July 26, 2018 / 5:51 AM / a year ago

Daimler braced for emissions-test impact as profit weakens

PARIS/FRANKFURT (Reuters) - Mercedes maker Daimler (DAIGn.DE) blamed U.S.-China tariffs for a 30 percent drop in second-quarter profit and predicted a further decline as new emissions test standards hit sales.

Earnings before interest and tax (EBIT) fell to 2.64 billion euros ($3.1 billion), weakened by Chinese price-cutting on U.S.-made Mercedes models to offset import duties, the company said on Thursday. Revenue dipped 1 percent to 40.8 billion euros.

Earnings were hit by a 418 million euros charge to settle a dispute over German motorway toll collecting system Toll Collect, higher investments into electric and autonomous cars, and slower sales of Mercedes Benz cars.

The carmaker was part of a consortium involved in building Toll Collect which ran into technical and budget problems.

Daimler last month cited U.S.-China trade tariffs as it cut full-year guidance. Rivals Fiat Chrysler (FCHA.MI) and General Motors (GM.N) followed suit this week.

Since July, the Mercedes-Benz GLE sports utility vehicle which is built in Tuscaloosa, Alabama has been hit by tariffs when it is exported to China, hurting Daimler profits. Asked whether Daimler could build the GLE in Beijing, Chief Executive Dieter Zetsche said, “We are thinking about such matters, but so far we have not come to a decision.” Zetsche added that recalibrating the production footprintwas costly and time consuming since it also required reconfiguring the supplier network.


The German luxury carmaker also cautioned that emissions-related vehicle certification bottlenecks would further dent Mercedes earnings in the current third quarter.

Daimler shares rose by less than those of its German peers as an easing of EU-U.S. trade tensions lifted the sector.

Daimler was up 2.4 percent at 1434 GMT on Thursday, while BMW (BMWG.DE) was 3.7 percent higher and Volkswagen (VOWG_p.DE) up 3.95 percent. The rally followed moves to resolve a trade dispute that had threatened to add U.S. autos tariffs to those already slapped on European steel and aluminum.

Zetsche said he was heartened by the positive signals following the negotiations and said he hoped the final outcome of talks would result in fewer tariffs.

The Mercedes-Benz passenger car division’s profit margin narrowed to 8.4 percent in the quarter from a year-earlier 10 percent, also eroded by currency effects, a supplier fire and spending on autonomous and electrified vehicles. Deliveries fell 1 percent.

The rest of the year “remains a challenge” for Daimler, Evercore analyst Arndt Ellinghorst said.

“Vehicle certification is expected to lead to some bottlenecks in parts, halted deliveries and higher inventory build, before some pressure is alleviated in the fourth quarter.”

Daimler repeated a warning that the new Worldwide Harmonised Light Vehicle Test (WLTP) standards taking effect in September would lead to “some temporary restrictions in the availability of vehicles” as well as a build-up of unsold cars.

Customers were seeing delays because regulators no longer wave through groups of similar vehicles during certification and probe each car in a much more granular way, Zetsche said.

Daimler was not able to deliver all of the cars customers wanted, because of delays in approving the vehicles for road worthiness. Customers were either choosing lower margin vehicles or needed to buy a different model, Zetsche said.

“This has an impact on pricing,” he added.

As a result, third-quarter Mercedes earnings will be “significantly below” the 1.9 billion euros recorded in the three months to June 30, the group said on Thursday.

Daimler is grappling with a separate emissions headache after Germany’s KBA regulator forced a recall of 1.6-litre diesel Mercedes Vito vans suspected of using defeat devices to manipulate tests. Daimler maintains its vehicles are legal.

The new WLTP standards have already caused a slowdown in sales for carmakers including Volkswagen, which has rented space to store some of the 250,000 vehicles that may be caught up in testing delays.

French supplier Valeo (VLOF.PA) also cut its 2018 outlook on Wednesday, largely citing WLTP disruption.

Zetsche further said Daimler was experiencing a supply shortage of battery cells which was causing a delay in sales of electric Smart cars and hybrid Mercedes-Benz models.

Stuttgart-based Daimler also said it would spend somewhere between 500 million and 1 billion euros overhauling its corporate structure under a plan approved by the board on Thursday, along with new German job safeguards until 2029.

FILE PHOTO: The Daimler logo is seen before the Daimler annual shareholder meeting in Berlin, Germany, April 5, 2018. REUTERS/Hannibal Hanschke

Separations such as Fiat Chrysler’s (FCHA.MI) Ferrari (RACE.MI) spin-off have improved market valuations in recent years, and suppliers including Autoliv (ALV.N) are decoupling future vehicle technologies from combustion-engine assets.

The proposals announced last year will see Daimler’s activities regrouped into three legally separate divisions - cars, trucks and mobility services including financing - under a holding company structure. There are no plans to divest any of the divisions, the company reiterated.

Subject to approval by the annual shareholder meeting next May, the changes will take effect in January 2020.

Reporting by Laurence Frost and Edward Taylor; Editing by Maria Sheahan/Keith Weir and Alexandra Hudson

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