BMW Struggles to Offset Drag From Technology Outlay, Currencies

(Bloomberg) -- BMW AG first-quarter profit failed to offset the hit from currency moves and higher spending on technology and new models, set to reach a record 7 billion euros ($8.4 billion) this year.

Currencies, namely the yuan and ruble, pulled down sales by 5.1 percent to 22.7 billion euros in the period, BMW said Friday in a statement, mirroring reports by German rivals Daimler AG and Volkswagen AG last week that highlighted the fallout from a strengthening euro. The company expects currency and raw materials headwinds in a mid-to-high three-digit million amount for the year.

“BMW guided that the revenue would suffer from currency headwinds, but a 5 percent decrease is pretty hard,” Juergen Pieper, a Frankfurt-based analyst with Bankhaus Metzler said. “The automotive margin was pretty good.”

BMW, which plans to offer 12 battery models by 2025, is working to offset record spending by expanding the top end of its model lineup. Higher-returning vehicles set to be unveiled include the full-size X7 sport utility vehicle and the 8-Series coupe, putting the company on a path to finance the electric shift essentially with gas guzzlers. Spending on new models and technology will rise by 15 percent from last year, staying high this year and next, BMW has said.

“We will see a significant increase in costs in the second half of the year,” Chief Financial Officer Nicolas Peter said on a call with reporters. “We're offsetting this by reducing complexity while later this year we'll launch a number of lucrative models.”

Sales success of models such as the 5-Series sedan helped push the return on sales in BMW's autos unit to 9.7 percent from 9.4 percent a year ago. BMW shares fell as much as 2.1 percent were down 1.7 percent at 11:45 a.m. For the year, currencies will account for about two-thirds of negative drag and commodity prices will make up about one-third, Peter said.

Mercedes Chase

The company, in the midst of a record rollout of new and refreshed models, is also pushing to recapture the luxury-car sales lead from Mercedes-Benz by 2020. Progress has so far been lagging growth at Mercedes, where unit sales jumped 6 percent during the first quarter compared with BMW's 2.8 percent. More sales momentum will get underway during the second part of the year, when higher numbers of sport utility vehicles like the new X2 compact crossover are set to shift.

“We are now in Phase II of our model offensive -- where the focus is on luxury and the X family,” Chief Executive Officer Harald Krueger, flagging 20 new and revised models throughout this year, said on the call. “We earn high margins in this segment.”

The two-pronged approach -- reducing complexity and focusing on high-end cars -- are designed to keep returns from carmaking in a targeted range of 8 percent to 10 percent.

In the shift to self-driving, electric cars, BMW is straining more than competitors like Audi and Mercedes, who can spread investment across a broader portfolio. Audi is part of Volkswagen AG's 12-brand portfolio, while Mercedes-maker Daimler also produces vans and is the world's biggest truckmaker.

1Q Highlights

• Group earnings before interest and taxes down 3.1% to 2.73 billion euros
• Group revenue falls 5.1% to 22.7 billion euros
• Result beat the 2.58 billion-euro average estimate of 5 analysts compiled by Bloomberg
• Automotive revenue down 3.4% to 19.3 billion euros
• Automotive EBIT rises 0.2% to 1.9 billion euros
• Affirms 2018 targets for slight gains in unit sales, revenue, group pretax

To contact the reporter on this story: Oliver Sachgau in Munich at osachgau@bloomberg.net.

To contact the editors responsible for this story: Tara Patel at tpatel2@bloomberg.net, Anthony Palazzo at apalazzo@bloomberg.net, Elisabeth Behrmann, Chris Reiter

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