Daimler expects to get back on course in 4Q after 2 outlook cuts

A Mercedes-Benz EQ Silver Arrow electric concept supercar, manufactured by Daimler AG, is unveiled during the Paris Motor Show, in Paris, France, on Tuesday, Oct. 2, 2018. The auto industry -- a slice of it at least -- converges in France this week for the biennial Paris Motor Show, where executives are showing off electric cars for the masses, robo-cars for the future and the self-proclaimed quickest car in the world. Photographer: Krisztian Bocsi/Bloomberg

By BLOOMBERG

FRANKFURT • Daimler AG has its work cut out to get a fourth-quarter (4Q) earnings bounce.

After two consecutive profit warnings, the German manufacturer of Mercedes-Benz cars sees improvements by clearing out vehicle stock in Europe and maintaining sales momentum in China, the Stuttgartbased company said yesterday in a statement.

“Daimler is certainly not alone when hoping for a significant 4Q boost from releasing its inventory,” Evercore ISI analyst Arndt Ellinghorst said in a note. “The same applies to Volkswagen AG, Audi AG and — to a lesser extent — BMW AG. We fear that this will lead to ongoing fierce price competition.”

Inventories will return to normal during the 4Q after increasing “temporarily”, Daimler said, with some spillover persisting early on. The carmaker and rivals have struggled against a Sept 1 deadline to meet tougher emissions tests in Europe, resulting in a rush to sell vehicles before the date, price discounts and a build up of stock afterwards.

Global automakers are dealing with multiple hurdles stacking up at a time of increased spending to finance the tectonic shift to electric cars and new digital services like ride-hailing.

Trade barriers between the US and China hurt exports for Mercedes- Benz and rival BMW AG, who have both warned of lower profits. Regulators also stepped up scrutiny of diesel cars on the two companies’ European home turf, on top of economic uncertainty in countries like the UK and Italy.

Earnings Impact
The sale of inventory in coming weeks will be critical to recover a 3Q earnings impact of “more than €2 billion (RM9.59 billion)” at the cars and van operations in the final months this year, CFO Bodo Uebber told reporters on a call. The company’s profit before interest and tax plunged 27% during the 2Q to €2.5 billion.

Running counter to this, Daimler is facing pricing pressure from planned incentives for customers to trade in older diesel vehicles in Germany, he said. The programmes to rejuvenate diesel fleets come amid public furor in the company’s home country over looming diesel driving bans in cities exceeding emissions regulation.

Despite the challenges, Daimler is sticking to a cashflow target of €4 billion for the year and dividend policy. The company still expects “good growth rates” in China, the world’s biggest car market, Uebber said.

China’s auto sales are on course to contract for the first time since at least the 1990s as a trade war with the US and a sliding stock market dampen prospects for the US$12 trillion economy.

China accounted for 29% of Mercedes-Benz deliveries through September, rising 13%.

Daimler is facing a “perfect storm” of softening global demand, tradewar tariffs and numerous other headwinds, Bloomberg Intelligence analyst Michael Dean said in a note. “No doubt Dieter Zetsche’s successor as CEO, Ola Kallenius, will appreciate higher second-half provisioning that will allow the company to enter 2019 on a firmer footing,” he said.