Sharply reduced second quarter profits have prompted swift action at BMW including a switch of emphasis from the US to more profitable markets.
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Reduced residual values of leased vehicles in the US prompted the group to increase its risk provision from EUR236m in the first quarter to EUR695m “thus significantly holding down earnings for the first half of 2008”. The automaker also booked EUR107m in the second quarter for workforce reduction measures.
Adjusted return on sales improved to 7.3% for the six-month period.
Group second quarter revenues fell 0.9% to EUR14,552m due mainly to exchange rate factors. EBIT fell 58.3% to EUR425m and pre-tax profit, at EUR602m, was down 43.5%. Net profit fell 32.7% to EUR507m.
Half-year revenues rose 4.5% to EUR27,837m, EBIT fell 35.2% to to EUR1,252m and pre-tax profit was also off 35.2% to EUR1,243m. Pre-tax profit for H1 2007 included a one-time gain of EUR61m on the conversion of the exchangeable bond on shares in the aero engine manufacturer, Rolls-Royce plc.
Group net profit fell 25.8% to EUR994m.
The total number of vehicles delivered increased 4.0% to 413,087 units in the second quarter and 4.7% to 764,874 units in the first half.
Automobiles EBIT fell 52.1% to EUR395m and pre-tax profit tax was off 59.4% to EUR325m. Due to US dollar weakness, segment revenues fell 3.5% to EUR13,754m.
Revenues for the six-month period edged up 0.9% to EUR25,916m, but EBIT fell 31.7% to EUR1,014m and pre-tax profit was down 38.7% to EUR864m.
The motorcycles business was also affected by difficult market conditions, BMW said.
Financial services segment business volume increased 8.8% to EUR53,115m as the number of lease and financing contracts in place with dealers and retail customers rose 12.9% to 2,806,776.
Six month segment revenues climbed 18.4% to EUR7,734m but EBIT fell 68.0% to EUR118m and pre-tax profit was off 60.2% to EUR148m.
BMW’s workforce was down 1.2% to 105,802.
“At an operating level, the BMW group has improved significantly during the first half of the year”, said BMW chairman Norbert Reithofer on Friday.
The group has revised its earnings forecast to take account of less favourable market conditions.
“We now expect the pre-tax return on sales for the year to be at least 4%”, added Reithofer. An EBIT margin of approximately 4% or higher is forecast for the automobiles segment. BMW is still aiming for a new sales volume record for the year, though.
But such growth will not be pursued at the expense of profitability. Due to the weakUS dollar and market, sales volumes there will be reduced and some vehicles originally destined there will be switched from the dollar region to countries with higher margins.
The group’s US sales volume figures for 2008 are now likely to be lower than a year ago as emphasis switches to profit-oriented growth in other regions.
The group will also reduce production volumes and increase selling prices.
A new working time account system introduced at the beginning of April allows greater flexibility in working hours, therefore making it easier to offset production fluctuations.
The group will also negotiate with employee representatives about voluntary benefits beyond general pay.
The financial services segment will consider measures to improve residual values and reduce bad debts.
“We assume that 2009 will be another difficult year full of challenges”, said Reithofer.
For 2010, BMW has set as an intermediate target a group return on sales of at least 6% and an automobiles segment EBIT of almost 6% or higher. By 2012, the group continues to target a return on capital employed (ROCE) in excess of 26% and an EBIT margin of 8% to 10% for automobiles.
