Falling Mercedes-Benz Sales Are More Bad News for Auto Industry

(Bloomberg) --

Daimler AG said its financial targets have become harder to achieve after a tough start to the year, forcing the auto manufacturer to step up efforts to drive down costs.

The Mercedes-Benz maker’s first-quarter profit slumped 16 percent after a decline in deliveries combined with the rising cost of developing new models. While earnings met analyst estimates, Chief Executive Officer Dieter Zetsche said the results fell well short of the company’s expectations.

“Achieving the financial targets for 2019 has not become easier since the first quarter,” Zetsche said Friday in a statement.

The manufacturer, like other carmakers, is battling slower sales in the U.S. and Europe while shouldering record spending on a range of new electric vehicles. Also on Friday, Renault SA reported a 4.8 percent drop in first-quarter revenue, while earlier in the week Nissan Motor Co. said it would miss its annual profit goal. Ford Motor Co. meanwhile surged past expectations.

Daimler in February already vowed to cut costs to shore up falling profits, with a 5.6 percent drop in Mercedes-Benz deliveries through March exacerbating pressures. The company on Friday gave scant fresh detail about how to reverse a profitability decline in the main cars unit to 6.1 percent from 9 percent a year ago. While Mercedes-Benz sales held up in China, the world’s largest market is still mired in a slump.

CEO-Designate

Investors are likely to look beyond first-quarter woes and focus on CEO-designate Ola Kallenius taking over in May, Bloomberg Intelligence analyst Michael Dean said in a report. “We anticipate his new strategic plan will be unveiled this summer.”

The world’s biggest luxury carmaker and heavy trucks manufacturer still expects group earnings before interest and tax to “rise slightly” this year. The shares fell as much as 1.1 percent and were 0.4 percent lower at 57.49 euros at 10:26 a.m. in Frankfurt trading. After a dismal 2018, the stock has gained 25 percent since the beginning of the year, outpacing German rivals BMW AG and Volkswagen AG.

Sticking to the outlook “seems slightly optimistic given the weak start of the year,” Jefferies analyst Philippe Houchois said in a note.

Business is expected to improve during the second half of the year, Chief Financial Officer Bodo Uebber said on a call with reporters, adding unfavorable exchange rates have eased somewhat. Drag from currency swings are forecast to cut between 500 million euros and 1 billion euros from earnings this year.

Planned efficiency measures are set to bear fruit and push the Mercedes-Benz cars unit’s margin back to between 8 percent and 10 percent and the trucks unit to between 7 percent and 9 percent “by 2021 at the latest,” Uebber said. He declined to elaborate on the cutbacks.

Daimler is reportedly considering a reduction of about 10,000 jobs through voluntary measures as part of 6 billion euros ($6.7 billion) in savings at the cars operations by 2021. Zetsche, who’s departing in May, earlier flagged a weak first-quarter margin in the cars unit because of the cost of upgrading the GLE sport utility vehicle and ramping up a joint Mexican factory with Nissan Motor Co.

Bottlenecks Blame

High inventory levels resulted in negative cash flow of 2 billion euros compared with a positive 1.8 billion in the first quarter last year, Uebber said.

“Daimler is blaming supplier bottlenecks and quality issues pretty much across all divisions for its poor financial performance,” Evercore ISI analyst Arndt Ellinghorst said in a note. “To be clear: it is management’s job to manage its supply chain and relationships with partners. Other companies do not complain about similar issues.”

Daimler slashed the margin guidance for the vans unit to between zero and 2 percent, which swung to a loss in the first quarter. It previously targeted a return on sales between 5 percent and 7 percent, but expenses to ax capacity in Argentina and Russia along with costs for a new factory in the U.S. are squeeze profit.

To contact the reporter on this story: Christoph Rauwald in Frankfurt at crauwald@bloomberg.net

To contact the editors responsible for this story: Anthony Palazzo at apalazzo@bloomberg.net, Elisabeth Behrmann, Chris Reiter

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