Daimler Edges Past Torrid Few Months to See Strong Rest of Year

(Bloomberg) -- Daimler AG showed signs of moving past a rough few months marred by two profit warnings by predicting a strong rest of the year and pledging to control mounting expenses in the shift to electric vehicles.

A drop in vehicle inventories will help boost the Mercedes-Benz maker’s bottom line for the remainder of 2019 and deliver positive free cash flow, Chief Financial Officer Harald Wilhelm said Thursday. The manufacturer also warned it might face more fines and recalls of diesel vehicles as investigations into emissions in Germany and the U.S. continue. The shares rose as much as 6.4%, the most since December.

“We expect a strong fourth quarter, which is a positive signal for free cash flow,” Wilhelm told reporters on a call. “This will be fed by an expected drop in inventories.”

New leaders Chief Executive Officer Ola Kallenius and Wilhelm have had a difficult start with supplier issues slowing deliveries of sport utility vehicles, diesel provisions and fines undermining investor confidence. Thursday’s results helped set the scene for when the pair unveil a plan on comprehensive cost savings slated for Nov. 14. Still, Daimler said its outlook could come under pressure as provisions to cover probes into questionable diesel emissions might not suffice.

Cost Savings

To master the industry’s generational shift to electric cars and new services, the manufacturer is looking at cost reductions in all divisions across production, personnel and how the company allocates investments, Wilhelm said.

Like others in the auto industry, Daimler is grappling with a softening global economy, the unresolved U.S.-China trade spat and continued Brexit uncertainties. Consumer demand for new electric models like the EQC is another black box for Daimler as it invests heavily to meet challenging new emissions rules.

“Daimler needs all eyes on the cash ball,” Evercore ISI analyst Arndt Ellinghorst said in a note, with the carmaker due to pay out a diesel fine in Germany of 870 million euros ($968 million) during the fourth quarter.

Cost strains were also evident at Ford Motor Co., which cut its full-year forecast in the latest sign that an $11 billion restructuring plan will take more time to bear fruit. Meanwhile, Nissan Motor Co. is weighing options about the future of its two plants in Europe as the Japanese automaker faces declining sales in the region and a shift to electric cars, people familiar with the matter said.

Tesla Inc. underscored the shifting industry dynamics, delivering positive earnings few saw coming and declaring it’s ahead of schedule on a new plant and product.

Uber Valuation

Daimler’s shares maintained early gains to rise 4.9% at 10:33 a.m. in Frankfurt. The stock had fallen 27% over the past two years, valuing the German auto icon roughly the same as ride-sharing startup Uber Technologies Inc.

While Daimler’s third-quarter earnings before interest and taxes rose 8%, profit margins for the critical Mercedes cars unit narrowed to 6% from 6.3% a year ago. The full-year target is a range of 3% to 5%.

An economic downturn is hitting the trucks division faster than expected in Europe and North America, prompting Daimler to lower its margin guidance for the unit to a range of 6% to 8% from the previous 7% to 9%. The division’s revenue is now expected to be flat.

High investment spending and costs for an internal reorganization means Daimler expects its industrial cash flow to be “significantly lower” this year.

To contact the reporter on this story: Elisabeth Behrmann in Munich at ebehrmann1@bloomberg.net

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

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