German luxury-vehicle maker BMW (NASDAQOTH:BAMXF) (NASDAQOTH:BMWYY) said on May 7 that its first-quarter operating profit declined 78%, to 589 million euros ($659 million), on increased pricing pressures and an accounting provision for a hefty potential fine related to a European Union antitrust action.
The raw numbers
|Metric||Q1 2019||Year-Over-Year Growth (Decline)|
|Revenue||22.462 billion euros||(0.9%)|
|Earnings before interest and tax (EBIT)||589 million euros||(78.2%)|
|EBIT margin, automotive segment||(1.6%)||(11.3 percentage points)|
|Net income||588 million euros||(74.2%)|
Why BMW's profits dropped so sharply
BMW is anticipating a hefty fine from the European Commission related to an ongoing antitrust proceeding. In a nutshell, the commission is expected to conclude that BMW and other European automakers colluded by keeping certain emissions-filtering technology to themselves.
BMW strongly disputes the allegations. But it said that accounting standards compelled it to hold about 1.4 billion euros in reserve, in anticipation of a likely fine.
In other results from the quarter:
- Despite a slight increase in auto deliveries, the impact of the reserve put BMW's automotive segment into the red for the first time in years. On an EBIT basis, the segment posted a loss of 310 million euros, down from a profit of 1.9 billion euros in the first quarter of 2018.
- The slight increase in deliveries was driven by a strong showing in China, where sales were up 10.2%, offsetting a 1.7% sales decline in the U.S. and a roughly flat year-over-year result in Europe. But increasing pressure on BMW's pricing in China and in Europe cut into the profits from its sales gains.
- Earnings were also hit by increased spending on research and development related to future-mobility initiatives. BMW's R&D spending rose 8.4% from the year-ago quarter, to 1.4 billion euros.
Mixed results for BMW's brands and segments
- The BMW brand's worldwide auto deliveries rose 0.4% from a year ago, to 519,307.
- The Mini brand delivered 84,820 vehicles, down 1.8% from a year ago.
- Rolls-Royce delivered 1,206 vehicles, up 49.4% from a year ago, on strong demand across its model range.
- BMW Motorrad, the company's motorcycle unit, delivered 38,606 units in the first quarter, up 7.7% from a year ago. The sales gain drove a profit gain: EBIT rose 15.6% from a year ago to 89 million euros.
- BMW's financial-services subsidiary earned 627 million euros on a pre-tax basis, up 13.4% from a year ago. Total new financing and lease contracts rose 3.9% from a year ago, driving an 8.9% increase in revenue.
What management said about full-year guidance
"Our financial strength enables us to continue investing in the future, even in a difficult external business environment," CFO Nicolas Peter said. "As long as conditions do not deteriorate significantly, we expect that the full financial year 2019 will develop in line with our guidance."
The full-year guidance that BMW presented in March calls for a "slight" increase in auto deliveries versus 2018, a "solid" increase in motorcycle deliveries, and a result for its financial-services unit that is "on par" with its good 2018 profit.
That guidance also calls for a full-year automotive EBIT margin between 6% and 8%. Peter said that aside from the provision for the antitrust allegations, BMW is still on course for a full-year EBIT margin in that range. "Since the provision, however, has a negative impact of 1.5 percentage points on the EBIT margin, we are expecting a margin in the automotive segment for 2019 between 4.5 and 6.5 percent."
BMW said in March that it expected its full-year pre-tax earnings to be "well below" the 9.82 billion euros it earned in 2018. That's still true, Peter said, but he noted that those earnings will be hurt by the antitrust fine provision as well.