Daimler Expects to Get Back on Course After Two Outlook Cuts

(Bloomberg) -- Daimler AG has its work cut out to get a fourth-quarter 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 Stuttgart-based company said Thursday in a statement. Neither will be easy.

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

Inventories will return to normal during the fourth quarter 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 U.S. 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 U.K. and Italy.

Earnings Impact

The sale of inventory in coming weeks will be critical to recover a third-quarter earnings impact of “more than 2 billion euros ($2.3 billion)” at the cars and van operations in the final months this year, Chief Financial Officer Bodo Uebber told reporters on a call. The company’s profit before interest and tax plunged 27 percent during the second quarter to 2.5 billion euros.

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 programs 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 euros 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 U.S. and a sliding stock market dampen prospects for the $12 trillion economy. China accounted for 29 percent of Mercedes-Benz deliveries through September, rising 13 percent.

Daimler is facing a “perfect storm” of softening global demand, trade-war 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.

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