Bayerische Motoren Werke Aktiengesellschaft (BMW) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. I would like to welcome you all to the BMW Group's telephone conference for the third quarter results. With us today are Oliver Zipse, Chairman of the Board of Management; and our Chief Financial Officer, Walter Mertl. First, Walter will take you through our financial results. Oliver will then give you a general business update for the BMW Group. Afterwards, we will have time for our Q&A session. Walter, please go ahead.

Good afternoon, ladies and gentlemen. The BMW Group delivered a strong performance in the third quarter. As expected, we achieved solid sales growth and correspondingly positive financial key figures. The group EBT margin for the third quarter came in at 10.6%. For the 9 months period from January to September, it was 11.9%, exceeding our strategic target of 10%. The Automotive segment posted an EBIT margin of 9.8% for the third quarter and 10.3% for the year to the end of September. Without depreciation of BBA assets from the purchase price allocation, margins came in at 10.8% for Q3 and 11.4% through 9 months. After a successful third quarter, we expect a positive business development in the fourth quarter. All segments are on track to meet our goals for the year. I'd now like to show you a few slides with our business figures for the third quarter and the first 9 months in more detail. Let's start with the group figures. Group earnings before tax for the third quarter were on par with last year at just under EUR 4.1 billion despite a significant headwind from the fair value assessment of interest rate hedges compared to Q3 2022. Group pretax earnings for the year to the end of September decreased by about EUR 6.8 billion. However, last year's figure included onetime income of EUR 7.7 billion from the revaluation of equity interest in BBA. Without this effect and looking at the underlying operating result instead, group earnings were EUR 900 million higher year-on-year in the first 9 months. Let's take a look at the individual segments, starting with the Automotive segment. The BMW Group delivered just under 622,000 vehicles to customers in the third quarter of 2023, a year-on-year increase of 5.8%. Year-to-date September, deliveries rose 5.1% to around 1.84 million vehicles. Our order books take us into 2024 with valuable impetus coming from new models like the BMW 5 Series. We expect this positive trend in deliveries to gain momentum in the fourth quarter, resulting in solid growth in vehicle sales for the full year as forecasted in August. In addition to models from the upper price segment, our all-electric vehicles are another important growth factor. We sold around 94,000 units in the third quarter and just on the tune of 47,000 fully-electric vehicles for the 9-month period. BEV share of total sales continues to grow. In the third quarter, it was 15.1%. In the fourth quarter, our sales of all electric vehicles will get a further boost from the launch of the new BMW i5. For the full year, we expect BEV to account for about 15% of deliveries. After 9 months, the share was 13.4%. Third quarter Automotive revenues were at the same level as the prior year at EUR 32.1 billion. However, currency translation headwinds from the U.S. dollar and Chinese renminbi played a part in this. Adjusted for these currency translation effects, revenues increased by 6.5%, thanks to higher sales. The Automotive segment's operating result for the third quarter totaled just over EUR 3.1 billion, with an EBIT margin of 9.8%. Year-to-date September, the EBIT margin came in at 10.3%. Let's take a look at the operating results in the Automotive segment in more detail. In the year-on-year comparison, we see that Q3 2023 was impacted by just under EUR 200 million from the net balance of currency and raw material positions. This difference is mainly due to currency translation effects from development of the Chinese renminbi. Raw material prices remain high, although we are seeing a slight tailwind compared to Q3 2022. However, this does not include material and logistic costs. Volume, model mix and pricing effects all contributed to a tailwind of around EUR 300 million in the quarter. The largest share of this position results from higher vehicle sales. The contribution from the model mix is only slightly lower than the previous year despite BEV growth. The market has continued to normalize over the course of the third quarter partly due to improved vehicle availability. We continue to pay close attention to price discipline. Expenses for research and development rose by around EUR 100 million. This reflects the decrease in the capitalization rate of 8.5 percentage points to 32.2% year-on-year. Based on group R&D spending, the R&D ratio according to German Commercial Codes came in at 4.6%. We expect the figure for the full year to be within our long-term target range of 4% to 5%. Research and development expenditure focused on the electrification and digitalization of our vehicle fleet as well as the development of new models, likely all new BMW 5 Series and the Neue Klasse. Digitalization includes the innovative BMW operating system line which we are rolling out this year. We are also making great progress in the area of automated driving with Level 2+, the new BMW 5 series already offers a partially automated driving experience. We will also be launching highly automated driving Level 3 shortly. Sales in administrative costs increased by about EUR 100 million partly due to higher spending for digitalization projects. Other cost changes include cost for materials and logistics. They remain at a high level due to among other factors, higher lever costs from our partners. Although they were more or less stable in the quarter compared to previous year. We recorded a notable negative impact in the 9 months period. Free cash flow in the Automotive segment totaled EUR 2.6 billion in the third quarter. The basis for this high figure is the strong quarterly result of EUR 3 billion. A change in working capital increased free cash flow in this quarter by around EUR 100 million. In Q3, inventory levels rose. However, increase in trade payables nearly offset the impact of the higher inventory on working capital. The data between capital expenditure and depreciation reduced free cash flow in the third quarter by about EUR 500 million. Capital expenditure for the first 9 months totaled around EUR 5 billion mainly from the fifth and sixth generation e-modular kits and the construction of the plant in Debrecen, Hungary. The CapEx ratio for the year to the end of September was 4.5%. We still expect the ratio for the full year to be around 6%. Changes in provisions had a negative impact on free cash flow of about EUR 400 million. In the third quarter, the profit sharing bonus for financial year 2022 was paid out to our employees and the corresponding provisions is solved. Other items boosted free cash flow by around EUR 400 million. At the end of September, free cash flow in the Automotive segment stood at around EUR 5.8 billion. In the fourth quarter, we are planning for a significant increase in capital expenditure due to usual seasonality. This will negatively impact free cash flow. As I mentioned, we expect the CapEx ratio for the full year to be around 6%. Inventory decreased towards the end of the year but will still be at a high enough level to maintain vehicle supplies to markets. This will ensure we are able meet the robust global demand for our vehicles in the first quarter of 2024. The planned significant uptick in costs as well as higher tax payments will weigh on our Q4 free cash flow. As a result, we still expect a free cash flow of above EUR 6 billion for the full year 2023. Let's turn now to the Financial Services segment. I will focus on the first 9 months of this portfolio business. Year-to-date September, the number of new financing and leasing contracts concluded with retail customers decreased by 5.6%. This is partly due to higher interest rates which have substantially increased financing costs for consumers. At the same time, the Financial Services sector remains as competitive as ever. However, when we look at the course of the year, we see a clear positive trend in new business in Financial Services. While new contracts with end customers in Q1 were just under 20% below Q1 2022, ever back to the previous year's level in Q2, driven by higher vehicle sales and by the pre-owned car business, Financial Services reversed trend in the third quarter. New contracts with end customers rose by 5.7% compared to the third quarter of 2022. We expect the positive development in new business to continue in the fourth quarter as well. The average financing volume per vehicle increased from the previous year, primarily due to an improved product mix in the Automotive business. For this reason, the volume of new business decreased by only 1.6% for the year to the end of September. Segment earnings before tax totaled EUR 2.45 billion at the end of September, down 8.3% from the previous year. This decrease mainly reflects higher refinancing costs and the smaller size of the total portfolio. Income from the resale of end-of-lease vehicles remains consistently high. The credit loss ratio is still at the low rate of 0.15% across the entire credit portfolio. And we expect return on equity for the full year to be within the range of 16% to 19%. Let's move on to the Motorcycles segment. In the third quarter, BMW motor sales were on par with the high level of Q3 2022 at just over 52,000 units. Segment EBIT totaled minus EUR 4 million compared to EUR 87 million in the third quarter of 2022. This decrease was primarily due to changes to the model launch calendar compared to the previous year. EBIT for the year to the end of September totaled to EUR 308 million and was, therefore, slightly lower than the previous year. The EBIT margin came in at minus 0.6% for the third quarter and 12.0% for the first 9 months. I'd like to look now at the outlook for our key performance indicators. We expect to see stable business development for the rest of the year and are, therefore, able to confirm our guidance for the financial year 2023 for all segments. This assumes that the geopolitical and macroeconomic conditions do not deteriorate significantly. In the Automotive segment, we are planning for a solid increase in deliveries compared to last year. The segment's EBIT margin should come in at between 9% and 10.5% and in a return on capital employed of between 18% and 22%. The Motorcycles segment is projected to report higher sales. In this segment, we expect to see an EBIT margin of between 8% and 10% and the return on capital employed of between 21% and 26%. In the Financial Services segment, return on equity should be between 16% and 19% for the full year. Ladies and gentlemen, our third quarter results once again underlying the BMW Group's performance capabilities. On this basis, we will be able to deliver a strong finish to 2023. With our attractive premium product portfolio, we are in an excellent position across all brands, segments and drive technologies to take advantage of market opportunities. We remain cautiously optimistic about the future despite all the economic and geopolitical volatility. We have a long-term strategy, and we have a clear plan. Our underlying earning power is the result of continuous profitable growth in our core business as well as disciplined price and cost management. It lays the foundation for our business success and allows us to leverage our cash flow to finance our investment in emission-free mobility. At the BMW Group, our thinking and actions are always geared towards the long term. We are securing and creating value and our financial strength allows us to shape our own future. Thank you.

Thank you very much, Walter. It was a pleasure. And now Oliver Zipse. Oliver, please go ahead.

Ladies and gentlemen, good afternoon. Before I talk about current developments, I would like to say a few words about the change in the Board of management of BMW AG. As you all know, the Supervisory Board appointed Jochen Goller to the Board of Management effective 1st of November. After various roles in China and the United Kingdom as well as serving as Head of the MINI brand, Jochen Goller has managed our activities in China very successfully since 2018. John Green, who was previously Senior Vice President, Sales and Marketing at our BBA joint venture will be responsible for our business in China going forward. Jochen Goller takes over from Pieter Nota who led our customer brands and sales board division from 2018. Under Pieter Nota leadership, the BMW Group grew its global market share significantly. And during this time, the BMW brand also regained its position at the top of the premium segment and steadily expanded it. I would like to extend my sincere thanks to Pieter Nota and with Jochen Goller all the best as he embarks on his new role. I just got back from a trip to Asia about a week ago. I know that some of you were also able to get an idea of the current market situation over there at the recent BMW China base in Shenyang and Shanghai. For me, the visit to Beijing and then the Japan Mobility show in Tokyo clearly showed once again, there is no one size fits all for the mobility of today and more specifically, tomorrow. Our world is multifaceted, and that's why we need different technological solutions. On the one hand, to meet our customers' wide range of needs, on the other hand, to comply with very different regulatory requirements in countries around the world. To decarbonize, China relies on pure electric vehicles, but also on plug-in hybrids and hydrogen fuel cell vehicles. In Beijing, for example, a large number of taxis already run on hydrogen. In the third quarter of this year, we grew our business worldwide, thanks to our wide range of premium vehicles across all-drive technologies. Pure electric vehicles stood out in China, in particular, we more than tripled our sales there in the first 9 months compared to the same period of last year. In Japan, the current demand for all electric cars is still relatively subdued. The focus is more on hybrids and cars with combustion engines. However, it became clear at the Japan mobility show in Tokyo that Japanese manufacturers, in particular, are starting to step things up with their own concept cars and fully electric options. Japan recognized the importance of hydrogen earlier. This is why our BMW iX5 hydrogen pilot vehicle has been well received there. For a global premium manufacturer like the BMW Group, technology orientation and openness remains the right path for decarbonizing mobility. Our healthy sales and financial figures are proof of this. We will continue to pursue this path consistently in the future. In October, we presented the BMW X2 with the all-electric iX2 as the latest example of this. The X2 is more than anything a digital champion. The new BMW operating system 9, introducing the iDrive platform for a comprehensive range of digital features and functions such as totally new gaming and streaming capabilities. It has features like these, such as optimized touch controls or seamlessly integrated voice control that allow our customers to enjoy a unique digital experience in their car. Early next year, our rollout of new all-electric products will continue in the spring. The new BMW 5 Series Touring will celebrate its world premiere. It will be available with the same drivetrain portfolio as the Sedan including the all-electric i5 Touring. This gives us a real unique selling point in a segment that is very popular, especially here in Europe. And our goal remains the same, more than half our global sales from all electric cars well before 2030. To this end, we're also further expanding our leading role in battery cell technology. In our competence center in Parsdorf near Munich, we are laying the technological foundations for the efficient and resource-saving production of battery cells. And we do this along the entire value chain. We share the know-how we develop there with our suppliers. In this way, we are setting benchmarks in production, quality, performance, costs and, of course, ecology of battery cells. Last week, we put the competence center in Parsdorf into operation. Sample production of sixth generation round cell has begun. These cells are characterized by an up to 20% higher energy density. In addition, we were able to reduce the CO2 footprint in cell production by up to 60%. Our customers will benefit from up to 30% faster charging speed and up to 30% higher range according to WLTP and of course, substantially lower manufacturing costs. In line with our local-for-local principle, the BMW Group also ensures that the next step high-voltage battery assembly takes place as close as possible to the vehicle plants. This approach secures our production, even in the event of unforeseen political and economic developments. Short transfer distances also reduced the carbon footprint of vehicle production. Production facilities for the sixth generation of BMW high-voltage batteries are currently being built at all major manufacturing locations. In Debrecen, Hungary; in Woodruff in South Carolina and the United States; in San Luis Potosí in Mexico; in Shenyang in China and in [ Straßkirchen ] to supply our vehicle production here in Bavaria. A clear majority voted to allow the planning process in lower Bavaria to continue in a recent referendum. It not only secures the future of our Bavarian vehicle plants. It also sends an important signal underlining Germany's future viability as a location for industry. We will start construction within the next year. These high-voltage batteries will then be used in our Neue Klasse which will also be produced at our main plant in Munich from 2026 onwards. We provided a glimpse of the Neue Klasse at the IAA Mobility in early September near Munich. The BMW Vision Neue Klasse shows how we are designing individual mobility to be more human, more intelligent and more responsible. For example, the materials we are developing for the Neue Klasse will help to reduce its carbon footprint. An additional highlight is the BMW panoramic vision display which uses the entire width of the windscreen and is visible to all passengers. What has always said, BMW marks a perfect interaction of all components and the unmistakable brand authentic driving dynamics that this enables. We are also taking this unique selling point to a whole new level with a perfect combination of hardware and software. The Neue Klasse is more than just another BMW brand new car. It is a whole new generation of products. We will be releasing 6 models on the roads within 24 months from SAVs to sedans. What all the models have common is the all-electric heart that powers them. MINI will also be all electric in the future. Between now and 2030, we will be completely realigning MINI and making the brand all electric. We presented 2 key members of the new MINI family at the IAA mobility, the MINI Cooper 3-door, the MINI Countrymen. The next fully electric MINI is ready to go in April 2024. The MINI Aceman will make its world premiere in the premium compact car segment. The new MINI Family is produced by our Chinese joint venture partners, Spotlight in China and in our plants in Leipzig and Oxford. Our second British brand is also on the threshold of pure electromobility. By the early 2030s, Rolls-Royce will also be exclusively all electric. Preparations for the less sales launch of the first electric Rolls-Royce are currently in full swing. The Spectre, which is scheduled for release by the end of the year is set to redefine modern luxury. And there's also been a change at the top of Rolls-Royce. Torsten Müller-Ötvös who has led Rolls-Royce since 2010 and driven the transformation and rejuvenation of this unique marque is retiring. He will be handing over to Chris Brownridge from 1st of December. Chris currently heads the U.K. market for BMW, bringing experience, of course, but above all, a feel for the exclusive demands of the brand and its customers. Let's now move on to BMW Motorrad. We recently celebrated the brand centenary at the end of September with German Chancellor, Olaf Scholz at our plant in Berlin Spandau. The brand has performed exceptionally well in recent years. Its centenary celebration with the culmination of the career of BMW Motorrad's long-standing leader, Markus Schramm who is also retiring. Under his leadership, BMW Motorrad steadily expanded its product range, opened new markets for the brand and saw numerous record-breaking years. Now Markus Flasch took over from him on the 1st of November. Markus brings experience as Head of BMW M GmbH and Head of the product line for BMW's midsized and luxury class and Rolls-Royce. Let's talk about digitalization of the customer interface. While we are constantly expanding and refining our product range, our current focus is on further digitalization of exactly this customer interface. Direct customer access plays a key role in this. And to support this, our new direct sales model for MINI is about to be launched in Europe. The rollout with MINI in China was already a big success. The European rollout will begin on 1st of January with Italy, Poland and Sweden. Other European countries will follow in stages and then the BMW launch will get underway in 2026. The direct sales model will benefit everyone involved. Our customers are guaranteed full price transparency and can move seamlessly between online and off-line, consulting options during the purchasing process. At the same time, it offers our retailers an attractive business model, as shown by their positive response. All our European retailers have signed contracts to this effect. In return, the BMW Group gains direct access to customers, which we will use to curate an entirely new customer experience. The best example of this is our new proactive care service. It uses data analytics and AI to evaluate data from the vehicle and detect potential problems before they even occur. If the cause can be fixed using software, this is done remotely. In all other cases, our customers receive a notification. For example, a tip for how to handle the issues themselves or if necessary, a note asking them to contact the BMW dealer. And if the customer agrees, an appointment can easily be set up using the automated system. Ladies and gentlemen, in 2023, we are once again demonstrating the success of the BMW Group's strategic approach. With our products, range of drive technologies and production sites worldwide, our position is highly diversified. A recent study also confirms this. U.S. magazine Time and global database Statista named the world's top 750 companies. The BMW Group ranked in the top 10 and was the highest-rated automotive manufacturer worldwide. The mood is also very positive inside the company as this year, our employees have reconfirmed. We asked our just under 150,000 employees on a global scale to tell us what they think. Their responses showed that the BMW Group is a highly attractive employer. The workforce backs the company's goals and our employees worldwide are very proud to work for the BMW Group. That is the best foundation for continuing on our successful work in the future. Thank you very much.

Thank you very much, Oliver. Ladies and gentlemen, the line will shortly be open for questions. The operator will first give you some technical instructions, please?

[Operator Instructions] Our first question comes from George Galliers from Goldman Sachs.

Oliver, maybe just the first one for you. When your team very kindly hosted us in China a few weeks ago, one of the subjects, which came up was whether or not it would be possible to price the i5 at the same level as the combustion engine cars, given that at the top end of the market, you're seeing a consumer preference still for ICE over electric. From your perspective, do you see this as purely a phenomenon in China? Or do you think there's a risk that in other parts of the world, we also see the consumer not willing to pay more for a battery electric vehicle versus an internal combustion engine vehicle. The second question I had, which is also related to battery electric vehicles was for Walter. Obviously, BMW has had tremendous success with its battery electric vehicles and matched it in your sales numbers today. Could you just elaborate for us, are you starting to see some meaningful scale benefit as your battery electric vehicle volumes rise? And what are the implications from that for the economics on your BEVs as we think about 2024 and out years?

We start with your pricing question about the i5 in China with Oliver and then Walter.

George, first of all, you mentioned there are some resistance in buying EVs in China. That's not true for BMW. We tripled our EV sales in the first 9 months. So with the ramp-up of e-mobility worldwide, which is still not the majority of cars being sold -- by the way, nowhere in the world, we are right on track there. One peculiar good observation is that in the 5 series, on the comparable performance level, we will pursue a pass at the same pricing for EVs and the ICE. Every market will have a different approach there. I think in China, this is -- at this point in time, the right approach. This is still, by the way, a very profitable thing for us. And when we do the pricing, we will not do anything which will harm our profitability and especially, we will be super careful about our keeping of the pricing points there. But I think our strategy in EV in China is working out for us, as I just presented.

Thank you very much. Walter?

Yes, George, EV is scaling and is contributing towards, the scale is positive. And we shouldn't forget that Gen 5 is still going to scale, as you saw in our CapEx numbers which were still contributing to more capacities, and this will even end up in a better scaling effect for us. So yes, we are looking forward to it.

Thank you very much, Walter. And next question, please.

Our next question comes from Dorothee Cresswell from BNP Paribas Exane.

The first one is around BEV demand in the near term. So I think this morning, you said that your overall order book reaches into Q1 2024 but you also said that the BEV orders are particularly strong. So can I ask specifically how long your BEV order book is at this stage and also how that's evolved over the last few months? Basically, where was it in Q2? And where is it now? My second question is on the mix. I think when you discussed the Q3 EBIT bridge, you indicated that the mix dynamic was a combination of a positive model mix and a negative powertrain mix, and they seem to broadly balanced each other out. So is that something we should expect to see going forward and through 2024. And if you could tell us what the key factors in the model mix evolution are likely to be through the coming 12 months, that would be most helpful.

Yes. Thank you very much, Dorothee. We start with Oliver and then Walter. Oliver?

Dorothee, thank you for your question. Let me first start with an overlook. We always said that the EV ramp-up is not a zero-sum game. If you look closely at our figures for the first 9 months, then the combustion engine part, including the plug-in hybrids, they almost stayed the same compared to last year. I think it's minus 1.6%, so almost the same. Whilst at the same time, for BMW, the demand for BEVs increased by more than 100%. So the question is, how do you remain our traditional car business intact, which is working, and the growth comes out of the EV. Now look, the order book for the next year, we will introduce the i5, the iX2, the iX1 with all performance levels, we will have 3 completely electric MINI models and that is my belief because they all knew at the same time that we will have a strong push towards BEV demand to reach our target of 20% in 2024, which we always said 15% this year, 20% next year and then goes in 2025 to 25% and so on. So actually, it's happening exactly in the way we prognosed it to be.

Thank you very much, Oliver. Walter?

Yes, discussion on the bridge, Dorothee was with regards to Q3 '23 versus Q3 '22. So of course, we had benefits in a stronger mix in [indiscernible] as well as in the M not to forget. And here, we started with the lower segment with [indiscernible] and [indiscernible], but not to forget there are strong contributors to our total contribution, right? So of course, the total contribution on average on an EV total all volumes is still lower than the total ICE level. But we shouldn't forget that we always speak about the portfolio. The total portfolio is starting with a MINI and ending ultimately with Rolls-Royce and everything in between. So of course, you have models which you have very, very high contributions over the average. And of course, we also have some under, but we are still happy with the contributions of our EV cars.

Clear message. Thank you very much, Dorothee. Next question, please.

Our next question comes from José Asumendi from JPMorgan.

Two items, please. The first one, Walter, can you comment a little bit with regards to the fourth quarter, what should we expect in terms of volume outlook for Q4 and then when it comes to supplier compensation in Q4, maybe can you elaborate a little bit around whether BMW books the supply compensation on a quarterly basis? Or should we expect bigger onetime impact in Q4, maybe similar to what we have seen across some of your competitors? And then for Oliver, look, one of your competitors seems to be quite clear that they can launch electric cars, price below EUR 23,000 in Europe and actually make money. So I was thinking if you could please -- maybe you can provide us an update with regards to your path to margin parity between ICE and BEV and I will be particularly interested in understanding the better this path to margin parity in the smaller premium car segment for BMW and whether the battery remains the biggest driver in this path?

Good. Thank you very much, Jose. We start with Walter and then Oliver.

Jose. So as I mentioned and you know our seasonality in Q4, first of all, volume-wise, as we predicted in August, it will be a solid performance in Q4 compared with previous quarter 4. But as I just mentioned, seasonal impacts on costs, fixed costs, will always hit Q4 as usual. So this will weigh and the material cost headwinds, which we referred to in August, is also still down, which is linked to the supplier compensation for increasing labor costs and inflation. We haven't finished all contracts yet, but the majority is done. So of course, there will be the final impact, but not major, I assume. And in total costs, which is also something which we shouldn't forget, some elevated labor costs applied only from July onwards with a full second half year impact, which wasn't there in the first half year. So having said that, I still can confirm that the full year 2023 will deliver within our revised corridor of 9% to 10.5%, still.

Thank you very much, Walter. Oliver?

Jose as I said before, the question is not to sell an ICE or a BEV, it's a question to participate in the BEV growth and we do substantially in that. And then look at our product portfolio, there is an i4 M50, which is very profitable. With what car do we compare that? There is no comparing combustion engine or an i7 M60 or an i7 M70. These cars are sold because they are best and not because there is another ICE. So these comparisons are very difficult to do because all the growth goes into the best segment. The question is, do you grow or do you not grow. So -- and we decided to grow. And in these upper segments, there is no unprofitable segments. And in the segment, you mentioned EUR 25,000 BMW -- neither BMW nor MINI is participating in the segment. So I cannot comment on that segment because we are not in that.

Thank you very much, Oliver, and thank you very much, Jose. Next question, please.

Our next question comes from Tim Rokossa from Deutsche Bank.

Good quarter. I would have two questions, please. The first one is Oliver, when you say selling the 5 Series best at a comparable price to the ICE version, how can that be what you call a very profitable thing for you because the BEV engines must be a lot more expensive, right?. And then secondly, when we think about it strategically, one of the big takeaways from this reporting season for many of your peers has a much lower demand for BEVs, hence, lowering their targets. If we come to a situation where a lot of your competitors need to invest more into ICE engines for longer than they thought, would you be open to provide ICE engines to them as a potential supplier to some of your competitors in meaningful size?

Thank you very much, Tim. Oliver?

Tim, you really like that question about this parity. And I just repeat myself, if you would not provide the best to the market, you would simply not have the business. There are no customers who desire between BEV and an ICE. It is not existent. So either you grow and you make best and with the i5, this is profitable growth. And then, of course, the final price point is not only the powertrain. It's the options you put in the car and at the end is the contribution of the car. And I can only tell you we would never sell an electric car without being contributing to profitability. We will not do that. And it's a question of growing or not growing. It's not -- is that exactly comparable. And we only see that currently in China, not in the other markets that we position the car exactly at the same price. Now this is a unique thing for China and nowhere else in the world. And first of all, partially, we already provide some engines to other car manufacturers like for Range Rover, we do that, that's public. And the rest is a question mark, I don't know but no one asks us yet.

And Walter, can I just clarify one point that you said that the Q4 would be within your full year guidance range on Automotive. That's at least how some people interpret that. Just to make sure that we got the right message.

I said that the full year number will be within our guidance. I didn't speak about the Q4 guidance because we have...

Okay, Tim. Thank you very much. Next question, please.

Our next question comes from Patrick Hummel from UBS.

My first question, probably to Oliver, regarding the BEV sales trajectory. Undoubtedly, you have good product momentum with the new 5 Series, 5 Touring, i5 Touring coming. If I remember correctly, you said 15% roughly this year, 25% -- 20% next year, 25% in 2025. Now from a CO2 compliance in Europe, you probably don't even need such a steep curve. Correct me if I'm wrong. So in light of what your competitor called brutal competition, you might be inclined to say, let's not push too hard on the BEV side, that would also optimize your margins maybe against that backdrop of brutal competition. Would you see that 20% next year in '25 and [ '25 ] are still more or less a linear trajectory? Or could it be the right time to slow down things a little bit on the BEV side next year before maybe reaccelerating later? And my second question, Walter, I'm not sure to which extent you want to answer it. Nonetheless, I try. On a qualitative basis, if we think about the key bridge items going into next year, you said you look into 2024 cautiously optimistic, which means everything and nothing. But if you think about the main building blocks in the bridge like volume, price, mix, fixed costs, residual values, et cetera. How do you feel about those items from today's perspective? Do you end up with a positive view in terms of growing EBIT year-over-year? How do you think about these items?

Patrick, I do understand, you're right that you try to slow us down. 2 years ago, it was double [indiscernible] , right?

I'm not trying to slow you but I want to understand your thinking.

Okay. We will do exactly what we said 2 or 3 years ago. We are creating a market that strong products create strong demand. And then the numbers 15%, 20% -- 25%, 33% and 50% before 2030 is our market figures. These are demand figures. These are at no point in time, a push figure. We will not do that. By the way, independent of the regulation and we are quite sure with that wide array of products we are having and which are about to come, including the Neue Klasse, there will be strong market demand and strong market demand always means profitable price points. We will never push cars into market only for regulatory reasons, at least not in the next 3 to 5 years, which we can oversee. And that's not necessary because we have in every segment, we have best, we will have the MINI 4 cars. We will have a whole array in BMW from UK and all the way to the 7 Series and of course, at Rolls-Royce. And I think there is no reason to slow down and there is no reason to even accelerate. So we see what we see strong normal, if I may say so, market demand, and we will follow the markets here.

Yes. And with respect to '24, I think we will speak about in March and all the rest is up to the community because, as Oliver Zipse mentioned, we have strong attractive products to come, which we're all looking forward to.

I think the next question, which is the last question -- I don't know. Sorry three more questions.

Our next question comes from Michael Tyndall from HSBC.

Just a couple if I may. You mentioned in the preamble around price normalization. And if I'm not wrong, you mentioned it in Q2. I wonder if you could just kind of elaborate a little bit more on what that means. What are you seeing sequentially in terms of pricing? And what are you thinking of going forward on pricing? And then the second question, I guess you've mentioned part of the reason for keeping the cash flow guidance still at EUR 6 billion, even though you've done quite a lot of that already is this big step-up in costs in Q4. I wonder if you can just help us a little bit to understand the order of magnitude of some of those costs that are going to come through in Q4.

Thank you very much, Michael. Walter?

Pricing side, let's start with that one. Then if you have a look for our numbers, our net sales average is quite stable, I would say, FX related. It looks like it eventually is different. But if you correct it by FX, you will have more or less the same amount as we had in Q2 and Q1. So that is still positive. And with respect to, for example, some external data, we also do use auto data for the U.S. You will see that our sales allowances is less than $3,000 a car. Why is that? Because we recognize that the Auto Data Institute is rather taking on, also the [ IRA ] support and is including that one, which is reflecting roughly $900 to $1,000. But if you deduct this one because this is to the customer support by the government rather than by us, we are under $3,000, which is a superb number if you compare it with historical data, I would say. So I think our momentum is still positive. With respect to free cash flow. Well, I think we mentioned already in Q2, with the Q2 actuals that we see strong CapEx cash out in Q4 and we also stressed that we are not reducing inventory levels as we did in previous years because we want to achieve our momentum in Q1 '24, to have stable supply for the good demand we are facing. So that's the reason why the free cash flow is not exploring, but rather static above EUR 6 billion.

Thank you very much, Michael, for your questions. I think we have 2 more questions. Please go ahead.

Our next question comes from Stephen Reitman from Societe Generale.

Yes. Steve Reitman from Societe Generale here. Apologies, I was cut off for a little while, so I'm not sure if these questions have been asked, but I'll try anyway. First question, please, near term. Could you comment on your certified-used vehicle program, how that's been developing? Because obviously, that's been a very big difference from the last -- when we had the great financial recession, the ability to treat your returning cars much better than getting higher price realizations on those. So if you could give us a trend on that, please? And secondly, maybe a bit longer term. And looking at the Generation 6 on the battery cells, you're moving to the new cell format, the cylindrical cells. How confident are you and what kind of indications you have on the manufacturing to avoid some of the problems that others who have gone to that largest cell format maybe been standing at the moment.

Okay, we start with your first question with certified-used cars program and then Oliver. Okay. Walter?

Right. The certified-used car program is still running nicely. With respect to our new car and used-car business with Financial Services is still moving ahead. So it's increasing both businesses. I think that is most relevant. With respect to used car in principle, as I stated, the residual value is still strong. And the returns, as I also mentioned, are also coming in on a high level.

Okay. And the second part, Stephen, was about larger cell formats and our challenges for this and this will be answered by Oliver.

We are starting with our sixth generation and new era inside the cell development, first of all, to scale it up to the needed volume to support market demand and also to reduce costs. At the same time, not all cell we move to the cylindrical shape. We will still have rectangular cells in our portfolio for specific demand, especially for the entry models. So there will be a long time where we have both cell format, cylindrical and rectangular at the same time to create the right mix for the customer demand and also to create the right price point for each and every model. But what is correct, the 6th generation, the majority of sales will be cylindrical.

Good. And now we are coming to the last question, yes.

Our last question will come from Henning Cosman from Barclays.

Congrats actually on the result. I think it's pretty clean, solid results in a difficult environment. I wanted to ask a couple of clarifications, please. I just have the feeling we might leave with very mixed messages at both on the volume and a pretty wide range for the margin for the first quarter. So let me ask you, the 15% implied volume growth to get you to the midpoint of what you define as solid, that would imply 750,000 units in the fourth quarter. That seems pretty high. I just wanted to perhaps discuss if that's really what you're thinking. And perhaps more importantly, Walter, I appreciate you say you come in the margin range for the full year. But of course, for the fourth quarter, in the meantime, that implies a range of 5% to 11%. So I'm just wondering if you really want us to leave the call thinking it could be really as low as 5%. I guess you're accommodating, [ protect ] for lower pricing, maybe some dealer compensation again and higher R&D. But do you really not sort of draw a line that's a bit higher than 5% for the fourth quarter.

Okay. Thank you very much, Henning. Walter?

Henning, I thought I'm rather speaking clear than giving mixed messages, but never mind. So I think with respect to these margin ranges you reflect here, I think I pronounced that we will be within the 9% to 10.5% EBIT margin full year. And if you then mathematically calculate it back, you will never end up with a 5% or 6% or 7% or chance, 8%. So I think all the rest is up to your [ axle ] model, I guess. So with respect to the headwinds, I mentioned them already. Fixed cost will raise and then with having less inventory at year-end than currently year-to-date September, this will also have a slight impact on that, right? So I think we made it all clear, at least my thought.

I think now it is clear. So ladies and gentlemen, thank you very much for your questions. It was a pleasure, and we see each other again. Bye-bye, and [Foreign Language] from Munich. Bye.