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Old 11-08-2007, 02:00 PM
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Arrow BMW profit disappoints as dollar weakness creates a drag

Nov. 6 (Bloomberg) -- Bayerische Motoren Werke AG is having a head-on collision with the dollar.

The world's largest maker of luxury cars posted third- quarter pretax profit of 765 million euros ($1.1 billion), 125 million euros less than estimated by analysts, as a weaker dollar reduced the value of U.S. revenue and research and development costs increased 20 percent.

BMW makes two-thirds of its cars in Germany and gets about 25 percent of sales from the U.S., its biggest market, where the dollar is trading at an all-time low against the euro. Margins were hurt as steel prices rose and the Munich- based company invested in new models. BMW sold 13 percent more cars, spurred by a new Mini and X5 sport-utility vehicle.

``The market is disappointed over margin development,'' said Juergen Meyer, who helps manage 1.3 billion euros, including BMW shares, at SEB Asset Management in Frankfurt. ``When you look at the value of the dollar since the beginning of the year it's not surprising what has happened.''

Shares of BMW fell 1.49 euros, or 3.3 percent, to 43.31 euros, the biggest drop since Sept. 7. The stock has added 0.5 percent this year, compared with a 59 percent gain at Daimler AG, the second-biggest maker of luxury cars, and a 119 percent advance for Volkswagen AG, owner of the Audi luxury brand.

Chief Executive Officer Norbert Reithofer reiterated that he expects BMW to report a full-year pretax profit higher than last year's record 3.75 billion euros. The company needs to earn 1.07 billion euros in the fourth quarter to beat that figure, 20 percent more than the average for the past three quarters.

Dollar Decline

The dollar fell 5.1 percent against the euro in the third quarter. It reached a low of $1.4570 today before trading at $1.4553 as of 12:25 p.m. in New York. That reduces the value of U.S. sales when translated into the European currency.

Other European carmakers are also suffering. Fiat SpA Chairman Luca Cordero di Montezemolo said today the dollar's weakness was ``devastating.'' The Ferrari unit of Italy's biggest carmaker exports 30-35 percent of production to the U.S.

Tate & Lyle Plc, maker of calorie-free sweetener Splenda, reported a 56 percent declined in six-month profit on Oct. 31 after the dollar's declines against the British pound wiped $21 million from earnings. Tate carries out 80 percent of its business in the U.S. currency. Eni SpA, Italy's largest oil company, said the dollar's slide hurt third-quarter earnings and eroded potential gains from rising oil prices.

BMW's operating costs jumped 22 percent to 10.9 billion euros in the third quarter on the dollar and raw-material expenses, the company said in a statement. The cost of European hot-rolled 2 millimeter-thick steel increased 16 percent in the first nine months, according to Metal Bulletin prices.

R&D Outlay

Research and development spending rose 20 percent to 723 million euros as the company invested in developing more fuel- efficient engines.

The pretax margin was 5.5 percent, lower than the 6.9 percent predicted in a Bloomberg survey. Net income rose 78 percent on a tax credit.

``The margins are about as bad as we've seen,'' said Georg Stuerzer, an analyst at Unicredit in Munich with a ``hold'' recommendation on BMW shares. ``The X5 is certainly making a positive contribution, but the fact that sales are rising much faster than profit is disappointing.''

Parts Purchasing

Reithhofer said the U.S. is delivering ``acceptable'' earnings, though margins are not as wide as in 2002, when the dollar was at a high against the euro. The company aims to boost the proportion of parts bought in dollars to compensate for the currency's decline, he said on a conference call.

BMW's third-quarter net income exceeded the 620 million euros estimated by analysts, helped by a tax credit of 38 million euros versus a year-earlier payment of 268 million euros. Earnings were equal to 1.22 euros a share, up from 69 cents.

Sales rose 19 percent to 13.8 billion euros, beating a 12.9 billion-euro estimate on increased production of the U.S.-built X5 and British Mini, both updated at the end of 2006. Revenue should reach a record for the year, Reithofer reiterated.

``The margins are disappointing, especially given the good model mix and revenue growth,'' said Joerg de Vries-Hippen, who oversees about $60 billion in assets at Allianz Global Investors in Frankfurt. ``They should be higher for a premium carmaker.''

Savings Plan

BMW said on Sept. 27 it would cut spending by 6 billion euros over five years and boost the dividend ``substantially.'' The move is part of Reithofer's strategy of improving profitability and maintaining a global sales lead over Daimler's Mercedes-Benz division and Audi. The CEO said today that there's no need for a more radical reorganization.

``As always at BMW, our focus is on the mid and long term,'' he said. ``A company that has as much profit as we have is not a restructuring case.''

The CEO has a 2012 sales goal of 1.8 million cars and sport-utility vehicles, with deliveries exceeding 2 million units by 2020. BMW sold 1.37 million vehicles last year and expects to sell more than 1.4 million units this year.

Third-quarter deliveries rose to 364,564 cars and SUVs. BMW-brand sales gained 11 percent to 306,964, while the Mini added 17 percent to 57,315. BMW sold 285 Rolls-Royce Phantom super-luxury cars, up 52 percent. Fourth-quarter sales will be ``strong,'' reaching 400,000 units, Reithofer said today.

Audi has a 2015 goal of selling 1.5 million vehicles annually after adding 18 models. The Ingolstadt, Germany-based carmaker's total last year was 905,200 cars and SUVs. Daimler CEO Dieter Zetsche aims to raise Mercedes' earnings before interest and tax to 10 percent of sales by 2010.

Currency costs in 2007 will be less than last year's 666 million euros, BMW Chief Financial Officer Michael Ganal said on Oct. 29. The company is ``fully hedged'' against major currencies for the year, Ganal said, without specifying at what level.

Productivity Target

BMW boosted vehicle sales by two-thirds from 2000 to 2006, while the workforce grew by 14 percent. The company aims to raise productivity by 5 percent a year.

Model introductions in the past five years include the 1- Series compact hatchback model and the Mini. Pricing of both cars, excluding value-added tax, starts at less than 20,000 euros compared with 40,000 euros for the X5 SUV and 55,000 euros for the 7-Series sedan.

To contact the reporter on this story: Jeremy van Loon in Berlin at

Source: [url=http://www.iht.com/articles/2007/11/06/bloomberg/bxbmw.php]International Herald Tribune[/url]
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