FRANKFURT -- BMW AG said Thursday first-quarter net profit fell 38% from a year earlier due to costs for new model launches and because a special gain related to an exchangeable bond on shares in aircraft engine maker Rolls-Royce Group PLC boosted last year's figure.

Net profit came in at €587 million ($797.97 million), down from €948 million in the same period last year, the world's biggest premium auto maker by sales said in a statement.

Revenue rose 2.9% to €11.95 billion from €11.62 billion, while its closely-watched pretax profit fell 34% to €852 million from €1.3 billion. Pretax profit came in below analysts' estimates of €861 million, while revenues beat expectations of €11.61 billion.

Still, the car maker was bullish about its prospects for the full year. "We expect business to increase noticeably in the coming months," BMW Chief Executive Norbert Reithofer said in a statement. "We are right on course to achieve our targets for the full year. In addition to increasing sales volume in the high single-digit percentage range to over 1.4 million vehicles, the BMW Group is aiming to achieve a pretax profit, which, adjusted for the gain on the Rolls-Royce exchangeable bond, will be above the record level posted for the previous year."

BMW's pretax profit came in at €4.12 billion in 2006, up 26% from a year earlier, helped by a special gain related to the exchangeable bond on shares in Rolls-Royce, which contributed €372 million to the group's pretax earnings last year.

Unfavorable currency effects and high raw material prices will continue to have an impact on the company's earnings this year, albeit to a lesser degree than in 2006, BMW reiterated. Last year, unfavorable exchange rates, especially for the dollar and yen rates against the euro, as well as high raw material prices, burdened BMW's earnings by about €844 million.

BMW delivered 333,276 BMW, Mini and Rolls-Royce brand cars to customers in the first quarter, up 0.1% from a year earlier. BMW said it still expects stronger momentum in the next few months fueled by new models such as the revamped X5, 5-Series and the new 3-Series Convertible. In 2006, BMW sold a total of 1.37 million cars.

BMW's first-quarter earnings are broadly in line with expectations but show that the company had a tough quarter, said Nomura analyst Michael Tyndall, who holds a "neutral" rating on BMW stock. "They're likely to deliver according to their plans, but there's little upside potential," said Mr. Tyndall.

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Link (need subscription): http://online.wsj.com/article/...tos_1

 

Ouch. Surprising that profit fell that much even with increased sales. Less profit also means less resources to compete.

 

http://www.bloomberg.com/apps/news?p...b3c&refer=home



BMW Luxury Lead Threatened by Lexus, Stagnant Margins (Update1)

By Jeremy van Loon

May 4 (Bloomberg) -- On the outskirts of Leipzig, a 20-meter- tall steel, glass and concrete building rears out of the flat landscape. The complex, a car factory opened by Bayerische Motoren Werke AG in 2005, was designed by Pritzker Prize-winning architect Zaha Hadid and won Germany's top architecture award.

For the BMW executives who built it, the plant's form is less important than its function. The factory was custom designed to produce 1-Series or 3-Series BMW sedans in any order and with different options without stopping the production line. Leipzig is BMW's latest weapon in its battle to retain its position as the world's most-successful luxury car company.

BMW looks like it has everything going for it. Its sales last year set a new record of 1.37 million vehicles. It's pushed DaimlerChrysler AG's Mercedes-Benz aside to become the second- biggest-selling luxury car brand in the U.S., after Toyota Motor Corp.'s Lexus. It has the kind of cult status among owners other car companies can only envy. And it's taken the low-budget, English Mini Cooper and made it a favorite of the post-college set.

The company's investors, however, aren't satisfied. BMW's stock price was up just 6.7 percent this year as of yesterday's close, while Germany's DAX Index gained 13 percent in the same period. Its profit margin has been stuck in the same place for six years. And competitors are eating away at BMW's market share, with Volkswagen AG's Audi and Lexus growing especially fast.

The best evidence that BMW is looking over its shoulder: It now gives U.S. buyers incentives that average $4,000 a vehicle, almost double what Lexus and Mercedes offer.

Earnings Hit

On Thursday BMW announced that first-quarter profit fell 38 percent. Net income dropped to 587 million euros ($799 million), or 90 cents a share, from 948 million euros, or 1.44 euros a share, a year earlier. Chief Financial Officer Stefan Krause blamed rising materials costs and a falling dollar for the profit decline.

``BMW may be in for a tough six months or perhaps a tough couple of years,'' said Max Warburton and Avaneesh Acquilla, analysts at UBS AG, in a note today.

The May 2005 opening of the Leipzig factory coincided with BMW's stealing the title of world's largest luxury car manufacturer from Mercedes. Sales of BMW-brand cars had been rising for more than a decade, based on a series of successful designs that appealed to rising young executives and entrepreneurs, particularly in the United States.

``BMW is more like a religion than simply driving a car, especially in the U.S.,'' says Christoph Stuermer, an auto industry analyst in Frankfurt for Waltham, Massachusetts-based research firm Global Insight Inc. ``You get in, and you never get out. First you convince your family to buy one and then your friends.''

Growing Luxury Market

BMW is the leader in a global market for luxury cars that will likely reach 6.72 million units this year, up from 5.27 million vehicles in 2001, according to Global Insight. This year, BMW, including Mini, is expected to have 27 percent of that market, up from 16.9 percent in 2001. Mercedes is projected to have 26.1 percent; Audi, 17.8 percent; and Lexus, 9.9 percent.

When it pulled ahead in luxury sales in 2005, BMW hadn't beaten Mercedes since 1993. This time it plans to keep the title, says Chief Executive Officer Norbert Reithofer, who took over when Helmut Panke retired in September.

``We intend to remain the No. 1 premium car brand,'' Reithofer, 50, told a September press conference. ``How we have achieved our growth over the past few years has a lot to do with productivity and efficiency improvements.''

Reithofer was head of production until last year. His proudest achievement in his previous post: The company increased unit sales by two-thirds from 2000 to '06, while the workforce grew just 14 percent. Revenue per 1,000 employees rose to 459.8 million euros ($624.1 million) last year from 395.4 million euros in 2001. BMW's pretax profit in 2006 rose 3 percent to 3.75 billion euros, on revenue of 49 billion, not including the sale of a stake in independent airplane engine maker Rolls-Royce Group Plc worth 350 million euros. BMW retains the Rolls-Royce car brand.

Leipzig Grows Wings

The new Leipzig plant is a showcase for BMW's efficiency drive. The factory has a main building with four finger-shaped wings, which make it easier and quicker for trains and trucks to deliver parts. Managers can add modules at the ends of the wings to accommodate a rise in production. They can also adapt the machinery to produce any BMW model.

And the Leipzig factory, like other BMW plants, can adjust to new orders so quickly that customers can change their options as little as six days before delivery. To save space, cars in various stages of assembly pass over the heads of managers and workers at their desks. Employees have agreed to flexible work schedules that minimize overtime.

``Leipzig is the result of all our production successes coming together,'' says Frank-Peter Arndt, BMW's head of production. ``We have worked a lot on the standardization of processes, using modules and building blocks to reduce the number of steps that are really needed to build a car.''

Margins Weak

Larger forces in the global economy, though, have conspired to thwart BMW from turning its efficiencies into bigger profits. Its profit margin, 5.85 percent in 2006, has moved little since 2001.

``An improvement in margins would be very welcome,'' says Peter Braendle, a fund manager at Zurich-based Swisscanto Asset Management, which oversees the equivalent of 34 billion euros. ``The risk is that they don't transform the gains they've made by selling more products into improvements in profits and margins.''

Margins haven't budged, BMW executives say, because of the sharp rise in the price of the steel, rubber and other materials that go into making a car. The falling dollar has also worked against the company. BMW says it lost about 1 billion euros in earnings in 2006 due to high commodity prices as well as the declining value of the greenback, which makes the dollars the company earns in the U.S. worth less when they're converted into euros. The euro has gained almost 50 percent against the dollar since 2001.

``The prime factor has been the negative headwind caused by the depreciating dollar,'' says Michael Raab, an analyst at Frankfurt-based private bank Sal. Oppenheim Jr. & Cie.

Hedging the Dollar

BMW CFO Krause says he expects the dollar to gain in value in 2007 and is therefore doing only tactical hedging. ``Improving your exposure to currency is a slow-moving thing; it's nothing you can do on an operational basis,'' he says.

Raab notes that another German carmaker, Porsche AG, has had a more successful hedging strategy than BMW. Porsche is protected through 2009 from the changing value of the dollar, says Holger Haerter, the sports car maker's CFO.

BMW's profit margins have also suffered because the company's biggest sales gains in recent years have come from its least- expensive cars -- the Mini Cooper, which starts at $18,000; the 1- Series, which sells in Europe for the equivalent of $30,000; and the 3-Series, which ranges from $40,000 to $60,000.

Those models have smaller profit margins than BMW's top-of- the-line vehicles. The 3-Series represents 42 percent of the company's sales.

Stock Trails Dax

Sagging margins have helped depress BMW's stock price. The stock has consistently trailed Germany's DAX Index; BMW shares rose 4.9 percent in the five years ended on May 3, while the DAX jumped 67 percent. ``BMW shares are quite cheap,'' says Thomas Romig, a fund manager who helps oversee 1.3 billion euros at Frankfurt-based Cominvest Asset Management GmbH. ``The big question on investors' minds is how BMW will prevail against its competitors.''

CEO Reithofer has a simple explanation for his company's weak stock. ``We don't have a restructuring story, and we can't offer one,'' he said at the September press conference. He went on to say that BMW executives believe they are doing everything they can to maximize efficiency and have no plans to revamp operations. ``If it's not broken, don't fix it,'' Raab says. ``BMW has always managed to keep their cost base tighter than Mercedes, and they have also done a better job using common parts as well as making production more flexible.''

Mercedes' Troubles

Mercedes, by contrast, suffered in 2004 and '05 from rising costs as well as electrical and brake system faults that triggered a recall of 1.3 million models, the largest in the company's history. In 2005, the Mercedes Car Group lost 505 million euros, the division's first red ink since Daimler-Benz AG's merger with Chrysler Corp. in 1998.

Last year, Mercedes cut 9,000 manufacturing jobs in Germany. DaimlerChrysler is also in negotiations to sell its money-losing Chrysler division. As a result of all the changes, DaimlerChrysler stock jumped 26 percent in the first three months of this year.

Volkswagen is also revamping its German and U.S. operations; the U.S. division has lost money for the past six years. Management set a goal one year ago of cutting VW's German workforce by 20,000 through attrition.

Volkswagen is also introducing new vehicles, including a compact sport utility vehicle and a minivan built with Chrysler. And it's squeezing suppliers for price cuts. Investors like VW's plans: Its stock was up 88 percent in the year ended on May 3.

Stuck in Neutral

While BMW is stuck in neutral, the competition is gaining ground with new models. Mercedes-Benz might have already regained the sales lead if it weren't for BMW's revival of the Mini Cooper, which it bought as part of Rover Group Plc in 1994. Last year, BMW sold 188,000 Minis, a decline of 5 percent from 2005, because of a changeover to new models at the factory in Oxford, England, where they're built.

Mercedes Car Group sold 1.25 million cars in 2006, up 3 percent from 2005. In the first quarter, Mercedes sales fell 2.8 percent to 286,800 units, while Mercedes-Benz brand sales expanded 3.1 percent. BMW's first-quarter vehicle sales increased slightly to 333,276 units from 332,948 a year earlier, with BMW-brand sales rising 1 percent to 286,185 and Mini-brand declining 5.1 percent to 46,978 cars. Though BMW sales for the first quarter were flat, Reithofer predicted in a May 3 earnings report conference call that 2007 sales would hit a record of more than 1.4 million.

Audi, Lexus Gain

Audi and Lexus are gaining on BMW from a smaller sales base. Audi's 17.8 percent share of the global luxury market is up from 14.1 percent in 2001, according to Global Insight. Lexus has risen to 9.9 percent from 5.2 percent. Audi sold 905,000 cars worldwide in 2006, a 9.2 percent increase over 2005. Volkswagen CEO Martin Winterkorn, who ran Audi until he was promoted last year, has set a target of 1 million Audi sales by 2008 and 1.4 million by 2015.

Lexus is growing even faster. It sold 475,000 cars worldwide in 2006, up 20 percent from 2005. Lexus does its biggest business in the U.S., where it's the best-selling luxury car brand, with 322,000 units driven off the lot in 2006 compared with 313,000 for BMW.

Lexus is also becoming competitive in Europe, where BMW sells half of its cars. Lexus sold 36,662 vehicles in Western Europe last year, a 72 percent increase over 2005, according to the European Automobile Manufacturers Association.

Both Audi and Mercedes are trying to erode BMW's market share by pushing into new niches. Audi introduced its new Q7 SUV last year as a direct challenge to BMW's X3 and X5 SUVs, which are big sellers in the U.S. Mercedes rolled out its M-Class and GL-Class SUVs.

Crossing Over

Mercedes also launched a new crossover model, called the R- Class, which blends the spaciousness of a station wagon with the performance of a grand touring car. Audi will also introduce compact premium cars to compete with BMW's 1-Series.

BMW has countered with new versions of its X3 and X5. And it plans two crossovers for next year.

The new X5, built at BMW's Spartanburg, South Carolina, factory, is about 19 centimeters (7.5 inches) longer than its predecessor, 7 centimeters wider and as much as 14 percent more fuel-efficient. The extra length enabled designers to add a third row of seats. The car, which starts at 51,900 euros, also has a so-called ``heads-up'' display that projects speed and other functions on the windshield, enabling the driver to keep his eyes on the road.

Redesigned 3-Series

BMW also launched an updated version of the 3-Series two years ago. The car's engine is 14 kilograms (31 pounds) lighter and uses 13 percent less fuel. It comes in 12 colors and four different interiors. It accelerates from 0 to 100 kilometers (62 miles) an hour in 6.3 seconds, or 0.2 second faster than the older model.

Two-thirds of BMW's cars are still built in Germany, where labor is expensive. In trying to keep efficiency high and costs low, managers measure improvement in seconds. BMW's most- productive workers are a team of robots made by Fanuc Ltd. and Kuka Roboter GmbH, a division of IWKA AG.

The robots have gradually replaced workers in the paint shop and for welding and assembly processes. They have helped reduce the time it takes to weld together a body to 56 seconds from about 70 seconds during the past decade. Workers who used to do the welding manually have been trained to operate and program the robots.

Orange Kuka robots, packed 12 into a bedroom-sized space, place panels together with glue and then fire welds into pieces of metal before passing them on to an assembly line that installs a dashboard and electronics. Putting those parts together now takes 65 seconds, down from 72 seconds a decade ago.

`A Solid Image'

Maria Bissinger, a credit analyst at Standard & Poor's in Frankfurt, sees BMW continuing to dominate the luxury category. ``We expect BMW to be able to sustain above-average margins and benefit from its premium positioning, despite increasing competitive pressure,'' she wrote in a recent report. ``This is because BMW has a solid image, broad geographic distribution of sales and a high degree of operating efficiency.''

BMW's 5.85 percent profit margin, even if it's not increasing, beats the margins of Volkswagen, at 2.6 percent; PSA Peugeot Citroen, at 1 percent; and General Motors Corp., at minus 1 percent.

BMW's bonds, meanwhile, are rock solid. ``Demand for their bonds is very high, and the supply is low,'' says Elmar Zurek, a fund manager at Frankfurt-based DWS Investment GmbH, which oversees 140 billion euros in assets, including BMW shares and bonds. ``They have one of the best ratings in the sector, and, therefore, credit default swaps have declined dramatically this year.''

High Credit Quality

The cost of a CDS based on 10 million euros of BMW bonds has fallen to 9,000 euros from 24,660 in the past two years. A fall in price implies stronger credit quality.

In the race for market share, what BMW has going for it is its cachet among the young and affluent -- and its virtual cult status among existing owners. BMW clubs have sprung up from Bellevue, Washington, to Jakarta and now have almost 200,000 members. There are numerous Web sites devoted to the brand on which fans can get information about how to baby their vehicles. ``Customers are sold emotion at BMW; that's their strength,'' Zurek says. ``BMW is certainly the benchmark among luxury car makers.''

BMW is controlled by the Quandt family, one of Germany's wealthiest clans. Herbert Quandt, a Daimler-Benz board member, bought a controlling share in 1959 to prevent it from being swallowed up by the then much larger Mercedes. He turned the company's fortunes around by introducing the 1500, a sporty luxury car that's a predecessor to the 3-Series. He died in 1982.

Quandt Family Control

Today, the Quandt family's interests are guarded by supervisory board members Stefan Quandt, 41, and Susanne Klatten, 45. They together own a 30 percent stake, with their mother, Herbert's third wife, Johanna Quandt, 78, holding another 16.7 percent. Members of the family don't give interviews, according to their spokesman, Joerg Appelhans.

BMW made what Raab calls the biggest error in its corporate history in 1994, when it bought Britain's Rover Group for 800 million pounds ($1.6 billion) with a notion to enter the mass market. He says there was a belief in the industry at the time that size mattered -- that carmakers considered too small would be bought out and would have too few resources for research and development.

Rover was a money-losing operation when BMW acquired it and remained so for the years BMW owned it. In 1999, it was the main contributor to BMW's $1 billion loss, the biggest in the company's history. In 2000, BMW threw in the towel and sold Rover for 10 pounds.

Redesigning the Mini

BMW found a gold nugget under Rover's hood in the Mini Cooper. BMW redesigned the Mini and relaunched it as the youth car of the '90s. The Mini's current TV marketing campaign features young actors driving through fields of corn. There's also a magazine series featuring profiles of youthful Mini owners.

``The success of a car like the Mini has to do with establishing it as an icon,'' says Chris Bangle, BMW's head de- signer. ``A car that is an icon is one that has wide appeal.''

Besides its Mini factory in England, BMW has 15 production facilities outside Germany, including its South Carolina factory, which opened in 1992 and produced 105,200 Z4 roadsters and X5 SUVs last year. Since it was introduced in 1998, the X5 has been BMW's hot seller in the U.S.

``The year before the introduction of the X5, total sales in the U.S. were about a 10th of what they are now,'' says Matthias Hoffmann, who heads marketing for the SUV. The U.S. is now BMW's largest market, making up about a quarter of total sales. The number of vehicles sold there has quadrupled since 1998.

The Lexus Challenge

BMW's short-term goal for its U.S. operation is to catch Lexus with the two new crossover vehicles planned for next year. ``We're paying very close attention to Lexus,'' says Martin Kuhn, 41, who's responsible for purchasing strategy at BMW. ``The time when they merely copied ended a long, long time ago.''

Lexus's LS sedan and RX SUV compete directly with BMW's 3-and 5-Series models and the X3 and X5 SUVs. Last year, Lexus reintroduced a vehicle specifically aimed at BMW's high-end 7- Series line. The new Lexus LS, which starts at $71,000, features a 4.6-liter, V-8 engine; a leather-trimmed interior; heated and cooled seats; a voice-activated navigation system; and satellite radio.

The task of squeezing more efficiency, more profit and a higher stock price out of BMW falls to Reithofer, on the job for less than a year. He rarely talks to the press, and declined to be interviewed for this article. The night before the company's annual earnings conference at the Munich headquarters on March 13, when journalists typically get a chance to speak off the record with management, Reithofer stayed home.

Press Shy

Reithofer's press shyness, colleagues say, doesn't prevent him from being a superior manager. ``Reithofer has the ability -- and this is his great strength -- to see things from a very global perspective, right down to the small details,'' says Manfred Erlacher, manager of BMW's Munich factory. ``He has the ability to engage and absorb the details of what a worker is explaining to him and to listen.''

Outsiders agree that, given Reithofer's background as manufacturing head, BMW is in good hands. ``BMW over the years has done a better job than Mercedes of continually improving itself,'' says Marc-Rene Tonn, an analyst at M.M. Warburg & Co. in Hamburg. Now, it has to prove to investors that it has a strategy for increasing profits that matches its zeal for designing cost- efficient factories.

 

My 2 cents. I think first off the title is a little misleading, Lexus sales are stilll less than 1/2 of BMW worldwide and its not like BMW is faltering. There are some great points made and the $4,000 in rebates has to be concerning.

 

BMW sells more but makes less
http://detnews.com/apps/pbcs.dll/art...703240309/1362

fleet sales, subsidized leases, and free maintance are preventing BMW from achieving the operating margins Toyota enjoys.

either way BMW profits are off, and while Toyota doesn't list Lexus profitability seperate, Lexus pulls more then $1billion/quarter.

 

Great article. The Lexus pressure on BMW is good for everyone - it will make BMW work that much harder.

Given the dollar's weakness and the amazingly high cost of German labor I bet we can expect to see more BMWs made in the U.S. and maybe even a second plant.

 

I think BMW ought to redo they way they package their cars. The standard equipment list is a bit long IMO. Yes, you read that right.

 

What would you take off the standard equipment list!?

 

Yea with only €4.12 billion in profit I can see your point

 

that X5 in the pic looks awesome.

 

yet they dont give you floor mats, metallic paint, and leather included standard

 

The standard equipment includes an engine and air around the driver. What would you want to take off? Air around the driver or the engine?

 

... compared to the estimated net profit of over 13 Billion USD that Toyota will announce in a few days. Less profit means less freedom in terms of devoting resources to R & D.

Yeah, 4.12 Billion Euro in pre-tax profit sure sounds like a lot ... and then you look at their net profit which was $800 million USD for the first quarter. Extrapolated, that's a 2.4 Billion USD annual net profit, a far cry from the misleading figure of the pre-tax profit.

Dropping profits are a warning sign that tells a company they should be cautious and look carefully at their operations and competition. Let's hope BMW doesn't still possess an ignorant mentality and that they take this profit drop seriously.

 

Very nice to hear that BMW is watching Lexus, and not being complacent. Also nice of them to acknowledge Lexus as leaders in certain segments, not followers. Now if only BMW fans and dealers weren't so condescending and arrogant towards their competition.

 

If I was running that company I'd be like what the ****ed do you mean we lost x-amount of money!!!