Why BMW's $800 Million Second-Quarter Loss Was Worse Than Expected

BMW AG (BMWYY +0.00%) (BAMXF 1.88%) reported an operating loss of 666 million euros ($790 million) for the second quarter, its worst quarterly result since 2008 and a steep drop from its 2.2 billion-euro profit a year ago, as its sales fell 25% amid the global coronavirus pandemic.

But the Munich-based maker of BMW, Mini, and Rolls-Royce vehicles said that its sales have begun to recover. Assuming that recovery continues, BMW still expects to report a profit for the full year.

Why BMW's loss was worse than expected

BMW's loss was wider than investors and analysts had expected, and its shares fell in early trading after the results were released. The reason for the surprise: While General Motors and Ford Motor Company, both of which reported second-quarter results last week, cut spending quickly once it became clear that factories would have to be idled amid the pandemic, BMW's costs remained stubbornly high. 

Put another way: BMW's negative operating leverage, meaning the amount of profit that it lost for every lost euro of revenue, was 49.9% in the second quarter, versus just 18.5% for both GM and Ford.

Chief Financial Officer Nicolas Peter said that, aside from the sales the company lost while its dealers were closed, BMW's result was affected by the heavy spending needed to prepare to produce its upcoming line of electric vehicles. 

That's not a new issue. Heavy spending on electric vehicles and related technologies has weighed on BMW's results for the last several quarters. 

The electric BMW iX3 is the first of a new wave of battery-electric BMWs. Production of the iX3 will begin in China later this year. Image source: BMW AG.

Key details from BMW's second-quarter report

• The company's global auto sales fell 25.3% versus the second quarter of 2019, to about 485,000. Sales at all three of BMW's auto brands fell, but the BMW brand fared better (down 23%) than Mini and Rolls-Royce (down 38% and 47%, respectively).
• Its automotive segment revenue fell 34% to about 14.9 billion euros; its earnings before interest and taxes (EBIT) swung to a loss of 1.55 billion euros from a profit of about 1.5 billion euros a year ago.
• Its automotive EBIT margin, a widely watched indicator of profitability, was negative 10.4% in the second quarter and negative 4% for the first half of 2020.
• BMW Motorrad, the company's motorcycle unit, posted an EBIT loss of 7 million euros as revenue fell 28% from a year ago to 522 million. Deliveries of BMW motorcycles fell 23% from the second quarter of 2019, to about 42,000.
• BMW Financial Services, the company's captive-financing subsidiary, saw its pre-tax profit decline 83% to just 97 million. Total new lending and leasing contracts fell 29% from a year ago, and revenue declined almost 10% to 6.7 billion euros. 

What BMW's CEO had to say

CEO Oliver Zipse encouraged auto investors to focus on BMW's execution under the circumstances. The company was quick to idle factories, he said, which helped to preserve a positive EBIT for the first half of the year and keep the company on track for a full-year operating profit. 

And while the company's spending was high, Zipse emphasized that all of its future-product programs remain on schedule and will come to market as planned. 

Now the markets are recovering, Zipse said, but at varying speeds. He noted that BMW's sales grew year over year by about 17% in China but were significantly lower in Europe and North America. 

"In July, sales were moving in the right direction," Zipse said. "What matters now is how robust this upward trend is and when individual markets will follow suit."

Looking ahead: BMW is "cautiously optimistic" about the second half of 2020

BMW didn't give detailed guidance, citing the ongoing uncertainties amid the pandemic. But it reaffirmed the cautiously optimistic outlook it gave in May. Assuming that the ongoing recovery trends continue:

• Automotive deliveries will be "significantly lower" than in 2019, and the segment's EBIT margin will be between 0% and 3% for the year.
• The overall company's pre-tax profit will also be "significantly lower" than in 2019, but it will be a profit, not a loss. 

The raw numbers

Data source: BMW AG. As of August 5, 1 euro = about $1.19.