Dear colleagues, ladies and gentlemen, good morning and welcome to the telephone conference of the BMW Group for the third quarter. Today, we have here Milan Nedeljković, Chairman of the Board of Management of BMW AG, and our CFO, Walter Mertl. We will start with Milan briefly putting yesterday's announcement into context. He is followed by Walter, who will take you through our financial results. Milan will then give you a general business update for the BMW Group. After a short break, we will have time for our Q&A sessions.
Milan, please go ahead.
Good morning, ladies and gentlemen. I'd like to begin with a few general remarks. After the first nine months of the year, we achieved an operational performance of 3.5% EBIT margin in the Automotive segment. Despite the difficult business environment, we reached group earnings of EUR 2 billion in Q3. At the same time, we are driving the structural transformation of the company forward across all levels. We are making good progress, and we want to take the opportunity this year to pick up the pace even further. Therefore, we proactively decided to expand our portfolio and structural measures to accelerate the necessary change. Accordingly, we adjusted our guidance for 2026.
I will hand over to Walter to run us through the Q3 figures and outline the financial impact of yesterday's decision. After that, I will provide a strategic update.
Thank you very much, Milan. Walter, please go ahead.
Ladies and gentlemen, good morning. The BMW Group continued to operate in a challenging global market environment in the third quarter, with significant differences across regions. Volume growth in Europe and the U.S. partially offset the decline in China and Asia Pacific. In this environment, we remain focused on the factors that we can directly influence, so we continue discipline on costs and operational performance. Against this backdrop, our third quarter financial performance was in line with expectations. Let me start with an overview of our group performance in the third quarter. Group revenues amounted to more than EUR 30 billion in the quarter and almost EUR 93 billion after nine months. Our diversified business model once again supported our group result. Group earnings before tax totaled EUR 2.1 billion in Q3, benefiting from both our Financial Services business and the positive development of interest rate derivatives.
After nine months, Group EBT amounted to EUR 6.1 billion. Accordingly, the Group EBT margin stood at 6.8% in the third quarter and 6.6% year to date. In the Automotive segment, EBIT amounted to EUR 901 million in the third quarter, corresponding to a reported EBIT margin of 3.4%. The margin benefited from the settlement reached with our supplier in connection with the IBS brake system warranty case. At the same time, the margin also included two familiar items. First, elevated tariffs had an impact of around 1.25 percentage points, and second, depreciation from the BBA purchase price allocation. BBA reduced the margin by 1.2 percentage points. The expenses related to our workforce restructuring program will be recognized in the P&L in the fourth quarter. They will impact the full year EBIT margin by around 1.25 percentage points.
After nine months, Automotive EBIT amounted to around EUR 2.9 billion, with an EBIT margin of 3.5%. Let me now provide more detail on the performance of the Automotive segment. In the third quarter, the BMW Group delivered around 551,000 BMW, MINI, and Rolls-Royce vehicles to customers, 6.3% less than in the same quarter last year. Automotive segment revenues declined by 6.5% to EUR 26.7 billion, largely reflecting lower vehicle deliveries and the continued competitive intensity in several markets. While overall deliveries and revenues were below the prior year level, our BEV retail sales gained further momentum in the third quarter as demand remained strong across key markets. With over 110,000 deliveries, an increase of 7.2% year-on-year, our all-electric models accounted for one in five units sold worldwide.
Including plug-in hybrids, sales of electrified vehicles amounted to more than 150,000 units, which corresponds to an electrified vehicle share of 27.4%. Let's now take a closer look at our sales performance across the major regions. In Europe, our largest sales region, retail sales increased by 2.6% year-on-year. Europe also remains the main BEV growth driver. Here, more than one in three vehicles sold were all-electric. Including plug-in hybrids, the European electrification ratio came close to 50%. In the U.S., retail sales grew by 2.5% in the third quarter and 3.5% after nine months, outperforming a declining overall market. In China, weak consumer demand continued to weigh on large parts of the automotive market, particularly in the non-electrified vehicle segment. In this environment, BMW Group retail sales declined by 24.8% in the third quarter. This was in line with the overall market, which was down 24.6%.
We continue to focus on balancing volumes, pricing, and profitability in this highly competitive market. At the same time, we are preparing for the market launch of the long-wheelbase BMW iX3 in November in China, followed by further Neue Klasse models throughout 2027. In our sales region, Asia Pacific, Eastern Europe, Middle East, and Africa, retail sales declined by around 8,000 units, or 10.9% year-on-year. Several markets in the region were affected by weaker consumer sentiment resulting from the ongoing conflict in the Middle East, as well as increasing competitive pressure linked to spillover effects from China. Let's now take a closer look at the year-on-year development of Automotive EBIT on the following slide. Changes in currencies reduced EBIT by around EUR 100 million year-over-year, while raw material positions were broadly neutral.
As expected, the year-over-year currency headwind was significantly lower in Q3 than in the first two quarters of the year. The net effect of volume, model mix, and pricing had a negative impact of around EUR 600 million compared to the third quarter of 2025. This mainly reflects lower volumes in China and continued pricing pressure in several markets. Total group R&D expenditure remained below the prior year level at EUR 1.8 billion, decreasing by 6.8% year-on-year. Research and development expenses recognized in the P&L, however, increased by around EUR 200 million, mainly due to higher depreciation on capitalized development costs from previous years. The R&D ratio, according to the German Commercial Code, came in at 5.9% for both the third quarter and the first nine months. We continue to make progress in reducing our operating cost base.
As a result, selling and administrative expenses decreased by around EUR 100 million year-on-year in the third quarter. Other cost changes had a positive EBIT impact of EUR 400 million, mainly reflecting the settlement reached with our supplier in connection with the IBS brake system warranty case. As a result, Automotive EBIT amounted to EUR 901 million in the third quarter and EUR 2.9 billion after nine months. Let's switch to free cash flow in the Automotive segment, starting with earnings before tax of around EUR 900 million. The net change in working capital contributed around EUR 600 million, mainly reflecting lower inventories as we have adjusted production schedules in line with market demand. The net effect of capital expenditure and depreciation contributed positively by around EUR 600 million, as depreciation continued to exceed capital expenditure.
We expect depreciation to remain above capital expenditure for the full year 2026 and beyond. The capex ratio was 3.9% for the first nine months. The change in provisions reduced free cash flow by around EUR 900 million in Q3, mainly reflecting the consumption of provisions for warranties and bonus payments. Other items reduced free cash flow by EUR 1.8 billion. This mainly reflects timing effects, as some of the accruals that supported free cash flow in the second quarter reversed in the third quarter. In total, Automotive free cash flow amounted to EUR -566 million in the third quarter, and after nine months, it stood at EUR 724 million. As you know, the BMW Group is steering Automotive free cash flow on an annual basis. For the full year, we continue to target more than EUR 2.5 billion of Automotive free cash flow.
In the fourth quarter, we expect significant positive cash contributions from further working capital reduction and tariff refunds. Ladies and gentlemen, the BMW Group remains committed to its shareholder return strategy, combining attractive dividend payments with share buybacks. The third and final tranche of our current third share buyback program is expected to be completed in November. With this, we will have completed the entire EUR 2 billion program five months ahead of the original schedule. This reflects our disciplined approach to capital allocation and our focus on creating value for our shareholders. Under the current program, we will have returned around EUR 1.25 billion to shareholders through share buybacks in 2026. News on share buyback program four will follow in due course. As stated at our Capital Markets Day at the end of September, we are currently reviewing our shareholder return framework.
In our financial services segment, new business remained at a high level. During the first nine months, we concluded around 1.3 million new contracts with retail customers, a slight increase of 1.3% year-on-year. Adjusted for FX effects, total new business volume grew by 3.3% to around EUR 49.4 billion. At the same time, the penetration rate for lease and loan products increased to 53.7%. This development was supported by a more favorable competitive environment in China since mid-2025. Our financial services balance sheet volume reached EUR 159 billion at the end of September. This represents an increase of more than 5% year-on-year, driven by retail financing and leasing contracts. Quarterly earnings were stable year-on-year, with segment earnings before tax amounting to EUR 639 million. For the first nine months, segment earnings totaled EUR 1.65 billion, down 10.3% year-on-year.
This decline results from an addition to an existing provision in the first quarter, which was related to a consumer compensation program in the U.K. Overall, the segment continued to grow and made an important contribution to group earnings. The credit loss ratio across the entire credit portfolio increased to 0.35% at the end of September. This reflects the sale of non-performing loans in the third quarter. In the motorcycle segment, deliveries declined by 12.5% year-on-year to 46,600 units. Segment EBIT for the third quarter totaled EUR 33 million, resulting in an EBIT margin of 4.8%. Ladies and gentlemen, building on our solid Q3 results that I just outlined, we took the decision yesterday to expand and intensify our portfolio and structural measures in the financial year 2026.
As we successfully ramp up the Neue Klasse , we will gradually phase out previous vehicle and technology generations earlier. In addition, we are further accelerating the organizational realignment of the company. Considering these measures, we have changed our outlook for the financial year 2026 for the following KPIs. In the Automotive segment, we now expect the EBIT margin to come in within a range of -0.5% to +0.5%. I would like to reiterate that this full-year auto EBIT margin includes our portfolio and structural measures. Their impact on the margin was originally expected to be 1.25 percentage points, but after our decision to expand these measures, we now anticipate a total burden of around 2.5 percentage points. That means that without these measures, the auto EBIT margin is still expected to be above 2%.
Accordingly, the return on capital employed in the Automotive segment is expected in a corridor between -1% and +1%. Given the changes to our 2026 outlook, we will consider the impact of our portfolio and structural measures in total when determining the level of shareholder returns for the 2026 financial year in February. Ladies and gentlemen, our diversified global business model enables us to manage diverging developments across regions and support the overall performance of the group. On this basis, the BMW Group achieved earnings before tax of more than EUR 6 billion in the first nine months of 2026. For the full year 2026, we continue to expect an Automotive EBIT margin above 2% before portfolio and structural measures, and an Automotive free cash flow of more than EUR 2.5 billion.
At the same time, we are seeing positive momentum from the initiatives we launched in 2026. We are now moving into the next phase of our transformation, rolling out the technologies of the Neue Klasse across our portfolio, simplifying structures and processes, and further reducing complexity across the company. Artificial intelligence will play an increasingly important role in driving these changes. Going forward, we will further reduce operational costs as well as R&D and CapEx to improve our long-term profitability. For the full year 2026, we expect both R&D and CapEx to be below prior year levels. In 2027, we will be heading back towards our strategic corridors, which are 4%-5% for R&D and less than 5% for CapEx.
As outlined at our Capital Markets Day, we are targeting an Automotive EBIT margin of 3%-5% in 2028, and aim to return to our strategic target range of 8%-10% by the beginning of the next decade. The decision that we took yesterday is an important step towards achieving these targets. On that basis, we will create sustained value for all our stakeholders. Thank you.
Thank you very much, Walter. Coming back to our CEO, Milan, please go ahead.
Ladies and gentlemen, at the end of September, we presented our strategic outlook at our Capital Markets Day. We outlined where we stand and how we are positioning our company for the future. We also confirmed our long-term target range of 8%-10% EBIT margin in the Automotive segment. We aim to achieve this target at the beginning of the next decade. As you know, we have set an interim target of 3%-5% EBIT margin in 2028. To improve our profitability and to reach these targets, significant measures are needed. As we presented at the end of September, we are tackling all major business processes. In sales, we are preparing the rollout of our direct sales model for the BMW brand in Europe, which will start next year. We are also taking measures to expand our offering at the high end of our product portfolio.
We are therefore looking at introducing additional offering above the current top-end model, the BMW X7, tailor-made for the U.S. market. In engineering, we want to reduce the development cycle significantly. At the same time, we are reviewing the number of variants across our entire portfolio and will reduce complexity. In purchasing, we are reorienting our sourcing strategy and leveraging strategic partnerships, industry best practice, and AI applications. In parallel, we are streamlining our organizational structures across all divisions of the BMW AG to become more agile and efficient. Today, I'd like to focus on our progress since the Capital Markets Day regarding the transformation of our company and the successful rollout of the Neue Klasse . After that, I will give you an outlook on the months ahead.
Ladies and gentlemen, in the last few weeks, we have launched many initiatives across the whole company, and we have already made significant progress. For example, we are accelerating the streamlining of our organizational structures, including the announced 20% reduction of the senior vice president roles. As an important enabler of our transformation, we started a voluntary severance program. The program focused on all indirect employees of the BMW AG in Germany. Due to strong interest, we will be able to complete the program in a short amount of time. This highly positive response to the program opens up more significant potential to faster streamline our structures. We have deliberately decided to take advantage of the opportunity this year to extend our wide range of structural measures to further accelerate the transformation.
Based on this decision, we aim to finalize most of our company's organizational transformation by the middle of next year. This will enable us to significantly improve our agility and the profitability of our organization. In addition, we are rolling out the Neue Klasse products at remarkable pace across the portfolio and all powertrains. After the success of the BMW iX3, many other models have followed, including the updated seven Series, the three Series with BEV and ICE variants, the X5 with multiple drivetrain options, as well as the iX4. Neue Klasse production is up and running in Debrecen, Munich, Dingolfing, Spartanburg, and Shenyang. In Debrecen, we have already expanded operations to three shifts to meet demand. There, the iX4 will be produced alongside the iX3. We will further enhance our leading position in the BEV premium segment.
All BEV variants of the Neue Klasse are powered by our new sixth-generation high-voltage batteries. At the beginning of October, we opened our new plant in Irlbach-Straßkirchen, which will supply our German plants. Just three weeks ago, I joined the opening of our Gen6 facility in Shenyang. Series production in Woodruff in South Carolina will begin before the end of this year, with San Luis Potosí in Mexico following next year. In line with this growing production capacity and demand, we have significantly increased the ramp-up of the Gen6 models this year. This will allow us to phase out some Gen5 BEVs sooner than planned, with an additional impact on 2026 earnings. Looking ahead, the better margins of the Gen6 products will help drive the transformation of our portfolio and increase profitability.
The speed of our structural transformation and the ramp-up of the Gen6 technology both reflect our confidence in our path forward. This brings me to our priorities for the next month. With our global market strategy, we are increasing our regional setup to tailor our offerings to the different needs of the markets. In Europe, this means strengthening our presence in the high-volume entry premium segment by introducing another fully electric BMW model in 2028. In the U.S., we continue to deliver on the strong customer demand for SUVs with our plant in Spartanburg that is running at full capacity. China remains a key focus for us. The rollout of the Neue Klasse begins this month with the market launch of the iX3 in China. Feedback from the pre-drives of the new iX3 and i3 has been extremely positive.
In particular, our ADAS with the unique BMW Symbiotic Drive has been very highly rated. Going forward, we will further strengthen the local R&D and sourcing functions to be even more focused on Chinese customer needs and to address them at a faster pace. We are also looking to leverage our production network in Shenyang more broadly by considering exports of vehicles manufactured in China to markets in Asia Pacific. All in all, we are taking steps in all our major regions to develop our local footprints further and to localize our supply chains. This is the basis for a more resilient and profitable global setup. Ladies and gentlemen, as mentioned, we are committed to our long-term profitability targets.
For this, we are driving the transformation of our processes and structures forward, and with the Neue Klasse , we are rolling out an extensive product portfolio. We are seeing high demand for Neue Klasse models, and we have made very positive progress with the workforce restructuring program. Therefore, we have now actively decided to expand the portfolio and structural measures while focusing on the successful rollout of the Neue Klasse . By doing this, we are laying the foundation, starting next year, for reaching our next milestone in 2028, and therefore staying firmly on course towards our long-term ambitions. Thank you.
Thank you very much, Milan. Ladies and gentlemen, we will now have a short break before we move on to the Q&A session. See you in five minutes.