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Why BMW AG Cut Its 2018 Profit Guidance

By John Rosevear - Sep 25, 2018 at 4:46PM

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Trade wars were a factor, but not the biggest factor.

BMW AG (BAMXF 2.47%) has cut its full-year profit guidance. The German automaker said on Tuesday that it now expects the costs of adjusting to new emission rules and the effects of global trade disputes to cut into its 2018 profit.

BMW's shares closed down about 5.2% in Frankfurt after the revised guidance was announced. 

Why new emissions rules led BMW to a profit warning

BMW said that there are several factors that will weigh on its second-half and full-year earnings more than it had expected. The biggest impact is related to new European Union standards for testing emissions and range of new vehicles, called the "Worldwide Harmonized Light Vehicle Test Procedure," or WLTP.

WLTP has been in the works for a couple of years, but it came into full effect on Sept. 1: All new light vehicles (cars, pickups, and SUVs) registered in the EU after that date must be approved under the new rules.

A blue 2018 BMW X3 SUV, wearing European license plates, parked on a rocky beach.

Surprise competitive pressures led BMW to cut its 2018 estimates. Strong global sales of the all-new X3 SUV, introduced last October, will help offset the added profit pressures. Image source: BMW AG.

BMW said that it was able to meet all of the new WLTP requirements before the deadline. The problem is that some other automakers didn't. That led to big price cuts on rivals' non-compliant vehicles before the deadline, and thus what BMW described as "unexpected intense competition."

While BMW's sales in Europe rose slightly in August, that gain fell far behind those of some rivals that chose to be aggressive on price: Ford Motor Company's (F -4.16%) Europe sales rose 17% in August from the same period in 2017, Fiat Chrysler Automobiles' (FCAU) were up 40%, market leader Volkswagen's (VWAGY -1.78%) rose 41%, and Renault's (RNSDF 16.17%) rose a whopping 58%.

Those big gains by rivals dented BMW's sales, and will likely dent them further as the year goes on (because many people who might have bought new BMWs later in the year bought discounted cars from rivals in August instead). That has left BMW with higher inventories in Europe than it would like under the circumstances. BMW said that it will adjust its production to reduce inventories over the next several months in an effort to preserve its profit margins. That will reduce its revenue over the period, even if its sales are strong in the remainder of 2018: BMW, like most automakers, books revenue when vehicles are shipped from its factories to dealers, not when they're ultimately sold.

BMW said that it is also facing higher recall-related costs than it had expected, and that disruptions in markets and supply chains related to the ongoing trade disputes between the United States and China would likely weigh on its earnings as well.

BMW isn't the first German auto company to warn on concerns related to WLTP and the ongoing trade wars: Daimler AG, parent company of Mercedes-Benz, Audi, and Porsche parent Volkswagen , and auto-industry supplier Continental AG have all issued profit warnings on related concerns in recent months.

BMW's revised 2018 guidance: revenue and profit lower than 2017

Here are the specifics of BMW's revised guidance. BMW cut several key expectations that it had reiterated in its last guidance update on Aug. 2, when it reported its second-quarter earnings.

For the full year, BMW now expects:

  • Automotive segment revenue "slightly lower" than its 2017 result, a reduction from the "slight increase" it expected in August. (2017 result: 88.6 billion euros.)
  • Automotive EBIT margin to be "at least" 7%, versus 8% to 10% in its prior guidance. (2017 result: 9.1%.)
  • A "moderate decrease" in overall group profit before tax, versus "on par" with 2017 in its prior guidance. (2017 result: 10.65 billion euros.) 

BMW also noted that it now expects a "significant effect" on group profit before tax and the EBIT margin in its Automotive segment in its third- and fourth-quarter results.

In a statement, CEO Harald Krueger said that BMW's new-product efforts would continue on schedule, but the company's ongoing cost-cutting and efficiency-improvement efforts would be "intensified" in an effort to maximize profitability, but the company's aggressive new-product plans will remain on schedule. 

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