BMW will miss its 2008 targets, it said on Friday, after it unveiled an unexpected 44 percent drop in quarterly pretax profit, thanks to worsening industry conditions and big one-off charges.
"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 world's biggest premium carmaker said on Friday.
Chief Executive Norbert Reithofer, who had been expected to lower his targets after Daimler cut its 2008 earnings guidance last week, poured cold water on the following year, too.
"We assume that 2009 will be another difficult year full of challenges," he said in a statement.
BMW shares dropped 9 percent to 26.32 euros in early trade.
"We had expected an additional risk provisioning in Q2 and a profit warning for the full year 2008, but not to this extent," DZ Bank's Michael Punzet told clients in a research note.
BMW now forecast a 2008 pretax profit margin of at least 4 percent, after previously expecting earnings before tax to exceed last year's adjusted level of 3.78 billion euros ($5.9 billion) that excludes a one-off gain of 97 million euros linked to a Rolls-Royce convertible bond.
Sinking used car prices forced the company to more than double its risk provisions to 695 million euros due to lower than expected revenues from cars coming off lease, it said, adding more still could come in the second half.
"Measures aimed at improving residual values and reducing bad debts will be pursued more intensely," BMW said.
It will also scale back its U.S. sales efforts, shifting volumes to more lucrative regions.
"What we like is that the residual value risks are now covering not only the maturities for 2008 but also the years 2009 and 2010," wrote UniCredit analyst Georg Stuerzer.
He added charges are not only for the North American market but also for Western Europe, making additional charges in the coming months very unlikely.
BMW, which also booked a 107 million euro charge to cut its workforce, said it expected an operating profit (EBIT) margin of about 4 percent or higher at its core Automobile division.
As an intermediate target, BMW said it aimed to achieve a group return on sales of at least 6 percent and in the Automobiles segment an EBIT of almost 6 percent or higher.
By 2012, BMW continues to target a return on capital employed (ROCE) in excess of 26 percent and an EBIT margin of 8-10 percent for Automobiles.
BMW reported a 43.5 percent drop in quarterly pretax profit to 602 million euros, bringing its margin to just 4.1 percent and badly missing an estimate of 1.04 billion from a Reuters poll of 18 analysts.
Whereas the market was expecting pretax profit at Automobiles to edge higher, BMW said it fell by nearly 60 percent, almost matching a 66 percent drop in financial services earnings.
On an operating level, the two divisions together contributed just 434 million euros in quarterly earnings before interest and tax, down 57 percent, and squeezing the margin to a 2.5 percent.
Daimler's Mercedes and Financial Services divisions suffered a mere 2 percent drop in EBIT to 1.4 billion euros by comparison, adding up to a margin of 9.2 percent.
Adjusted for the one-off charges for risk provisions and staff cuts, however, BMW said group pretax profit rose 9 percent to 1.13 billion euros.