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BMW Profit Falls as Competition Offsets Sales Gains

August 01, 2012

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Bayerische Motoren Werke AG (BMW), the world’s biggest maker of luxury cars, reported a 19 percent drop in second-quarter profit on increased spending on new models and “intense” pricing competition offset higher sales.

Earnings before interest and taxes declined to 2.27 billion euros ($2.79 billion) from 2.8 billion euros a year earlier, the Munich-based company said in a statement today. Profit exceeded the 2.16 billion-euro average of 15 analyst estimates compiled by Bloomberg. Sales climbed 7.3 percent to 19.2 billion euros.

BMW forecast an automotive profit margin for the full year that’s below the level from the first half and warned that the European debt crisis could cause “the global economic climate to cloud over further.” Second-quarter earnings were burdened by higher personnel costs, increased spending on development and “intense market competition,” the company said.

Management appears “very cautious for the second half,” said Marc-Rene Tonn, an analyst with M.M. Warburg in Hamburg. “This indicates that the margins that we have seen over the past quarters are probably the upper end of what is achievable. Growth is still there but not at the same price levels.”

BMW fell as much as 4.3 percent to 58.16 euros and was down 3.5 percent as of 10:04 a.m. in Frankfurt trading. The stock has climbed 13 percent this year, valuing the company at 37.5 billion euros.

Luxury-car makers are starting to feel the slowdown of the European market that has prompted PSA Peugeot Citroen (UG), the region’s second-biggest manufacturer of mass-market autos, to cut costs and eliminate a total 14,000 jobs to stem losses. BMW will likely struggle with “increasingly unfavorable” car pricing, Credit Suisse said in a note to clients yesterday.

Higher Costs

“We are monitoring developments very closely in various markets,” Chief Executive Officer Norbert Reithofer said in the statement. “The BMW group has a flexible production network and, as a premium manufacturer, is focused on maintaining profitable growth.”

Net income in the second quarter dropped 28 percent to 1.28 billion euros. Comparisons are distorted by a one-time gain last year of 464 million euros for adjusting credit risks.

Germany’s luxury-car makers have thus far largely avoided the slowdown in the European auto market thanks to demand for their vehicles in China and the U.S. BMW’s sales were boosted by a 38 percent jump in deliveries of the X3 sport-utility vehicle. Deliveries of the 1-Series compact, which was revamped late last year, increased 21 percent.

Sales Records

The manufacturer stuck to its goal of increasing pretax profit this year from 2011’s 7.38 billion euros and delivering more than last year’s 1.67 million vehicles, with sales records at its BMW, Mini and Rolls-Royce brands.

Second-quarter Ebit at BMW’s carmaking division declined 16 percent to 2.02 billion euros. Its margin of 11.6 percent of sales matched Volkswagen AG (VOW)’s Audi brand, which targets surpassing BMW by 2015. Both companies beat the 8.6 percent margin at Daimler AG (DAI)’s Mercedes-Benz, which slipped to third in luxury-car sales last year.

BMW reiterated its goal to generate an auto margin at the “upper end” of its 8 percent to 10 percent target range for the full year, as long as the global economy “does not take a turn for the worse.”

BMW held its sales lead in the segment with first-half deliveries rising 8.3 percent to 747,064 cars and SUVs. Audi’s sales in the period jumped 12 percent to 733,237 deliveries, while Mercedes-Benz’s gained 6.9 percent to 652,924 vehicles.

Expansion Plans

BMW is extending its global reach by expanding capacity in the U.S. and China and discussing satellite production for its Mini brand with Nedcar in the Netherlands. Plans for a new plant in Brazil are on hold as negotiations with the local government on tariff regulations have run into difficulty.

The German company has teamed up with Toyota Motor Corp. (7203) to cooperate on hybrid powertrains and the development of fuel cells to power vehicles, tapping into the Japanese manufacturer’s experience with the Prius model.

The automakers have also agreed to collaborate on sports cars and lightweight materials. BMW has a separate joint venture with Wiesbaden, Germany-based SGL Group to make carbon fibers for use in lighter car bodies. BMW’s electric-powered i3 city car, scheduled to reach the showrooms late next year, will be the first compact model featuring a complete body made of carbon-fiber reinforced plastic.

To contact the reporter on this story: Dorothee Tschampa in Frankfurt at dtschampa@bloomberg.net

To contact the editor responsible for this story: Chad Thomas at cthomas16@bloomberg.net


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