Daimler Profit Rises 8% on Strong Mercedes-Benz Demand

German automaker Daimler AG (OTC: DDAIF) said that strong sales of Mercedes-Benz luxury vehicles helped boost its third-quarter operating profit to 2.69 billion euros ($2.99 billion), up 8% from the third quarter of 2018

But the company said that it will need to work harder to control costs as it shifts to electric vehicles and reiterated that it expects full-year profit and cash flow to fall below last year's levels.

The raw numbers

Data source: Daimler AG. As of Oct. 24, 1 euro = $1.11.

What happened at Daimler's divisions in the third quarter

  • Daimler's Mercedes-Benz Cars division, which makes and sells Mercedes-Benz luxury vehicles as well as the small Smart-brand cars, generated EBIT of 1.423 billion euros, up 4% from a year ago, on a 9% increase in revenue. Sales rose 8% to 604,700 on strong demand for compact cars and Mercedes' E-Class and S-Class sedans, offset by supplier issues that have delayed deliveries of the revamped GLE SUV. Pricing improved from a year ago, but the gains were more than offset by higher spending on new technologies, including electric drivetrains. The division's EBIT margin of 6% was down from 6.3% a year ago.
A silver 2019 Mercedes-Benz GLE, a five-passenger luxury SUV, parked on a beach.

Issues with suppliers have delayed shipments of the revamped Mercedes-Benz GLE in several key markets. Image source: Daimler AG.

  • Daimler Trucks, which makes heavy trucks under several brands including Freightliner, posted EBIT of 774 million euros, down 9% from a year ago on an 8% decline in sales. Sales were hurt by weakness in the heavy-truck markets in Europe and Asia. EBIT margin of 7.5% was down from 8.5% in the year-ago period, on higher spending for future products and new fuel-saving technologies.
  • Mercedes-Benz Vans, the company's commercial-vehicle division, posted EBIT of 113 million euros versus a loss of 93 million euros in the year-ago period. Sales rose 10% to 100,300 vehicles, driving a 15% increase in revenue. The unit's EBIT margin was 3.2%, helped by a favorable product mix but offset somewhat by higher spending on future products.
  • Daimler Buses' EBIT more than doubled from a year ago, to 79 million euros, as sales rose 16% to about 9,000. EBIT margin improved to 6.4% from 2.8% in the third quarter of 2018. Strong sales growth in Europe and Brazil helped, as did favorable exchange-rate movements.
  • Daimler Mobility includes the company's financial-services unit and its new-mobility businesses. It posted EBIT of 413 million euros, up 5% from a year ago, on a 10% increase in new business. But return on equity fell to 11.9% from 12.5% in the year-ago period, as spending increased on "new mobility solutions."

Other items of note:

  • Research and development spending in the third quarter totaled 2.5 billion euros, up from 2.4 billion euros a year ago. About 1.9 billion of that total went for electric-vehicle development at Mercedes-Benz Cars.
  • Through the first nine months of 2019, free cash flow at Daimler's core auto and truck businesses was negative 0.5 billion euros, a result of ongoing heavy investment in future products.
  • Net liquidity in Daimler's "industrial business" (excluding financial services) fell to 9.6 billion euros from 16.3 billion euros at the end of 2018.

What Daimler's CEO had to say

CEO Ola Kallenius said that Daimler's strong third-quarter performance was largely driven by good sales at the Mercedes-Benz Cars and Vans units. But he said that the decline in Mercedes-Benz Cars' EBIT margin will lead to a review of costs.

"In order to master the transformation in the next few years, we need to increase our [cost-reduction] efforts considerably," Kallenius said. "We have to significantly reduce our costs and consistently strengthen our cash flow."

Looking ahead: Daimler's full-year guidance

Daimler maintained its prior full-year guidance for sales and revenue. It still expects full-year sales to be roughly equal to its 2018 result (3.4 million vehicles), and revenue to be slightly higher than the 167.4 billion euros it generated in 2018.

But, reiterating last quarter's reduced guidance, it warned investors that it expects both its 2019 groupwide EBIT and industrial free cash flow to be "significantly lower" than its 2018 results, on weak commercial-vehicle markets and higher spending for future products and technologies.

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