Daimler's Q3 net profit rises 49% to EUR2.8 bil.

Daimler has posted another strong set of results for the third quarter with a 48% year-on-year (y/y) increase in net profits to EUR2.8 billion (USD3.6 billion), according to a company statement. This very strong third-quarter bottom line net profit figure comes from strong sales and revenue figures, with the former rising by 7% to 637,400 units, the highest quarterly sales figure in the firm's history, while the latter rose at the even higher rate of 10% y/y to EUR33.1 billion. The company's earnings before interest and taxes (EBIT) figure including special items also rose at a highly accelerated rate of 67% y/y to EUR3.7billion. The third quarter of 2014 was also strongly influenced by the sale of the shares in Rolls-Royce Power Systems Holding GmbH (RRPSH). This resulted in a gain of almost exactly EUR1 billion, which is presented in the reconciliation. The company reported an increase in plant and equipment investment during the quarter with a figure of EUR1.2 billion in comparison to the figure of EUR1.1 billion last year, most of which was aimed at the Mercedes-Benz car division, while R&D spending during the period rose to EUR1.4 billion, up from EUR1.3 billion in the third quarter of 2013. "Our strategy is paying off. We are growing profitably and look to the future with optimism also beyond the full year," stated Dr. Dieter Zetsche, Chairman of the Board of Management of Daimler AG and Head of Mercedes-Benz Cars. "In all our divisions, both the product offensives and the efficiency programs are taking effect. We are confident that we will achieve the targets we have set on a sustained basis." In the first three quarters of the year, net profit actually declined 13% to EUR6.1 billion, although this decline was largely down to the sale of Daimler's EADS stake in 2013. However, by way of contrast the revenue figure during the period was up substantially, with a 10% y/y to rise to EUR94.1 billion, while EBIT for the first nine months increased 3% to EUR8.6 billion.

Division by division

Mercedes-Benz Cars was a major contributor to Daimler's performance in the third quarter, with sales rising by 9% to 431,000 units, with particularly strong growth recorded in China, the US and the United Kingdom. Revenue rose by 13% y/y to EUR18.7 billion, while third-quarter EBIT rose to EUR1.6 billion up from EUR1.2 billion the year before. The unit's return on sales was 8.5% up from 7.3% in the third quarter of 2013.

Daimler Trucks continued to suffer from large variances in the performance of its regional markets, although third-quarter sales were slightly up on last year with sales of 125,600 units. Strong sales growth in the NAFTA region of 25% increased sales to 43,900 units, while Western Europe is still struggling from the pull-forward effect of the introduction of Euro VI emissions regulations at the beginning of the year with sales down 11% to 14,800, while sales in Latin America were down 23% y/y to 12,500 units, with a further 6% decline in Asia to 38,600 units. Revenue was up by 6% to EUR8.5 billion and EBIT was up to EUR588 million, up from EUR522 million. The division's return on sales was 6.9% up from 6.5%.

Mercedes-Benz Vans increased its third-quarter unit sales by 11% to 72,200 vehicles, with a 19% increase being posted in Europe and an 18% increase in the US. The division's revenue of EUR2.5 billion and operating profit of EUR176 million were also significantly higher than the prior-year figures of EUR2.3 billion and EUR152 million respectively. Return on sales was up 0.3% to 7.0%.

Daimler Buses posted significantly lower sales of 8,600 buses and bus chassis in the third quarter in comparison to 9,600 units sold in the same period of last year. Weaker Latin American sales were a key factor in this result. Revenue was also down at EUR1.0 billion, down from EUR1.1 billion last year. The division's EBIT of EUR64 million was above the prior-year figure of EUR59 million and return on sales increased from 5.2% to 6.2%.

Daimler Financial Services concluded approximately 339,000 new financing and leasing contracts worth EUR12.4 billion in the third quarter, increasing its new business by 20% compared with the prior-year period. Contract volume reached €93.7 billion at the end of September, which is 12% higher than at the end of 2013. Adjusted for exchange-rate effects, contract volume grew by 7%. The unit's EBIT rose to EUR355 million in the third quarter from EUR322 million as a result of the rising volume of contracts.

Outlook and implications

By far the biggest profit generator for Daimler during the third quarter was Mercedes-Benz cars, which benefited from the double catalysts of improved efficiency, through the Fit for Leadership programme, and improved model mix, with the growth in sales units from the company's expanded compact car range as well as the ongoing success of the new W222 S-Class range, which the company announced this week had sold 100,000 units during its first year on sale (see Germany: 21 October 2014: New Mercedes-Benz S-Class sells 100,000 units in one year). The strong sales of the passenger car division contributed to a substantially higher free cash flow than the same quarter the year before. Excluding the effects of acquisitions and disposals, the free cash flow of the industrial business amounted to approximately EUR2.9 billion in the third quarter up from EUR1.6 billion the year before, which is a strong indicator of the success of the firm's revamped passenger car range. This model strategy has been overseen by Zetsche and his team, who had previously come in for criticism for overseeing comparatively poor financial performance. The operating margin is still lagging slightly behind the double-digit figure generated by Audi, but Daimler continues to close the gap and further operating efficiencies and synergies are being sought, particularly in the area of the collaboration with Renault-Nissan. Daimler is still concerned about certain ongoing developments in the global economy, with growing concerns over the Eurozone and with developments in China also being watched very closely. However, for the full year Daimler is still forecasting significant increases in Group revenue, with above-average growth rates anticipated in North America and China. EBIT is also forecast to increase significantly in 2014. However, the company will also be keeping a weather eye on ongoing political volatility in the Middle East and Russia, and macro developments in Europe and China in particular.