Auto and you do know that last year we had big interest set and we also had on the leasing side, that comes in positive in the reconciliation. And the combination of those two plus not to forget and I don't want to overcomplicate it now, not to forget, reconciliation is also portfolios back as is the Financial Services business, per se, right? It's one level after the other. The combination of rundowns and runs-up is combining, of course, the final effect positive or negative in this total reconciliation line. But in fact, it is supporting our Financial Services business. And with regards to our guidance, slight increase of volume with automobile is, of course, benefiting also Financial Services business. And penetration ratios have increased quarter-by-quarter. So I don't know whether you had the chance to see my speech but we tried to organize you quarter-by-quarter to see the trend has changed. Q2 last year, we have been more or less seen the bottom side of new contracts. Q3 was already increasing, Q4 even more. So in total, I think, number-wise, new contract-wise, we equal spot 0.2% [ph] lower than in year '22. But you also saw, I guess, the beneficial side because we had heavier lease costs in more price cost than we got off and hence, the whole level lifted up. So I think from that perspective, this is a positive trend going forward. And financial results within Other Entities, I think you also raised the question, correct?
Horst Schneider: Yes, the Other Entities more general, right? When you guide for group PBT, what financial result assumption that implies?
Walter Mertl: On the financial -- on Other Entities segment, the financial result is, of course, also depending on our stand-alone derivatives. And you do know that with interest increases, you usually get positive incomes. With interest coming down, you get the lower ones. And then, of course, it's again the question of your interest portfolio with respect to the hedging strategy. So that one is quite okay, I would say, meaning more or less neutral. And Other Entities have rather potential of positive developments because we also have interest income because Other Entities are serving for all legal entities in Financial Services as well as Automotive. So they are getting also on interest income which is positive.
Ritu Chandy: Thank you very much, Horst. We will now move on to the next caller, Stephen Reitman from Societe Generale (OTC:SCGLY).
Stephen Reitman: I have questions about China and in particular, you mentioned already the launch of the 5 Series in the mid of February of this year. Early to say, I know but could you give any indications of what your dealers are saying and what feedback you're getting on the reception to the i5 and in particular, the pricing decision to price it at the same price as the 525Li which is obviously quite a bold step considering the difference you have in Europe. And also, in general, about your EV sales in China when you sold about 102,000 BEVs in China, so over 3x the volume of either Mercedes and Audi. As you might expect, their comments are, well, someone's discounting a bit more which explains that quantum change. But I'd like to get your view on the profitability of those sales, how that's building your strategy and your position in China in the BEV space.
Ritu Chandy: Thank you very much, Stephen. We'll start off with you, Oliver, please, on 5 Series, reception by dealers and also the recent trends, after which, we'll switch to Walter to talk about the second question. Thank you. Oliver.
Oliver Zipse: Well, Stephen, thank you. Thank you for your question. Let's have first a look-back to 2023. In 2023, we sold more than 100,000 BEV only in China. And that number doubled during the year of 2023. So when you look at the market, I think it's -- we have to be careful not to talk about a general industry trend but you have to look manufacturer for manufacturer. And for us, our BEV strategy in China is working particularly well. We will also always balance growth and profitability like we do in Europe and like we do in the United States. And the price competition you see, especially in the lower segments in China, of course, that is very, very tough there. It's not in the same way happening in the upper segments of the market. And now on top of that, as you mentioned, we are offering the new long version of the 5 Series as a combustion engine but also for the i5. And that, of course, strengthens the development of the BEV market in China. Looking now at '24, we will see growth in China overall but also on the BEV side. After the first 2 months, we are not unhappy about the development there. The growth is not as strong as in the past, that is true. But we don't see that we are losing market share. We don't see that the market is shrinking. Look at January, February, we have double-digit growth for BEVs in China. Is there price pressure? Of course, there is price pressure. But we will always try to balance profitability and growth at the same time. So you see us not too overly optimistic, that would be the wrong word. But we are far away from a shrinking market, at least what we see for BMW. Thank you.
Ritu Chandy: Thank you very much, Oliver. And Stephen, to your second question, specifically on profitability in China, BEV and otherwise, Walter, please.
Walter Mertl: I guess I would like to clarify, first of all, that 90% of the Chinese market for BEV is under CNY 300,000, 90%. I think last year was ending with 91% or so. So I think that one is the first big thing to know because our cars start more or less from CNY 300,000 onwards. And last year, we achieved over 11% BEV share already with our products. So it is growing step by step. And with the 5 Series, it is really attractive. Just last weekend, so to say, we had the best foot traffic and incoming orders on the 5 Series demand. And the BEV side of this -- of the 5 Series is really also a great experience for everyone over there who is utilizing a test drive. And so we see also incoming orders there. So I think that is really a big position. What we have to know with respect to the profitability, the 5 Series is a long wheel-based car getting produced with our joint venture partner, Brilliance. So we also utilize cost advantages over there. This is not an import. And so far, if we would have a look on the profitability of our joint venture, BBA, that is quite stable over the last 3 years, stressing our profitability. And of course, with our full consolidation impact, it is also beneficial for the total BMW Group. So we are really looking forward. And with respect to pricing, just to give you a little comment, according to our surveys, we are doing really well in terms in pricing compared to our competitors. Stressing again my 7 Series example from beforehand, we had the possibility and we did it to increase mix as well as price even on the 7 Series side last year which is really a good position, I would say.
Ritu Chandy: Thank you very much, Stephen and thank you, Walter and Oliver. We will now move to our next caller, Pal Skirta from Bankhaus Metzler.
Pal Skirta: Congratulations to Neue Klasse world premiere. I mean, BMW obviously, incurred high R&D expenses with Neue Klasse and we can see the impressive result. But I have a question on a more general note. Considering the AI applications and considering the fact that technology is an ever-evolving topic, maybe you can give me some details on your strategy regarding AI application to cut R&D expenses and in particular, if you are -- if you can imagine cutting or downsizing your R&D budgets already in the short term driven by AI applications and downsizing your R&D -- maybe downsizing your R&D outsourcing activities because of AI applications.
Ritu Chandy: Thank you very much, Pal. We will definitely have more than one answer on this topic, I can assure you of that. We'll start with Oliver on R&D -- well, AI applications and what it means for R&D and beyond with Walter. Thank you. Oliver.
Oliver Zipse: Well, first of all, to frame that, we're not cutting down on R&D expenses because we have something ahead of us. And before I answer your question what is happening at BMW, we do the next step of our technology clusters which you will not only see in the Neue Klasse vehicles, you will see that in the next coming years in all BMWs: autonomous drivetrain technologies, electrical drivetrains, partially electrical drivetrains and of course, the new user interface. What you're talking about, I think, is about making R&D more efficient through the use of AI. AI, despite the fact that it became kind of fashionable to talk about it, that is not a new topic for us, not at all. You could not have any form of autonomous driving sub-functions or function without neural networks. So we use AI since the last 30 years already. So you will see a lot of AI application in the car to make the car more efficient, to make the car more intelligent and so on. And in the very same fashion, here we see applications during the development cycle, during the normal process and you will see that almost everywhere at BMW and of course, to make R&D more efficient. And we set ourselves a specific target to make the whole organization more efficient, not only R&D. It's administration, it's planning processes. Everything is looked for, for more efficiencies through AI but not only through AI. And I can tell you, whatever can be automated at BMW will be automated with or without AI, by the way. And of course, we live in a time where the application through newest technology is very easy, very applicable. And of course, through the big ramp-up we have now, we are seeking more efficient development processes, absolutely.
Ritu Chandy: Thank you very much, Oliver. And AI is not -- the limitations of AI or the applications for AI are not just limited to R&D. I'm certain Walter has something to add on all other processes within the company. Please, Walter.
Walter Mertl: Many thanks. So of course, as Oliver mentioned already, it is not just R&D. We are bringing it across even in our sales side. Have a look for our agency model with direct sales, we are also utilizing here pricing, situation of offer, incoming orders, the leads we are generating with web crawlers, getting all the numbers together. And bringing that also not just on the sales side but also bringing it into the production system, with purchasing. So we connect all the dots, also getting the administration functions in place. So we are utilizing that, connecting the dots. And as we said already, not just utilizing AI, there are different instruments to be utilized. And I think with respect -- usually everyone just talks about R&D with virtual worlds or even getting crash simulations faster then and of course, we utilize that. Because this is, on the one hand side, speed but on the other side, more qualitative aspects to see crash simulations, how they end up and how to tune without hardware. And of course, the cost side which I appreciate highly, to get them in order. Many thanks.
Ritu Chandy: Thank you very much for that, Pal. [Operator Instructions] With that, we will go to our next caller, Michael Punzet from DZ Bank.
Michael Punzet: I have two questions, if I may. First one is on the margin development in the Auto segment in the fourth quarter. I think that was the lowest number in the whole -- in the quarters in 2023. Maybe you can explain what happened there? Maybe have you booked some additional provisions or something like that? And the second one is on your residual values. You said that you expect lower residual values in 2024 with only in the Financial Services division or the Automotive division as well?
Ritu Chandy: Thank you very much, Michael. Your first question, specifically on Q4 2023 margin development and the reason for Auto EBIT at 8.5%. Walter, please?
Walter Mertl: The Q4 is always recognized with the highest fixed cost share in our business, at least with BMW, compared to the Q1. So usually, we have the lowest fixed cost share in Q1, more or less stable in Q2, Q3 and the highest one in Q4. And that is more or less the biggest answer for this margin coming down to this 8.5% which we achieved which I would say is a strong position in the Q4 with respect to other competitors. And with respect to residual values, yes, they are lower. They're still positive, I want to stress but less positive than in '23. And the effect of residual values getting the provisions released is in Auto as well as in Financial Services. And usually, the proportion is rather with Auto than with Financial Services, if this helps. Many thanks.
Ritu Chandy: Thank you very much. Our next caller, please. We have Justin [ph] from Federated Hermes (NYSE:FHI).
Unidentified Analyst: I thought the presentation you did this morning was very professional and clearly a positive year for the company, so I congratulate you on that. I am particularly interested in the alignment of the accounts with the company's climate commitments. And we welcome the company's explanation of how it has handled climate in the financial statements, although we would like to see more information on the rationale and I'll probably come back to the company on that in the future. I do have 2 questions on this point particularly though. The first that is in your presentation, Walter, you mentioned that there was a drop in the value of off-lease vehicles this year. And we have concerns over the coming years that the value of these assets which is quite considerable on the balance sheet will contain a lot of uncertainty between combustion engine and electric vehicle resale values. Will the company commit to providing information in the financial statements that show the value by engine type in future so that investors can understand the estimations made by the company and the potential impact of market changes and uncertainties in the secondhand vehicle values? The second question is relating more to your auditor. And we rely on the auditor to provide us with an independent assessment of the company's approach to the accounts. And we've been asking over the last year or so that they explain how they have considered climate in their audit report because with BMW being one of the world's top carbon emitters, we consider climate as being a material topic for investors. We note again that this year, the auditor has neglected to mention how it has considered climate and its rationale for not considering it material. Could you provide an overview of how this has been discussed between the company and the auditor and whether we can expect the auditor to include an explanation of its evaluation of climate in the future.
Ritu Chandy: Thank you very much, Justin [ph]. We'll start off with your first question on off-lease vehicles in 2023, engine type and what we expect to disclose in the future and what that means for provisioning of residual values. Walter, please.
Walter Mertl: Thanks for your questions. With respect to climate alignment. I think we report everything already what we can and there will be a change for the statement of 2024 with ESRS. So we will have a lot of adjustments there. But with respect to your question on retail volume by engine type, so we don't do that. We have our portfolio approach. We have this one. And of course, we have to understand that there is a difference in regions. And of course, every region has different aspects. The used car price for the same car in the U.S. is different than in the U.K. or in Germany. So we would rather, I think, confuse the reader than giving him a lot of tables and then explain everything how we come to this position because we have a dedicated method and math how we organize it, utilizing the regional aspects and also the regional forecast for the next year, 2 years or 3 years to go. And I think these models are quite complex, I would say but pretty good. And that's the reason I would say that we are not reporting even for the year '24 an engine type breakdown because that alone is not the message. With respect to the auditor assessment, I have to say I can't speak for the auditor. I just know a bit of this German law the auditor has to make his quote. And specifically for them, there are limitations what can be reported on climate over -- under German law. Yes, we are doing HGB, the German commercial code, rather than IFRS also and this is what he also has to stick to. He can't just write something because they are liable ultimately. So by law, that's currently not possible. But you will find some more information in the audit report you can read. We had a good discussion based on your inputs and he fine-tuned already a bit more than in the years before. So, I think that is what he could do. Otherwise, he we do something against the law and we don't want to have that, I guess, Justin [ph]. Many thanks.
Ritu Chandy: Thank you very much. Ladies and gentlemen, we have come to the end of our call this afternoon. We started today's annual press conference seeing the Neue Klasse, where we are showing nothing less than the future of the car. More BMW, more future, you said, Oliver. Well, with that, I'd like to ask you all to mark your diaries, July 15 and July 16. Oliver and Walter would be delighted to host you here in Munich to show you more of that future, more BMW; technology, brand, design, product. We look forward to having you here with us in Munich. Thank you very much for joining us this afternoon.
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