BMW Operating Profit Falls 20% on Electric-Vehicle Spending

German automaker BMW (OTC: BMWYY) (OTC: BAMXF) said on Aug. 1 that its second-quarter operating profit fell 20% from a year ago, to 2.2 billion euros ($2.4 billion), as it boosted spending to prepare its factories to build electric vehicles alongside conventional models.

A blue 2020 BMW 330i, a compact luxury-sports sedan.

BMW began rolling out its all-new 3 Series sedan in the second quarter. Supplies of the new model were tight, but strong SUV sales offset the impact. Image source: BMW.

The raw numbers

Metric Q2 2019 Change vs. Q2 2018
Revenue 25.72 billion euros 2.9%
Automobiles delivered 647,504 1.5%
Earnings before interest and tax (EBIT) 2.2 billion euros (19.6%)
EBIT margin, automotive segment 6.5% 2.1 pp lower
Net profit 1.48 billion euros (28.7%)

Data source: BMW; pp = percentage points. As of Aug. 1, 1 euro = $1.10. 

Why BMW's EBIT declined by 20%

Why did EBIT fall so much year over year? Increased spending, much of it related to the company's upcoming line of hybrid and battery-electric vehicles, accounted for much of the 538 million euro decline.

  • Capital expenditures rose by 330 million euros year over year, to 1.176 billion euros, as BMW began preparing its factories to build battery-electric, hybrid, and internal-combustion models on shared production lines. 
  • Higher research and development expenses accounted for an additional 78 million euros versus the second quarter of 2018. 

The remainder of the year-over-year decline in EBIT, about 130 million euros, is largely explained by higher raw material costs and exchange-rate swings, BMW said. Pricing pressures in some markets (particularly China) were also a factor.

What happened with BMW in the second quarter

  • Automotive sales set a record, as strong demand in China and Germany helped offset modest declines elsewhere. China's new-car market has been weak in 2019, but BMW has bucked the trend: Sales were up 23.7% in the quarter, and almost 17% in the first half of 2019.
  • The BMW brand had its best first-half sales result ever, despite short supplies of its big-selling 3 Series sedan. (An all-new 3 Series began shipping in March.) First-half deliveries totaled 1,075,959, up 1.6% from a year ago. Sales of BMW-brand SUVs led the way, rising 23% in the first half.
  • Sales for the Mini brand fell 3.9% to 177,344 in the first half of 2019.
  • At the ultra-luxury Rolls-Royce brand, sales rose 42.3% to 2,534 in the first half of 2019, with good demand across the product line. The waiting list for the all-new Cullinan, the brand's first-ever SUV, now stretches into the first quarter of 2020.
  • BMW Motorrad, the company's motorcycle division, posted a 6.8% second-quarter increase in deliveries (54,582). The division's EBIT of 102 million euros was up 4.1% from a year ago, but its margin fell 90 basis points to a still-strong 14%.
  • BMW Financial Services, the company's captive-financing segment, generated EBIT of 573 million euros in the second quarter, down 5% from the year-ago period despite a 4.8% increase in revenue. Strong growth in new retail business was offset by a decline in receivables from dealership financing, BMW said. Credit metrics remained stable.

Looking ahead: Guidance confirmed

Nicolas Peter is BMW's member of the board of management for finance, a title equivalent to chief financial officer of a U.S. company. Here's what he said about the outlook for BMW's automotive segment in the second half of 2019:

As long as conditions do not deteriorate significantly, we expect to remain within our announced guidance range for the full year. In the automotive segment, deliveries are forecast to increase slightly. More new models will be launched in the second half of the year. We expect the new 3 Series and the larger X models, in particular, to generate positive momentum. 

Peter confirmed that BMW still expects its full-year automotive EBIT margin to come in between 4.5% and 6.5%, the range given when BMW revised its guidance after the first quarter. 

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John Rosevear has no position in any of the stocks mentioned. The Motley Fool recommends BMW. The Motley Fool has a disclosure policy.

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