MIL OSI Translation. Region: Germany / Deutschland –
Source: BMW Group, Ladies and Gentlemen,
good morning from my side too.
As expected, the corona pandemic affected our business in the second quarter. Thanks to consistent measures to safeguard liquidity, a high degree of cost discipline and taking advantage of opportunities, for example in China and Korea, we were able to limit the effects of the pandemic on the BMW Group. Our flexibility in all areas of the company paid off in particular. This enables us to continue to use demand-based management. As announced, we significantly reduced inventories in the second quarter to support free cash flow.
After the gradual relaxation of the containment measures, business has now partially stabilized as expected after the almost complete lockdown. How sustainable this recovery is will depend on the further development of the infection process, the reaction of the politicians to it and the resulting economic consequences. The development in the markets is very different worldwide. The market development in China is more positive than expected. We benefit from our strong presence and good local supply situation. The same applies to Korea.
A slight recovery is now also noticeable in other important markets such as Germany and the USA. As planned, we are on track to achieve our annual targets.
Against this background, we are cautiously optimistic about the second half of the year. However, we will monitor developments closely so that we can react quickly and flexibly to the still very volatile situation if necessary. A renewed aggravation of the situation as well as a possible second wave of infections and the associated containment measures are still not included in our outlook.
Ladies and gentlemen,
let’s start with the group’s financials.
After we started the year with strong product and market momentum in January, the development in China had a negative impact on earnings in the first quarter. Business there picked up significantly in the second quarter. However, the global expansion of the pandemic has resulted in far-reaching sales restrictions in almost all other markets. As a result, sales fell to EUR 43.23 billion in the first half of the year.
Thanks to consistent and swift countermeasures, the group’s pre-tax profit reached almost +500 million euros in the first half of the year despite the challenging environment. In the quarter, due to the approximately two-month sales freeze in important sales markets, it amounts to -300 million euros. The Group’s EBT margin was + 1.2% in the first half of the year and -1.5% in the second quarter. As mentioned, the main influencing factor was the temporary closure of dealerships and the associated losses in the vehicle and aftersales business. Provisions were also made for residual value and credit risks due to the current volatility.
In addition, there is the undiminished increase in expenses for our successful electrical offensive.
In contrast, the good product mix and improved price enforcement due to our young model range had a particularly positive effect. In addition, the personnel and sales costs could be reduced depending on the situation.
Our performance program made an important contribution to coping with this exceptional situation. Important prerequisites have been created here for more than three years, which we now benefit from. With the performance program, we create the freedom to continue investing consistently in the future, even in challenging times. In doing so, we clearly focus on the issues that are important to us: emission-free drives, sustainable mobility and autonomous driving. Accordingly, we are concentrating in particular on the market launch of fully electric models such as the iX3 in 2020 as well as the i4 and the BMW iNEXT in 2021. In addition, we are currently introducing new plug-in hybrid models such as the 3 and 5 series touring. We also continue to make preliminary work for the next generation of our electronic construction kits.
The Group’s R&D rate in the first half of the year was 6.6%. The slight increase in the quota compared to the previous year is due to the corona-related decline in sales.
We have adjusted, prioritized and clearly focused our investment activity against the background of the current situation. Future topics will continue to be pursued consistently in order to exploit and expand competitive advantages. Investments amounted to around EUR 1.48 billion in the first half of the year. Accordingly, the investment rate has dropped to 3.4%. Investments in property, plant and equipment will be less than EUR 4 billion for the year as a whole.
The financial result increased to EUR 366 million in the second quarter. The main driver was the strong development of our Chinese joint venture BBA – both on the volume and on the price side. The sale of shares in HERE to Mitsubishi Corporation and the NTTC also had a positive effect.
As of June, the financial result was EUR -211 million. In particular, the positive appreciation effect from the bundling of mobility services with Daimler from the first quarter of 2019 had a negative impact compared to the previous year. Positive effects from the market valuation of securities could not fully compensate for the negative effects, in particular from the fall in interest rates in the USA in the first quarter.
A word about the consolidations: At EUR 1.3 billion in the first half of the year, they were significantly higher than in the same period last year. In the background: In the consolidations, the profits made for leasing vehicles in the automobile segment are withdrawn at the time of sale and distributed proportionately over the term of the leasing contract. As a result of the lower level of new leasing business, there is a positive effect in the consolidation segment: the margin recognition from previous years exceeds the margin elimination of new business from 2020.
Ladies and gentlemen,
we now come to the individual segments.
In the automotive segment, vehicle sales in the first half of the year fell by 23% to almost 963,000 deliveries. We see a positive development in China, where our sales in the second quarter were already higher than in the previous year. The first recovery can be observed worldwide in June and July.
Against the background of the limited sales situation in the reporting period, sales in the automobile segment amounted to EUR 32.87 billion. It reached EUR 14.88 billion in the second quarter. Thanks to the good mix of models and increased price enforcement, sales have only fallen below proportionally compared to sales. As expected, the operating result as of June was EUR -1.33 billion and EUR -1.55 billion in the second quarter, which mainly reflects the volume losses due to the temporary closure of many retail operations, particularly between March and May. In addition, provisions for residual value risks in the middle of the three-digit million range had a negative impact on earnings. Despite an operating margin of -4.0% in the first half of the year, we are on track for our annual guidance of 0 to 3% as planned.
There were two main effects on the financial result in the second quarter compared to the previous year: On the one hand, BBA’s contribution to earnings had a positive effect of EUR 176 million compared to the same quarter of the previous year. On the other hand, the sale of shares in the HERE card service to Mitsubishi and NTT led to a positive valuation effect.
Ladies and gentlemen,
we come to the free cash flow in the segment. It amounted to EUR -0.3 billion in the second quarter, mainly influenced by the decline in pre-tax earnings. Consistent management of working capital and, in particular, a significant reduction in our holdings enabled free cash flow to be supported in the second quarter. For the third and fourth quarters we are expecting positive values and further, continuous improvement. We have already taken effective measures to do this. In the coming months, we will set all levers in motion to achieve a black zero for the full year despite all the free cash flow challenges. A possible outflow of payments in connection with the cartel allegations by the EU Commission is not included in this assessment.
Overall, we are still very well positioned from a liquidity perspective. As of June 30, we increased our group liquidity to EUR 21.7 billion. We therefore have sufficient liquidity reserves to remain flexible and able to act at all times, even if the situation worsens. Should the situation stabilize further, Group liquidity will be brought back to the pre-crisis level by the end of the year. Thanks to our good credit rating, we benefit from attractive refinancing conditions even in these highly volatile times when compared to the competition and continue to enjoy the confidence of the capital markets.
Ladies and gentlemen,
we come to the financial services segment, which was also impacted by the effects of the Covid 19 pandemic in the second quarter.
Around 804,000 new contracts were concluded in the financing and leasing business with end customers in the first half of the year. That is 17.2% less than in the previous year. The contract portfolio with end customers was 5.5 million contracts at the level of the beginning of the year.
As a result of the pandemic-induced drop in demand and increased expenses for loan loss provisions as a result of the global deterioration in the economic situation in the second quarter, the segment result before taxes declined significantly in the first half of the year, as expected, at EUR 581 million. We continuously and regularly review the development of all major business risks. According to today’s assessment, we are adequately hedged against both residual value and credit risks.
Now to the motorcycle segment.
The effects of the corona pandemic can also be felt here. In the second quarter, after the gradual opening of some markets in Europe, there was a seasonal catch-up effect. Despite the occasional dealer closings, a total of around 77,000 motorcycles were delivered in the first half of the year. The operating result was EUR 65 million. The EBIT margin is 6.0%.
Ladies and gentlemen,
now to our annual forecast.
In our forecasts, we continue to assume that the economic environment will stabilize slightly in the course of the third quarter. Our outlook still does not include the possible effects of rising infection numbers and the associated containment measures, the same applies to the risk of production downtime due to local corona outbreaks near factory locations and other local lockdown measures, as well as a possible economic slowdown in China due to a recession in others World regions are still not taken into account here. Faulty offers due to even stronger competition continue to pose a risk to our guidance.
The automobile markets are recovering only slowly. Despite the current signs of recovery, we expect sales in the premium segment to decline significantly by just under 20% for the year as a whole. For the BMW Group, we therefore continue to assume that global sales in 2020 will be significantly below the previous year. In the Automotive segment, we continue to expect an EBIT margin of between 0 and 3%.
Deliveries in the motorcycle segment should decrease significantly in the forecast period. In our opinion, the EBIT margin will be between 3 and 5%.
At Financial Services, we expect a moderate decline in return on equity, mainly due to increased loan loss provisions and lower new business.
Consolidated earnings before taxes are expected to remain significantly below the previous year’s level.
Ladies and gentlemen,
we are cautiously optimistic about the second half of the year. Thanks to our creditworthiness and our immediate measures, we are very well positioned with regard to the liquidity situation. We have good access to the capital markets and thus secure our ability to act at all times.
The main focus is on securing earnings and further improving free cash flow. In the coming months, we will set all levers in motion to achieve a black zero for the full year despite all the free cash flow challenges. As I said, a possible outflow of payments in connection with the cartel allegations of the EU Commission is not included in this assessment.
To this end, we have launched numerous measures, some of which have already had an impact in the second quarter. This includes, among other things, the more consistent management of vehicle stocks. By intensifying our performance program, we will see further efficiency gains in the second half of the year.
In the second half of the year, absolute cost discipline and the consistent use of opportunities continue to be clearly in focus in all areas of the company and create the conditions for us to achieve our annual targets as planned.
EDITOR’S NOTE: This article is a translation. Apologies should the grammar and / or sentence structure not be perfect.