Daimler's Q3 net profit rises 53% y/y on strong passenger car sales

Daimler AG has recorded a strong set of third-quarter results on the back of revenue rises generated by healthy growth in the company's passenger car sales, according to a press release. The company's net profit during the third quarter rose by 53% year on year (y/y) to EUR1.897 billion (USD2.619 billion) on the back of a 5% y/y rise in revenues to EUR30.1 billion, although this figure actually translates into an 11% increase in revenues once exchange-rate effects are taken into account. This figure closely matches the company's overall rise in vehicle sales volumes during the July-September period, when it saw a very strong 13% y/y rise in combined sales volumes to 595,000 units. The company's earnings before interest and taxes (EBIT) also recorded a healthy rise from EUR1.923 billion in the third quarter of 2012 to EUR2.231 billion in the same quarter of 2013. The company's cash flow and net liquidity also remains on a very strong track. In the first three quarters of the year, free cash flow was EUR3.9 billion (although this did include EUR2.2 billion from the sale of the company's remaining stake in EADS), while in the third quarter alone cash flow from the industrial business was EUR1.6 billion. This helped Daimler's net liquidity to rise from EUR11.5 billion at the end of 2012 to EUR12.6 billion at the end of September 2013. The third-quarter results mean that its year-to-date (YTD) net profit has risen 67% y/y to EUR7.044 billion, while revenues have grown by just 2% y/y to EUR85.893, outlining the efficiency gains that the company has made this year.

Daimler CEO Dieter Zetsche said that the company's investment in new models was key to its performance. He said, "Our earnings continued improving in the third quarter, compared with the year to date and compared with the prior-year period. This shows that the high investments we have made were money well spent. We will continue to invest in products and production sites in order to secure the Group’s sustainable medium and long-term success."

In terms of the company's unit-by-unit performance, it was Mercedes-Benz Cars that was the standout performer during the quarter, its sales rising 14% y/y to 395,400 units. Revenue at this unit rose 8% y/y to EUR16.5 billion, while EBIT increased from EUR973 million to EUR1.2 billion, with the division's return on sales rising from 6.4% to 7.3%. As well as the expansion of the company's compact car range, Mercedes-Benz Cars also achieved an improved result through stronger pricing, although this had a negative effect on earnings. Daimler Trucks' third-quarter sales rose 4% y/y to 124,500 units, although revenue fell by 1% y/y to EUR 8 billion as a result of currency effects. Adjusted for exchange-rate effects, revenue increased by 8% y/y. The EBIT posted by Daimler Trucks of EUR522 million was higher than the EUR501 million achieved in the same quarter last year. The division's return on sales was 6.5%, up from 6.2% in the third quarter of 2012. There were positive effects from a recovery in Brazilian sales and growth in Western Europe, partially resulting from vehicle purchases being brought forward ahead of the upcoming introduction of Euro VI regulations in 2014, although warranty costs also rose. Mercedes-Benz Vans' sales rose by a very strong 17% y/y during the period to 65,300 units, with revenue correspondingly higher at EUR2.1 billion. During the quarter, EBIT also more than doubled to EUR152 million from the year-earlier figure of EUR152 million. Daimler Buses also enjoyed strong sales growth of 17% y/y to 9,600 units, while revenue was also up 19% y/y to EUR1.1 billion. Finally, Daimler Financial Services agreed 296,000 contracts during the period worth a value of EUR10.4 billion, equating to a rise of 4% y/y. Contract volumes reached EUR82.0 billion at the end of September and were thus 2% higher than at the end of 2012. Adjusted for exchange-rate effects, there was an increase of 6% y/y. With third-quarter EBIT of EUR322 million, Daimler Financial Services equalled its earnings in the year-earlier period.

Outlook and implications

These excellent third-quarter results vindicate the long-term strategy and model renewal programme that has been overseen by CEO Dieter Zetsche and the rest of the Daimler board. The company has one of the most modern vehicle ranges of all the major OEMs, including not only its passenger car models, but also a major investment in its heavy trucks, all of which are now Euro VI compliant and all of which have been renewed since 2011, including the company's flagship vehicle in the European market, the Actros heavy truck. The company is also starting to enjoy the fruits of a significant increase in its compact and medium passenger car offerings, which are being built on the firm's new modular front-drive (MFA) architecture, in which the company has invested heavily. This architecture is underpinning the revitalised A- and B-Class model ranges that were launched at the end of 2011 and 2012, respectively, as well as the new CLA-Class sedan/coupé model that is aimed at attracting a whole new generation of Mercedes-Benz buyers, especially in the US market where the company has set a highly competitive entry-level price of USD30,000 for the model (see United States: 30 September 2013: Mercedes introduces new CLA-Class model – report). This aggressive pricing is aimed at gaining conquest sales for the Mercedes-Benz brand and accelerating efforts to give the company a more youthful image and attract younger buyers to the brand. IHS Automotive is forecasting peak sales of 110,000 units for the CLA-Class by 2016, a very useful contribution to the company's combined sales total from a model that represents an entry into a brand-new segment for the company. Perhaps the key figure in this drive, Mercedes-Benz's head of design Gorden Wagener, vowed recently to eradicate Mercedes-Benz's image as a traditional manufacturer of "old man's" cars (see Germany: 18 October 2013: Mercedes-Benz design chief vows to banish brand's "old man" image) and the efforts in the form of the A-, B-, and CLA-Class would appear to be successful.

The new GLA-Class crossover will be added to Mercedes-Benz's product roster at the end of this year, and there will be another hugely strategically important new model launch next year in the form of the new C-Class. The company is looking to move the C-Class upmarket in terms of positioning and size in order to create space for the CLA-Class, with a lot of emphasis being placed on interior design and quality; this will boost transaction prices and its competiveness against key rivals such as the BMW 3-Series. Mercedes-Benz's push in the D segment and below will see the company's passenger car sales in these segments rise from around 600,000 units in 2010 to a forecast 1 million units by 2015. Daimler's own outlook sees combined passenger car sales rising by 3% in 2013, fed by ongoing strong demand in China and the United States, with global premium car sales growing at a faster rate, something from which Mercedes-Benz will benefit. However, there is little doubt that Daimler requires the current macroecomonic situation in China and the United States to be maintained and any disruptions or unforeseen turbulence in these markets will have a strong negative effect on the company's combined earnings. However, as things stand the company remains on a positive track and is set to post record combined vehicle sales this year of around 2.2 million units, an increase in the region of 6% according to IHS Automotive's forecast. This, together with ongoing cost reductions (CFO Bodo Uebber says that 70% and 60% of the ongoing programmes have been completed in the car and truck divisions, respectively) and sales growth should see Daimler record a strong full-year financial result.