Exports, soft euro help BMW weather Europe's woes

Reuters (Frankfurt) - BMW (BMWG.DE) shrugged off a weak European car market to post a smaller than expected drop in quarterly profits on Wednesday, highlighting the widening gulf between the continent's export-oriented premium car makers and their ailing mass market rivals.

However, although results were roughly in line with analysts' forecasts, investors sold the stock after hoping for an even better performance following last week's positive surprise from underperforming rival Daimler (DAIGn.DE) [ID:nL6E8IP175]. There was also concern over the level of price cutting in its weakest southern European markets.

The share price was down 3 percent at 58.99 euros in late trade on Wednesday, while the Stoxx Europe 600 automotive sector index .SXAP was down 1.1 percent.

Group earnings before interest and tax (EBIT) fell 19 percent from its all-time record second quarter last year to 2.27 billion euros ($2.80 billion).

The result was still its second-best quarterly operating profit ever with the decline on a year ago slightly less than the 23 percent drop feared and exaggerated by a gain in the same quarter last year of 464 million euros from a release in risk provisions.

But the EBIT profit margin at its core auto business fell 2.8 percentage points from a year ago to 11.6 percent, as BMW battled what it called "intense market competition" in southern Europe, a reference to a rise in incentive spending.

"These numbers are still good, they're just not standout great," said Bernstein analyst Max Warburton in a note.

Analysts criticized management during a conference call for the margin slide that exceeded rivals Audi (VOWG_p.DE) and Mercedes (DAIGn.DE), due to price-cutting that caused just over half the decline in its margin. Higher research and development and staff costs as well as last year's provision release accounted for the rest of the decline.

BMW's finance chief said that in some car markets in freefall, like Spain and Italy, BMW had little choice but to heavily discount its prices just like volume carmakers.

"We have to make sure that the dealers survive in a crisis like this and that is the reason why we have to maintain a certain momentum when it comes to the market share development," said Friedrich Eichiner.

"They need to sell some cars, otherwise they will die."

Eichiner said the rate of incentive spending would not worsen any further in the second half thanks to the launch of key volume models like the new 3 Series estate.

Chief Executive Norbert Reithofer reaffirmed full-year targets that include an autos EBIT margin at the upper end of its 8-10 percent range, but warned that short-sighted national governments may push the euro zone deeper into recession.

"There is no alternative to a collective Europe and a single currency. The euro has provided growth, employment and prosperity in this country and considerably strengthened Europe's role as an economic power," he told reporters.

When asked whether he would be in favor of large scale sovereign bond purchases by the European Central Bank, the BMW CEO replied: "We believe that price stability should remain the paramount goal of monetary policy. Nevertheless a very clear plea from my side for the preservation of the euro zone."

He added that BMW was taking steps to reduce its reliance on French mass market partner PSA Peugeot (PEUP.PA), which reported heavy losses for the first half.

LABOUR DISPUTE

BMW's export strength also benefited from the troubles in Europe as the economic crisis has caused the euro to drop to nine-year lows versus a basket of major currencies.

Eichiner told reporters that a weaker euro contributed profits in the mid-hundreds of millions of euros in the first half and forecast this could rise over the full year to a high triple-digit million euro amount.

BMW is traditionally seen as the German carmaker with the biggest foreign exchange exposure, which S&P Equity Research analyst Marnie Cohen quantified at about 11.4 billion euros in 2012 net transaction risks to the U.S. dollar and renminbi.

Rival Daimler's Mercedes-Benz cars business had a 317 million-euro gain related to foreign exchange effects in the first half and Volkswagen's Audi brand saw its first-half results lifted by 300-400 million euros.

Separately, Reuters reported earlier that BMW plans to hire an added 3,200 full-time workers by the end of next year to settle a long-running dispute with the company's German unions over its widespread use of temporary workers.

The issue has caused BMW some embarrassment, after local labor leaders at its Leipzig plant in Eastern Germany forced BMW to go to court for permission to staff the factory with one temporary worker for every three permanent employees.

BMW employs a full-time staff of nearly 75,000 in Germany.