BMW Profit Falls, Maintains Outlook
FRANKFURT — BMW AG is bracing for the overall car market to take a turn for the worse this year even as the German company's confidence in its own performance remains undimmed.
"Risks are increasing rather than decreasing,' said Chief Executive Norbert Reithofer. "Because in other regions of the world too, there is a significant dampening of growth, [and] competition is becoming tougher," Mr. Reithofer said.
Chief Financial Officer Friedrich Eichiner said BMW will maintain a liquidity cushion of between €8 billion ($9.84 billion) and €10 billion to safeguard its credit rating given market volatility, according to The Wall Street Journal.
The recession in 2008 and 2009 showed how quickly demand can evaporate as car sales nose-dived in many major markets, triggering huge losses in the industry, Mr. Eichiner said.
"If conditions change more than anticipated, we have the flexibility to respond decisively," Mr. Eichiner said. "All the same, even with countermeasures, we cannot completely rule out a possible negative impact on earnings."
BMW left its full-year profit forecasts untouched as it reported a near-record second-quarter operating performance despite intense competition, higher investment spending and a deteriorating global economy.
"We have achieved new sales volume and revenue highs as well as the second-best operating profit in the company's history," Mr. Reithhofer said.
BMW's earnings follow similarly robust second-quarter showings from Volkswagen AG's Audi brand, which is BMW's nearest rival, and Daimler AG's Mercedes-Benz division. They underscore how the luxury-car sector has so far been largely unaffected by the economic troubles in Europe that have hit the more price-sensitive mass-market segment.
But worries that Europe's economic troubles and slowing growth in China are putting a brake on global economic activity have sparked fears of softening demand for premium cars, notably in China, which has provided much of the growth for global auto makers in recent quarters.
Latest manufacturing data on Wednesday showed a steepening decline in output in Europe, where demand for new cars has continued to slump, as well as slower growth in production in China.
BMW reiterated its existing profit targets, saying its full-year margin on earnings before interest and taxes for its automotive business is expected to be at the upper end of its 8 percent-to-10 percent long-term target this year "provided that the global economic climate does not take a further turn for the worse." BMW's operating profit margin was 11.6 percent in the second quarter, a fraction below the 11.8 percent in 2011.
The group reported a 28 percent decline in second-quarter net profit to €1.27 billion because of higher costs and a large one-off accounting gain that boosted the year-ago result. Revenue increased 7.3 percent to €19.2 billion in the second quarter, driven by a 5.4 percent rise in sales to 475,011 vehicles because of strong demand for BMW's revamped and expanded model range in North America and China.
BMW stressed that competition in the second quarter was "intense," echoing comments by Audi that price pressure in China had gotten worse in recent months.
Audi has played down any significant impact on its business. Audi expects another year of "sporty double-digit" sales growth in China in 2012 while it has raised its forecast for sales in the U.S. to 140,000 cars from 130,000, Chief Financial Officer Axel Strotbek said on Tuesday.
BMW's worries about the economy may be worse news for mass-market rivals reliant on sales in Europe than its luxury auto peers. Fresh evidence of that pressure was visible in Wednesday's data for European new car registrations, a proxy for sales. The French market, Europe's biggest after Germany's, contracted 16 percent in July from a year earlier based on a comparable number of working days. Spain's shrank 17 percent.
Falling demand in most European markets has caused mass-market car manufacturers to cut back production to avoid buildup of expensive stocks of finished vehicles, exacerbating a problem of excess capacity. PSA Peugeot Citroën said last month it plans to halt production at one of its factories north of Paris in 2014 just weeks after General Motors Co.'s Opel/Vauxhall unit said it could close a factory in Germany after 2016.
In contrast, BMW targets higher pretax profit this year and new global sales records for its BMW, Mini and Rolls-Royce brands after selling a record 1.67 million vehicles in 2011 even though underlying profitability is expected to decline in 2012 because of heavy spending on new technology, new cars and increased production capacity.
"BMW's results are still excellent versus historic norms and fine versus consensus…but we have to admit we had hoped for more," Sanford Bernstein analyst Max Warburton said in a research note.
"An 11.6 percent auto margin is not to be sniffed at, and is at the same levels as in the first quarter—but we had convinced ourselves that is was more likely to be 13 percent," he said.
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