BMW Profit Declines as Competition Offsets Sales Gains

BMW Letting U.S. Lessees Skip Payments in Push to Pass Mercedes
BMW is introducing an incentive program through the end of this month that lets lease owners skip payments if they buy a new vehicle. Photographer: SeongJoon Cho/Bloomberg

Bayerische Motoren Werke AG, the world’s biggest maker of luxury cars, reported its first drop in quarterly operating profit in almost three years on increased spending on new models and pricing pressure.

Second-quarter earnings before interest and taxes declined 19 percent to 2.27 billion euros ($2.79 billion), the Munich-based company said in a statement today. Operating profit last fell in the third quarter of 2009.

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 5 percent to 57.72 euros and was 3.7 percent lower at 4:21 p.m. in Frankfurt. The stock has climbed 13 percent this year, valuing the company at 37.4 billion euros.

Luxury-car makers are starting to feel the slowdown of the European market that has prompted PSA Peugeot Citroen, the region’s second-biggest manufacturer of mass-market autos, to announce plans to cut a total 14,000 jobs to stem losses.

Economic Picture

Daimler AG, the world’s third-largest maker of luxury vehicles, last week reported a 13 percent decline in second-quarter operating profit. Volkswagen AG , Europe’s largest carmaker and the owner of the Audi brand, reported on July 26 slowing earnings growth as the impact of the sovereign debt crisis weighed on demand in its home region.

“The global economic conditions might deteriorate in the face of the euro crisis and high government debt,” BMW Chief Executive Officer Norbert Reithofer said today on a conference call with journalists. The carmaker “has a flexible production network and, as a premium manufacturer, is focused on maintaining profitable growth.”

Reithofer said he expects “further growth momentum” in the second half as the company rolls out revamped versions of the flagship 7-Series sedan and X1 small SUV, as well as wagon and stretched versions of the next-generation 3-Series.

Profit Drop

BMW’s second-quarter net income 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. Revenue climbed 7.3 percent to 19.2 billion euros.

“We had a significant one-time effect in the last year with residual-value provisions that we had to free,” Chief Financial Officer Friedrich Eichiner said on the call. “This has nothing to do with our operational levels.”

Germany’s luxury-car makers have thus far largely avoided the sales plunge 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 first-half deliveries of the X3 sport-utility vehicle. Deliveries of the 1-Series compact, which was revamped late last year, increased 21 percent.

BMW’s car prices are 1 percent to 1.5 percent below year-ago levels, Eichiner said on a call with analysts. The company doesn’t expect a further decline, with Europe stable and possible increases elsewhere, the CFO said. “We need our new products to maintain pricing,” he said.

‘Tough Pricing’

“Tough pricing” has continued in the shrinking southern European auto markets, and the company has had to raise incentives to stabilize the dealer network, Eichiner said.

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 Audi, which plans eventually to surpass BMW in deliveries. Both companies beat the 8.6 percent margin at Daimler’s Mercedes-Benz.

BMW reiterated its goal to generate an auto-division 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.”

Luxury Lead

The manufacturer held its sales lead in the luxury 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.

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 are ongoing. BMW will need production capacity for an extra 400,000 vehicles to reach its goal of 2 million deliveries by 2016, Reithofer told analysts.

The German company has teamed up with Toyota Motor Corp. 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 Carbon SE 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.

BMW also cooperates with Paris-based Peugeot, which provides engines for the German company’s Mini brand. After 2016, modular engine technology, which uses the same components over several sizes to save costs, will offer BMW “the opportunity to use our own engines,” Reithofer said.

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