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BMW May Increase Provisions for H2; Will Begin Earnings Recovery in 2011, Says CEO
11 Sep 08
BMW is confident of riding out the difficult global market but has not ruled out further provision for losses as a result of its vehicle leasing business.
Global Insight Perspective | | Significance | The BMW Group may lift its level of provisions for the second half of the financial year to take into the account losses generated by the company's vehicle leasing business. At the same time the CEO says it will take until 2011 to boost the company's comparatively weak earnings. | Implications | BMW's U.S. operations have historically been dependent on vehicle financing and leasing deals and BMW has had to take into account losses that will be booked this financial year as a result of a write-down in vehicle values coming of long-term lease deals. | Outlook | At the core of BMW's Number ONE Strategy which was announced last year was a goal to lift BMW's return on sales to between 8 and 10% by 2012. However, with the company facing all manner of market challenges this target looks increasingly ambitious, especially as the company is now forecasting a return on sales for 2008 of 4%. |
BMW's CFO Warns of Further Provisions for U.S. Leasing Losses BMW's chief financial officer (CFO) Michael Ganal has said that the company may have to consider increasing its provisions for the second half of the 2008 calendar year as a result of write-downs on second-hand values of passenger cars coming of lease deals in the United States, according to a Handelsblatt report. The company is also experiencing a growing number of defaults on financing and lease contracts while the sluggish market situation in Western Europe, with the markets in Britain, Italy and Spain performing particularly poorly, is also cause for concern. Ganal also underplayed the significance of recent gains made by the dollar against the Europe with BMW not expecting any positive currency effects as a result in 2008. Ganal also expected that the challenging global business environment will continue to be difficult but that BMW is well placed to rise out the downturn. He said, "From today's viewpoint, 2009 will remain a challenging year for the car industry. However, we will remain a healthy company despite the difficult situation." Meanwhile in an interview with Die Zeit newspaper, the BMW Group's Chief Executive Norbert Reithofer said that it will take until 2011 before the company recovers from its weak profitability. However he also commented on the industries wider concerns over the weakness of the U.S. market. He said, "The U.S. market could remain weak for a while. But from 2010 onwards the BMW Group will be in a good position again." Reithofer said that the company's drive to introduce 8,100 job cuts was proceeding and that 5,000 temporary workers have already been released, with 4,000 of this number already having found alternative employment in other countries in BMW's home state of Bavaria. Commenting about the current difficult environment the company is currently operating in, Reithofer added that BMW was optimistic about its future and has always come out stronger after phases of weakness. Outlook and Implications BMW surprised its investors and the financial community in July when it announced a profit warning and increased loss provisions, mostly on losses incurred by its vehicle leasing business, to 695 million euro (US$977.1 million; see Germany: 1 August 2008: BMW Reports 33% Fall in Net Profit, Lowers Outlook). BMW has ramped up its financing and leasing business considerably in recent years in Western Europe and in particularly in the United States. The latter market has begun to cause significant headaches as a result of last year's credit crunch, which was precipitated by the collapse of the country's sub-prime mortgage lending industry, which has led to increased restrictions on borrowing and higher interest rates. These factors, coupled with high fuel prices and rising living costs has seen the values of second-hand cars coming off lease deals fall to a greater degree than was originally anticipated and has led to provisions for losses in this area that now could be increased. BMW has also stated that its return on sales for 2008 will be around 4%, which is lower than the 5-6% posted in recent years. This level of profitability was achieved as the company set global sales records and overtook Mercedes-Benz as the world's largest premium carmaker. However, despite selling more vehicles than both of its principal rivals, BMW has failed to match their profitability. As a result it has set an ambitious profitability targets of achieving return on sales of between 8% and 10% by 2012 as part of the company's Number ONE strategy which was announced in October of last year (see Germany: 28 September 2007: BMW Targets Growth Through Increased Sales/Efficiency; May Add Another Brand). However, as things stand at the moment this target looks a long way off, especially in the context of the difficult market environment that the BMW Group is currently operating in.
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