BMW warns on profit as leased-car prices tumble

Aug.01, 2008 in Market Outlook

BMW shares drop on warning, provisions

By Steve Goldstein, MarketWatch

Last Update: 8/1/2008 8:48:00 AM

LONDON (MarketWatch) — BMW on Friday came under heavy selling pressure as the
luxury automaker warned of deteriorating prices on returned leased cars, leading
the Munich firm to report a 33% drop in second-quarter profit.

BMW (DE:519000), which brought forward its earnings announcement by a few days,
said it took a charge of 459 million euros on the higher risk provisions and
allowance for residual-value risks associated with leased cars. BMW warned it may
have to take further provisions in the second half.

General Motors (GM) faced a similar problem as the Detroit automaker lost $15.5
billion in the second quarter.

The BMW write-off led its profit to fall 33% to 507 million euros ($788 million)
in the second quarter.

The news didn’t come as a surprise to all — Deutsche Bank on Thursday published
a note warning that consensus profit estimates were too high and that risk
provision estimates too low — but the stock dropped 7% in afternoon trade.

“Business conditions for the automobile industry deteriorated sharply again in
the second quarter due to further ongoing steep rises in oil and raw material
prices, the weakness of the U.S. dollar, the impact of the international
financial crisis and a weaker U.S. economy,” the company said.

Revenue fell 0.9% to 14.55 billion euros, even as volumes rose by 5%, including a
2% rise for BMW-branded cars.

Mini sales climbed 13.5% and Rolls-Royce sales jumped 72%, albeit to just 312
cars.

But motorcycle sales fell 4%, which again it blamed on the weak U.S. economy.

“It’s not clear whether discounting or an increasing customer preference for
smaller cars drove the deterioration in average revenue per unit,” said Nomura
International analyst Michael Tyndall.

For the year, BMW expects its pretax return on sales to be at least 4%. Analysts
polled by FactSet Research had expected the ratio of pretax earnings to sales to
be 6.2%.

It didn’t sound optimistic for next year, either.

“We assume that 2009 will be another difficult year full of challenges,” said CEO
Norbert Reithofer.

BMW will reduce sales volumes in the U.S. and the group is looking to sell some
vehicles into countries with higher margins.

It’s going to reduce production volumes overall and increase selling prices.

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