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Thursday, 07/25/2019 12:55:08 PM

Thursday, July 25, 2019 12:55:08 PM

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Daimler to Step Up Cost Cutting to Tackle Flagging Returns

24. Juli 2019

Daimler AG’s new leadership duo vowed to accelerate an overhaul with a slimmer model line-up and stronger focus on generating cash after two rapid-succession profit warnings following their debut in May.

Some of the measures will begin bearing fruit in the second half of the year with profit and cash flow anticipated to “improve significantly,” Daimler said Wednesday as it reported earnings following its outlook cut on July 12.

While the German automaker said it would step up efforts to boost efficiency across the group -- including a plan to restore eroding margins at the main Mercedes-Benz cars division -- new Chief Executive Officer Ola Kallenius asked for patience. On a call with analysts Wednesday, he said Daimler would provide details later this year. Shares rose as much as 2.9% in Frankfurt trading.

It’s been a humbling start for Kallenius, a Daimler lifer, and his finance chief Harald Wilhelm, who joined from Airbus SE. Daimler expects profit before some items to be significantly lower than a year ago due to weaker markets, delays on rolling out upgraded models and higher provisions, including the fallout from diesel-emissions investigations.

Automakers are facing unprecedented investments to develop electric vehicles and roll out new digital services like ride-sharing that undermine traditional business of selling privately owned cars. Kallenius said the industry’s fundamental transformation will last “for many, many years.” As the changes rewrite the industry’s playbook, the new CEO remains “very open” for more cooperation projects with other manufacturers and technology firms to share costs.

Daimler earlier this month reported a 1.6 billion-euro ($1.8 billion) second-quarter operating loss, after raising provisions, including ongoing diesel investigations, to 4.2 billion euros. Annual revenue will be slightly higher than a year ago, while vehicle sales will be about the same as 2018. The numbers published Wednesday came a day after Chinese joint-venture partner Beijing Automotive Group Co. emerged as Daimler’s third-biggest shareholder.

Read this: China Strengthens Hold on Daimler, Buying $2.8 Billion Stake

The latest warning puts greater urgency on the new management team to show they can lift poor returns. Profitability at the Mercedes unit may fall to as low as 3% this year, a far cry from the 8.7% margin posted by Peugeot maker PSA Group in the first half. The French peer operates in the less lucrative mass-market segment and relies heavily on European sales. Mercedes stuck to a margin target between 8% and 10%, but Kallenius didn’t say when it can be reached.

“Given the volume of difficult stuff arriving in their in-trays, we’d assume neither Kaellenius or Wilhelm -- nor their wider executive team -- will be getting much of a summer break,” Sanford Bernstein analyst Max Warburton said in a note. “We’d expect most investors to wait until the new team lays out its plans in November and even then, the cyclical and structural pressures on the sector may limit enthusiasm.”

Daimler is battling slower demand for new cars in markets including China and the U.S., but Kallenius said vehicle availability should improve in coming months after the model changeover of the high-margin GLE sport utility vehicle was hit by output constraints triggered by a supplier in the U.S. Adding to the operating woes are higher-than-expected cost for ramping up a joint Mexican factory with Nissan Motor Co. and expenses for culling a plan to build the Mercedes-Benz X-Class pickup in Argentina, which casts doubt over the model’s future.

The operating woes have put Daimler on the back foot amid efforts toward a broad corporate revamp to establish three legally independent units for cars, trucks and mobility services. Beyond the organizational overhaul, Daimler will weed out its vast range of vehicle and engine variants to focus on the ones that generate the best returns.

“That’s how you trim this tree,” Kallenius said. Reducing complexity to slash cost will be critical to revive earnings and strengthen the manufacturer’s financial muscle. “We need a mindset shift toward cash.”

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