Munich Daimler has always had a dubious reputation among investors. Some major shareholders even recommended that the carmaker simply no longer provide any forecast on business development in the future. Too often, the Dax group has given its investors hope in recent years with grandiose promises of returns and shocked them a little later with devastating profit warnings.
“Over-promise and under-deliver” is what Anglo-Saxons call such insubstantial announcements – too much promised and too little delivered. Daimler is notorious for this.
Harald Wilhelm knows that. The CFO of the Mercedes manufacturer, who has been in office since May 2019, has stepped up to regain investor confidence in Daimler. The 54-year-old prefers to stack deep and then surprise positively. Due to the diesel scandal, this approach failed last year. But now Wilhelm is making first progress.
On Thursday evening at exactly 10:01 p.m. Daimler announced in an ad hoc announcement that business was going better than forecast. Both the free cash flow and the operating result are above market expectations.
While Daimler still had to cope with a loss in the second quarter, according to preliminary figures, the group was now able to post earnings before interest and taxes (EBIT) of around 3.1 billion euros in the third quarter. Analysts had only expected an increase of just under two billion euros. The result: After the corona shock, Daimler is back in the black after nine months.
The free cash flow in the industrial business is also turning noticeably from minus to plus. In the third quarter alone, Daimler reports a cash inflow of 5.1 billion euros. While free cash flow was still negative in the first half of the year, after three quarters it is now positive at 3.5 billion euros.
Daimler shares rose sharply on Friday
“The results of the third quarter reflect a very strong performance and prove that we are on the right track in lowering the breakeven point,” said Daimler CFO Wilhelm. Many investors reacted euphorically to the good numbers. Daimler’s share price rose by 5.5 percent on Friday.
“While the second quarter was still devastating for the entire auto industry, business in the third quarter was now better than expected,” Frank Biller told Handelsblatt. According to the LBBW analyst, China in particular is “strong on the move” with a sales increase of more than 20 percent among premium manufacturers. “Daimler benefits from this and was able to present very good figures,” explains Biller.
Arndt Ellinghorst assures us that it is not just the better market situation and luck that lead to the balance sheet policing in Stuttgart. “This is where the efficiency measures are also noticeable,” states the Bernstein analyst: “This is not a flash in the pan.” The management was able to reduce the fixed and variable costs considerably. The savings efforts on Mercedesstrasse are having an effect.
The group intends to cut more than 20,000 of its 300,000 jobs worldwide over the next few years, with fixed costs and spending on research and development reduced by a fifth. Entire works are available. The model range is being thinned out and the variance in internal combustion engines is to be reduced by 70 percent by the end of the decade.
At the same time, Mercedes is focusing more and more on building luxury cars. Sales with high-margin sub-brands such as the sports car subsidiary AMG or Maybach are to be doubled in the coming years. Mercedes is also planning an electricity offensive. The range of purely electric cars is expected to increase to more than ten makes over the next four years, and that of plug-in hybrids to over two dozen.
More humility, less show
The brand with the star is aiming for a margin of ten percent or more by 2025. That would be a huge step. After all, Mercedes has not achieved a double-digit return once in the past 15 years.
It is now essential that the group consistently continue on the path it has taken, emphasizes Ellinghorst: “Daimler must develop from the announced world champion to the emperor of returns”. The capital market expert noted benevolently that the culture in Stuttgart changed with the change of boss from Dieter Zetsche to Ola Källenius in May 2019. More humility, less show – this is how Källenius and his CFO Wilhelm want to score.
New handwriting
Daimler boss Ola Källenius (center), CFO Harald Wilhelm (left) and Daimler Trucks boss Martin Daum: Analysts are demanding that the group consistently continue on the path it has taken.
(Photo: AFP)
The strategy seems to be gradually working. Daimler’s share price has more than doubled since its low point in mid-March. At 52 billion euros, the car manufacturer is currently rated better than it has been for a long time. And many analysts see further upside potential. The reason: Daimler expects continued good business in the final quarter and intends to update its forecast when the final quarterly figures are presented on October 23.
“Daimler was able to reduce the stocks at the dealerships by around 50,000 vehicles in the third quarter. This made it sound to the group to reduce its working capital significantly. This is reflected directly in the free cash flow, ”explains LBBW analyst Biller. He assumes that Daimler will now adjust its forecast upwards and offer investors “the prospect of a free cash flow above the previous year’s figure”. In contrast, EBIT is likely to remain below the previous year’s figure.
Last year the inflow of funds was 1.4 billion euros and the operating result was 4.3 billion euros. Nonetheless, Biller emphasizes that the uncertainty is currently increasing again: “In Europe and North America the number of Covid cases is skyrocketing, the fear of new restrictions of all kinds, as in the spring, is spreading.”
Car manufacturers such as Daimler are also currently benefiting from relief factors such as short-time work, subsidy programs for cars or the reduction in VAT in Germany. “These effects are not indefinite,” warns Biller and further points out: “If there is a new lockdown in important markets, all of the carmaker’s forecasts are invalid.”
More: Less small cars, more returns – the new Daimler strategy makes sense