German luxury-car maker Bayerische Motoren Werke AG (OTC:BAMXF), better known as BMW, reported its second-quarter 2016 earnings on Aug. 2. Here's what investors need to know.
The key numbers
|Metric||Q2 2016||Q2 2015||Change|
|Units sold: autos||605,534||573,079||+5.7%|
|Units sold: motorcycles||44,105||43,855||+0.6%|
|Earnings before interest and tax (EBIT)||2,725||2,535||+7.9%|
|EBIT profit margin, auto segment||9.5%||8.4%||+1.1 pts|
|Operating cash flow, auto segment||2,905||3,008||(3.4%)|
What happened at BMW in the second quarter
Investors have been concerned about slowing car sales, but those worries didn't touch BMW in the second quarter -- at least not in Europe and Asia. Its total sales of 605,534 vehicles was an all-time quarterly record. BMW's three automotive brands all reported sales increases versus the year-ago quarter: Mini (96,587 sold, up 5.4%), BMW (507,814 sold, up 5.7%), and Rolls-Royce (1,133 sold, up 14.7%). Mini's second-quarter result was an all-time record for the brand.
But within those numbers is some cause for concern. BMW saw significant year-over-year sales growth in smaller models like the 2 Series (up 52.4%), the X1 crossover (up 61.7%), and the X3 crossover (up 16.6%), while sales of some of its larger models like the X5 crossover (down 5.4%) and the 3 Series (down 3.3%) and 5 Series (down 2.8%) sedans slipped.
Nonetheless, BMW was able to deliver a strong 9.5% EBIT profit margin in its automotive segment, up from 8.4% in the year-ago quarter. Tight cost controls and some favorable exchange-rate shifts helped offset the unfavorable shifts in sales mix.
BMW's automotive sales gains were driven by strong growth in Europe and a solid result in China. European sales of BMW's three automotive brands jumped 12.8% year over year, with strong gains in Germany (up 11.2%) and the United Kingdom (up 10.9%). BMW also did well in China, with sales of its auto brands up 4.3% to 120,650 year over year.
As it was in the first quarter, BMW was again hurt by short supplies of the X Series crossovers in the United States. But it's also feeling the effects of a slowing market for premium vehicles. BMW's U.S. auto sales fell 9.7% in the second quarter, the company's second quarterly drop in a row. CFO Friedrich Eichiner said last quarter that efforts were underway to expand production of the popular crossover SUV models. During BMW's earnings call on Aug. 2, he said that the company's inventories are now "optimized," but he expects the U.S. market to "remain challenging in the second half of 2016."
Global sales of BMW Motorrad, the company's motorcycle unit, rose slightly (0.6%) to 44,105 units in the second quarter. Revenue and earnings declined slightly year over year due to exchange-rate shifts and increased spending to start production of the new G 310 R model in India.
BMW Financial Services, its in-house financing arm, earned 529 million euros before interest and tax in the second quarter, up 10.5% from a year ago. Its leasing and retail financing businesses both showed strong year-over-year growth.
BMW continues to aggressively pursue advanced technologies, including self-driving systems, electrified vehicle drivetrains, and advanced carbon-fiber manufacturing techniques. It spent 1.128 billion euros on research and development in the second quarter, 4.5% of its revenue. That ratio was down slightly from 4.9% a year ago, but still represents a a heavy pace of spending.
What BMW executives said about the quarter
"For the past 25 quarters, we have achieved an EBIT margin in our Automotive Segment within our target range of 8 to 10 percent or higher," CEO Harald Krueger said during the earnings call. "Our strategy will maintain this focus on sustainable profitability -- despite a highly volatile environment and the constantly changing conditions we operate in. We will continue to strive for an EBIT margin of 8 to 10 percent in the automotive segment.
"We are convinced that profitable growth means much more than just being number one in sales and volumes -- especially now that players in the premium segment are increasingly using price discounts to gain a competitive edge," Krueger said.
On the earnings call, Eichiner said:
The sustainable profitability of our core business lays the foundation for us to invest in the future of the company. The Strategy Number ONE > NEXT we presented in the spring emphasized this and is now being implemented step by step. Initial signs of success are already visible, confirming our approach. We continue to systematically implement our strategy. The strategy of profitable growth and globally balanced sales continues to pay off for the BMW Group. This allows us to compensate for volatility in individual markets and regions of the world.
Looking ahead: BMW's guidance
BMW confirmed its prior guidance. It still expects deliveries and pre-tax profits to come in "slightly" ahead of its 2015 results, with an EBIT margin in its automotive segment between 8% and 10%. It expects continued strong growth in Europe, particularly southern Europe, and moderate growth in Asia to offset challenges in North and South America.