Zetsche’s legacy

Daimler’s quarterly results confirm downward spiral for maker of Mercedes cars

main 0204699458 imago DeFodi – Daimler CEO Dieter Zetsche CFO Bodo Uebber Mercedes-Benz cars trucks Ola Kallenius Kaellenius restructuring holding
Going, going, gone. Source: Imago

This year was supposed to mark Daimler’s breakthrough to the new era of automobiles after the company conquered the premium segment in the traditional industry and seemed on top of the world.

Instead, unit sales are down, earnings have evaporated and the stock has plunged to a five-year low as the automaker released dismal third-quarter results on the heels of its profit warning last week. Analysts wonder if the maker of Mercedes-Benz vehicles will have to suspend the dividend.

After record sales and earnings in 2017 and assurances as late as February about the company’s health, Daimler has issued two profit warnings since June and clearly has taken the exit ramp from the fast lane.

Third-quarter figures, in fact, seem more like a full stop. Earnings before taxes and interest (Ebit) fell 27 percent from the year-ago quarter, to €2.48 billion.

Worse, free cash flow swung into the red at a negative €1.86 billion, pulling down the nine-month figure to a negative €60 million. Revenue in the first three quarters was steady at €120 billion, but margins are down to 7 percent from last year’s 9 percent.

Daimler pins hopes on the fourth quarter

Unit sales were down 4 percent in the quarter, to 794,700 vehicles. Sales of Mercedes cars were down 6 percent worldwide to 559,539 units, with a 13-percent decline in Germany leading the way. Only strong sales in Asia were able to mitigate the declines in other world markets.

It is a tough environment for the automotive industry, and thus also for Daimler, CEO Dieter Zetsche commented. Still, he said he was confident about the fourth quarter thanks to high demand.

Dieselgate weighed on results, with costs associated with recalls, retrofitting, litigation and new certification procedures. CFO Bodo Uebber put the expense in the neighborhood of half a billion euros.

The hope is a strong fourth quarter will result in gains for revenue and unit sales with enough profit to cover the dividend.

“That’s a pretty big bet,” said Arndt Ellinghorst from Evercore ISI.

Swollen inventories will put pressure on prices

For one thing, the delays getting models certified in the Worldwide Harmonized Light Vehicle Testing Procedure have led to a buildup in inventories that carmakers will have to heavily discount in the fourth quarter, bringing pressure on prices and distortions in the market.

Mr. Zetsche has already announced his retirement for next year, but instead of leaving a proud legacy he is exiting as the herald of a difficult transition for the company that takes credit for inventing the automobile 130 years ago.

He and Mr. Uebber both are leaving after long years at the helm, making the workforce uneasy as they wait for Swedish manager Ola Källenius to take over the CEO spot in May.

Even their achievement of regaining the No. 1 spot in premium cars ahead of BMW has been called into question as Daimler, unlike BMW, has to recall hundreds of thousands of Mercedes cars over diesel emissions issues.

Likewise, their willingness to hold off on the development of electric cars while BMW put its first serially produced electric model on the road in 2013 means that Daimler doesn’t have any gains on this front to offset declines in combustion-engine vehicles.

Now, Daimler is under pressure from its new Chinese shareholder, Geely, to invest more heavily in future technologies and develop them together with the Chinese company and its other European acquisition, Volvo.

It will be up to Mr. Källenius to map out Daimler’s strategy, but as the 2018 performance shows, the company has missed out on a timely pivot to the future.

Franz Hubik and Markus Fasse cover the auto industry for Handelsblatt. Darrell Delamaide adapted this story into English for Handelsblatt Global. To contact the authors: hubik@handelsblatt.com and fasse@handelsblatt.com.

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