DaimlerChrysler Earnings Up 18% in 2nd Quarter
DaimlerChrysler reported Wednesday that second-quarter earnings rose 18% but warned that operating profit for the year would drop because fierce competition in the U.S. market would require larger sales incentives and increased spending to introduce new models.
Chairman Juergen Schrempp also said he would carve out $5.6 billion in costs and cut 25% of administrative costs by 2003. He pledged to improve the company’s weak stock price.
The company earned $1.67 billion on sales of $41.7 billion in the second quarter, up from $1.41 billion on sales of $35.6 billion last year. The earnings of $1.66 per share beat the $1.52 expected by analysts polled by First Call/Thomson Financial.
The company said it expects significant revenue growth to continue in the second half thanks largely to a positive outlook in almost all divisions. New American products, including the car that’s generating the most industry buzz these days, the hot-selling Chrysler PT Cruiser, are expected to strengthen its market position.
“But expenses related to those launches plus aggressive new marketing activities will depress its operating profit in the second half, especially in the third quarter 2000,” the company said in a statement.
Schrempp has been under pressure to improve DaimlerChrysler’s performance since the 1998 merger of Daimler-Benz and Chrysler Corp. because of the lackluster stock and steady departure of U.S. executives from the auto maker’s Chrysler arm.
Achieving the cost reductions will mean job cuts, Schrempp said at a news conference in Stuttgart, Germany, but he would not say how many jobs would be cut.
Nor did he give details on other streamlining measures. Company officials said earlier this month that they were exploring ways to cut costs in Stuttgart and in the North American headquarters in Auburn Hills, Mich., just north of Detroit.
Schrempp also pledged to boost DaimlerChrysler’s shares, which have plummeted more than 30% from less than a year ago. Investors seemed unfazed by Wednesday’s profit warning, however, sending shares up $1.31 to end at $53.56. That still left the company with a price-to-earnings ratio of just under 10.
DaimlerChrysler’s operating profit this year is likely to miss last year’s performance by a considerable margin, said John Lawson, managing director of equity research at Salomon Smith Barney in London and an auto industry specialist.
“I would venture to suggest, in terms of marketing costs or whatever, it could easily be $400-$500 million less than a year ago,” he said.
Competing products are also likely to pinch DaimlerChrysler’s profit, Lawson said in a telephone interview from London. “They say it’s down to the changeover [of models] and extra costs incurred there,” he said. “Most of us have a suspicion that there’s a fairly serious competitive set of issues as well, in terms of some pretty decent product from the likes of Honda etc., who are going to eat a bit of their lunch.”
Honda’s Odyssey minivan has received rave reviews since it was introduced last year, and its sales have soared about 150% in the January-to-June period over last year, while Chrysler and Dodge vans have dipped 6.8%.
The world’s fifth-largest auto maker has had trouble boosting sales of its Chrysler division--Chrysler, Dodge and Jeep vehicles--in the U.S., its big profit center, because of an aging lineup of minivans, sport-utility vehicles and mid-size cars.
Production on a new generation of minivans began Monday, and a new line of mid-size cars is being introduced soon, but the current generation of those vehicles along with some SUVs carry incentives of up to $2,000 each.
“We’re at a time when the incentive wars are escalating just tremendously fast, and are incredibly expensive,” said Thomas R. Marinelli, DaimlerChrysler’s vice president for the Chrysler/Jeep division.
Schrempp was optimistic of the company’s prospects in the rest of its vehicle business. “The recently announced acquisition of Western Star and Detroit Diesel, as well as the major steps taken in Asia with Mitsubishi Motors and Hyundai Motor, underline our strategy to focus on the automotive business,” he said.
Last week DaimlerChrysler bought the rest of engine maker Detroit Diesel Corp. that it doesn’t already own for about $423 million and agreed to buy Canada’s Western Star Trucks for $454 million. It also has recently acquired stakes in Japan’s Mitsubishi Motors Co. and Hyundai Motor Co. of South Korea.
Although operating profit will decline this year, Schrempp said he expected that one-time gains including DaimlerChrysler’s sale of its Dasa aerospace unit to anchor a new European space consortium and the sale of half its computer services unit to Deutsche Telekom will fuel a further increase in net income and earnings per share for the year.
Operating profit at Mercedes-Benz rose 22% to $719 million on revenue of $10.9 billion, up 18%, driven by stronger sales of Mercedes luxury cars and the two-seat Smart mini-car it manufactures and sells in Europe.
