German luxury-vehicle maker BMW AG (NASDAQOTH:BAMXF) said on May 4 that its first-quarter operating profit dropped 3% from a year ago, as unfavorable exchange-rate movements more than offset year-over-year gains in sales totals and profit margin.

The raw numbers

All financial results are shown in euros. As of May 4, 2018, 1 euro = about $1.19.

Metric Q1 2018 Change vs. Q1 2017
Revenue 22.694 billion euros (5.1%)
Autos delivered 604,629 3%
EBIT (earnings before interest and tax) 2.733 billion euros (3.1%)
EBIT margin, automotive segment 9.7% 0.3 ppts
Net income 2.301 billion euros 1.2%

Data source: BMW AG. "Ppts" = percentage points.

A blue BMW 1 Series, a small premium sedan, on a mountain road

The small BMW 1 Series was all-new last year. Sales rose 28% in the first quarter. Image source: BMW AG.

The nutshell summary: How BMW performed in the first quarter

BMW's global sales rose 3% in the first quarter, and its EBIT margin increased by 30 basis points. But its revenue fell 3.4% from a year ago, a result of two factors:

  • Unfavorable changes in exchange rates: CFO Nicolas Peter said that absent exchange-rate effects, BMW's revenue would have been roughly flat year over year.
  • A swing in product "mix" within the BMW brand: Sales of lower-profit small models rose; sales of higher-profit large models fell.

How BMW is using new models to offset R&D spending

BMW is unique in that nearly all of its business is centered on premium and luxury vehicles. Rival Mercedes-Benz is part of Daimler AG, which also makes heavy trucks and buses; Audi AG is a subsidiary of global giant Volkswagen AG; Lexus is a Toyota brand; and Cadillac is part of General Motors.

One implication of BMW's situation is that it doesn't have a mass-market parent with deep pockets (or a thriving heavy-truck division) with which it can share technology. Not only does BMW have to fund development of technologies like electric drivetrains and autonomous-vehicle systems on its own, it also has to -- somehow -- find the production scale to offer new technologies at prices its customers will accept.

The good news is that BMW has developed partnerships with suppliers and other automakers that will give it the scale it needs -- but it still has to spend a larger percentage of its earnings on research and development than some rivals.

The upshot is that, at least in recent quarters, BMW's spending on research and development has become a closely watched number. The company spent 6.1 billion euros on R&D in 2017, or about 6.2% of revenue, and said that R&D spending could rise as high as 7% of revenue in 2018. But it was just 5.6% in the first quarter, and Peter warned that there will be a "significant increase in costs in the second half of the year."

A dark blue 2018 BMW X3, a compact luxury crossover SUV, on a dirt road

BMW expects new SUVs to help offset higher spending on new technologies. It's in the process of rolling out an all-new version of its big-selling X3. Image source: BMW AG.

That may not be as bad as it sounds. CEO Harald Krueger promised last year to boost production of high-profit SUV models and higher-end cars in order to offset the increased R&D spending. Part of the story of the first quarter is that BMW is in the process of delivering on that promise.

Sales of the small X1 SUV jumped 17% in the first quarter, and about 4,600 examples of the all-new X2 were delivered before quarter-end. Sales of the high-volume X3 fell 19%, in part because of tight supplies: BMW is in the midst of launching an all-new version globally, and production of the new X3 hadn't yet started in China and South Africa as of quarter-end.

For the BMW brand as a whole, global sales rose 2.8% to 517,447 in the first quarter, driven primarily by good gains for smaller models. The Mini brand added another 86,375 sales, up 4% on strong demand for the Mini Countryman. Sales at BMW Motorrad, the company's motorcycle unit, rose 0.6%, with good sales in the United States offsetting weaker demand in Germany and Italy. BMW attributed the year-over-year fluctuation to the long winter in central Europe.

Last but not least, BMW's super-luxury brand, Rolls-Royce, delivered 807 vehicles in the quarter, for a gain of 10.1%. Much of that gain was driven by high demand (by Rolls-Royce standards, anyway) for the all-new Rolls-Royce Phantom. Rolls-Royce delivered 125 Phantoms in the first quarter, up from 56 a year ago.

A dark gray 2018 Rolls-Royce Phantom, a large and opulent super-luxury sedan

By Rolls-Royce standards, the new $420,000 Phantom is a hit -- 125 were delivered in the first quarter, up from 56 in the first quarter of 2017. Image source: BMW AG.

What BMW's CEO said

In a written statement, Krueger said BMW's new-model push is about to hit its high-margin stride:

We are now in Phase II of our model offensive -- where the focus is on luxury and the X family. We earn high margins in this segment. Our offensive will receive a major boost over the coming months from:

  • The new BMW X2.
  • The new X4.
  • The BMW 8 Series Coupe -- which launches the 8 Series range, with a total of six models.
  • Model updates to the 3 and 5 door MINIs and the MINI Convertible, and
  • The new Rolls-Royce Phantom.

Earlier this year I made it a point to meet with our dealers in the US and China. We showed them our new models for the coming months. The dealers in both countries were extremely pleased and could hardly wait to have these new models in their showrooms. These new models offer growth opportunities for the dealers and for our company. For us, new products and new technologies go hand in hand.

Looking ahead: BMW reiterated its full-year guidance

Krueger said that BMW is on track to meet its previous guidance for the full year. He still expects to deliver:

  • A slight increase in automotive deliveries and a new all-time high (2017: 2,463,536).
  • EBIT comparable to last year's result (2017: 9.88 billion euros).
  • An automotive-segment EBIT margin of between 8% and 10% (2017: 8.9%).

John Rosevear owns shares of General Motors. The Motley Fool recommends BMW. The Motley Fool has a disclosure policy.