German luxury-vehicle maker BMW AG (NASDAQOTH:BAMXF) said on Aug. 2 that its operating income fell 6% in the second quarter, to 2.74 billion euros ($3.2 billion), due to exchange-rate headwinds and higher spending on electric vehicles and self-driving technology. 

The raw numbers

As of Aug. 2, 1 euro equals about $1.16.

Metric Q2 2018 Q2 2017 Year-Over-Year Change
Revenue 25.023 billion euros 25.765 billion euros (2.9%)
Automobiles sold 637,878 633,582 0.7%
EBIT 2.746 billion euros 2.932 billion euros (6.3%)
EBIT margin, automotive segment 8.6% 9.7% (1.1 percentage points)
Net profit 2.082 billion euros 2.217 billion euros (6.1%)

Data source: BMW AG. EBIT = earnings before interest and tax. 

The BMW logo atop its corporate headquarters building in Munich, Germany.

Image source: BMW AG.

How BMW's business segments performed in the second quarter

BMW organizes its business into three segments:

  • BMW's automotive segment builds and sells cars and SUVs under the BMW, Mini, and Rolls-Royce brands.
  • BMW Motorrad, the company's motorcycle segment, builds and sells BMW-brand motorcycles.
  • BMW's financial services segment provides financing for dealers and buyers of the company's vehicles. 

Automotive

Earnings before interest and tax (EBIT) in BMW's automotive segment fell 14.5% from the second quarter of 2017, to 1.92 billion euros, despite a 0.7% increase in sales over a good year-ago result. Revenue of 22.2 billion euros was up slightly from a year ago, but profit was dented by two factors. 

First, unfavorable changes in the euro-to-yuan and euro-to-dollar exchange rates meant that BMW's earnings in the world's two largest auto markets (China and the U.S.) were worth fewer euros than a year ago. Second, in keeping with its prior guidance, BMW has ramped up research and development spending on electric-vehicle drivetrains and autonomous-vehicle systems. 

But despite the pressures on automotive-segment profit, BMW managed an automotive EBIT margin of 8.6%, within its long-term target range of 8% to 10%. 

By brand:

  • Sales of BMW-brand cars and SUVs rose 1.4% to 541,849 on good gains for its smallest SUV, the X1; strong results for its 1 Series and 3 Series sedan lines; and increased demand for the BMW i line of hybrid and electric models. 
  • Mini sales fell 3.2% to 95,055; a jump in global sales of the Mini Countryman wasn't quite enough to offset declines in sales of the brand's other three models.
  • Rolls-Royce sales rose 15.7% to 974 vehicles on high demand for the brand's all-new top-of-the-line Phantom sedan. 

Motorcycles

BMW Motorrad's EBIT fell 5.8% from a year ago, to 98 million euros, on a 3.1% decline in worldwide sales (51,117 units). Revenue decreased 5.3% to 658 million euros. The story here is simple, and not a surprise: BMW's production was down as it retooled for a series of new-model launches, leaving dealers with fewer motorcycles to sell. 

Despite the decline, BMW Motorrad's EBIT margin was a still-healthy 14.9%, down just 10 basis points from the second quarter of 2017.

Financial services

BMW's captive-financing segment generated EBIT of 607 million euros, up 3.2% from a year ago, on revenue of 7.14 billion euros (up 1.4%).  BMW signed 480,303 new financing and leasing contracts with retail customers during the quarter, up 2.5% from a year ago. 

BMW said that leasing accounted for 33.2% of its total new financing contracts in the first half of 2018, with credit financing accounting for the remainder. The growth in contracts is still being driven largely by China, where total contracts are up 7% since the end of 2017, but BMW is seeing incremental growth in Europe and the Middle East as well.

What BMW's CFO said about the rise in spending

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 increase in R&D spending in the first half of 2018:

Research and development spending, including capitalised development costs and minus depreciation, increased to 2.76 billion euros in the year to the end of June. The income statement impact from R&D costs in the first half year amounted to 2.61 billion euros. This is an increase of 312 million euros or 14% over the same period last year. 

The R&D ratio for the first half year stands at 5.8%. This is higher than the figure for the previous year and for the first quarter. As previously announced, the ratio will reach around 7% by the end of the year. This increase is mainly driven by: 

  • preparations for the fifth generation of the electric drive train;
  • continued development of our flexible rear and front-wheel drive architectures;
  • autonomous driving; and
  • development activities for the 8 Series model range and new X vehicles. 

Looking ahead: BMW confirmed most of its full-year guidance

Despite concerns about currency headwinds, Peter confirmed most of the full-year guidance that BMW provided in March, saying that several upcoming new models (including a Rolls-Royce SUV) should boost sales and margins in the second half of the year.

For the full year, BMW still expects:

  • A "slight" increase in automotive deliveries for the year (2017 result: 2,463,526).
  • Full-year automotive segment EBIT margin between 8% and 10% (2017: 8.9%).
  • A "slight" decrease in return on equity in its financial services segment (2017: 18.1%).
  • Profit before tax "at least on par" with 2017 (2017: 10.65 billion euros).

The one small change: Peter had previously said that BMW Motorrad would see a "solid" increase in sales over the 164,153 units it sold in 2017; he now expects a "slight" increase.

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