Balance Sheet Check Regaining the Premium Crown

After years of lagging behind domestic rivals BMW and Audi, Daimler’s Mercedes-Benz unit is close to regaining its status as top dog in the global luxury car market. It has got a firm grip on costs, rejuvenated its model range and achieved strong sales growth in China.
Results for 2015? Approved.

Daimler’s Mercedes-Benz division has a simple slogan for its customers: “The best or nothing.”

And Chief Executive Dieter Zetsche has an equally straightforward message for shareholders: “We will lead the company to an unprecedented level of earnings,” he said in early February at the presentation of last year’s results. It was a personal pledge, reinforced by the extension of his contract by three years to the end of 2019. At Wednesday’s annual general meeting, his mentor, 73-year-old supervisory board chairman Manfred Bischoff, will also seek approval to prolong his own term until 2020.

The 2015 results make a strong case for the two men to remain at the helm of Daimler. Revenue, unit sales and earnings all hit record levels, and the group looks poised to overtake luxury auto rival BMW to regain its lost title 'best in class'. Shareholders should be happy too, with a 33-percent rise in the dividend to €3.25, or $3.70 per share.

Now Daimler and BMW are neck-and-neck in unit sales of their core brands.

Daimler has made strides, especially in its auto division where Mercedes increased unit sales by 16 percent, the biggest increase by far among the big automakers.

It has chronically underperformed its rivals BMW and Audi for years, due in part to a stuffy brand image and its failure to match their sales successes in China.

But in 2015, Daimler for the first time sold more than 2 million cars of the Mercedes and Smart brands. BMW, which had been the market leader in the luxury segment, saw unit sales grow just 2.5 percent and lost its lead. Now Daimler and BMW are neck-and-neck in unit sales of their core brands.

Long-term Profit Trend-01 Daimler Mercedes

Daimler’s Mercedes-Benz Cars division accounts for more than half of group revenue, with a further quarter coming from its truck division, 12 percent from the finance division and 10 percent from vans and buses. All segments achieved significant earnings growth last year.

The auto division increased earnings before interest and tax (EBIT) by a third to almost €8 billion to reach a return on sales of 9.5 percent, beating BMW for the first time in years — BMW’s return on sales came to 9.2 percent.

Daimler Trucks managed to increase its revenue by 17 percent and its profit by 37 percent despite stagnating unit sales. Vans and buses unit sales slumped 15 percent but the division’s profit rose 9 percent.

Sales by Region-01 Daimler Mercedes

That left a group EBIT of €13.2 billion including income from share stakes, an increase of 23 percent from 2014. Net profit rose by a fifth to €8.7 billion.

Earnings outpaced revenues, indicating that Daimler has kept a firm grip of costs.

That increase understates the quality of the earnings improvement at Daimler because in 2014, the group still profited from extraordinary income from the sale of investments. In 2015, there was a net cost from extraordinary items, including the recall of vehicles to replace airbags made by Japanese supplier Takata. Excluding those factors, the adjusted EBIT rose as much as 36 percent to €13.8 billion.

Earnings outpaced revenues, indicating that Daimler has kept a firm grip of costs. The workforce increased by just 1 percent and labor costs as a percentage of revenue fell by a full point to 14 percent.

But Daimler also benefited from some very favorable external factors such as low oil prices and the zero-interest rate policy of the European Central Bank, which made car financing cheaper than ever before. The weakness of the euro led to a currency effect that Chief Financial Officer Bodo Uebber said boosted profit by some €1 billion.

Daimler owed its sales improvement largely to the European economic recovery, with double-digit increases in Spain, the United Kingdom and Italy.

In the weakening Chinese market, Mercedes managed to boost unit sales by 41 percent, but that was partly thanks to a catch-up effect because Mercedes last year followed BMW and Audi in ratcheting up its local production to circumvent duties and make its cars more competitive.

Sales were driven by new models, with a 38 percent jump in sales of the rejuvenated C-Class limousines. Mercedes has also renewed its range of sports utility vehicles and launched a new model, the GLE-Coupé. Mercedes last year sold 27 percent more SUVs, which tend to be more profitable than limousines.

Added to that, Mercedes benefited from the renewal of its new top-of-the range S-Class, sales of which fell some 106,000, but that was still three times more than its closes rival, the BMW 7 Series.

Daimler Financial Services earned a record operating profit of €1.6 billion last year, twice as much as in 2010, making it the division with the strongest earnings growth. So it comes as no surprise that Daimler plans to keep expanding its finance business to catch up with rivals like Ford and BMW, where sales finance accounts for a higher share of revenues. Daimler’s own bank finances around half of its sales. It’s been a profitable business in recent years because the loan default rates have been low, as have the refinancing rates. At present, Daimler can borrow at interest rates of less than 1 percent, and that’s unlikely to change anytime soon given the likelihood that the European Central Bank will keep rates low for a long time to come.

Daimler’s truck business is the only division that’s failing to shine. Weakness in the emerging economies is making life hard for the world market leader for heavy trucks. Even in the U.S. market, which has been booming, Wolfgang Bernhard, the head of Daimler Trucks, fears a decline in sales by 10 percent. In Europe, he expects a slight rise.

Brazil highlights the crisis gripping emerging markets. The country’s economic miracle came to an end in 2014 and the market collapsed by 49 percent last year.

Mr. Bernhard expects the division’s EBIT to remain stable at €2.7 billion in 2016, largely thanks to the European market, where sales are rising in Spain and Portugal as well as Eastern Europe thanks to the low oil price and low interest rates.

The group has high hopes for Iran too, where Daimler is hard at work to resume truck production following the partial lifting of sanctions in January resulting from last year’s nuclear deal with world powers. The company estimates that in the medium term, Iran offers the same sales potential as Turkey, where it sells some 40,000 trucks per year.



Markus Fasse covers the automobile industry, and Siegfried Hofmann is Handelsblatt's chemical and pharmaceutical industries correspondent. To reach the authors: [email protected][email protected]