Daimler's 3rd-Quarter Profit Drops on Diesel-Emissions Expenses

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Governments around the world are cracking down on the emissions from internal-combustion engines. Those pressures caught up with German auto-and-truck maker Daimler AG (NASDAQOTH: DDAIF) in the third quarter. 

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While an increase in sales drove a gain in revenue for Daimler in the third quarter, its operating profit fell 14% from a year ago on a jump in spending required to fix the emissions systems of older diesel vehicles in Europe.

It was Daimler's first year-over-year decrease in quarterly profit in over a year. 

Daimler earnings: The raw numbers

All financial figures are in euros. As of Oct. 20, 1 euro = about $1.18.

Metric Q3 2017 Q3 2016 Year-Over-Year Change
Revenue 40.8 billion 38.6 billion  6%
Vehicles sold 824,100 754,130 9% 
Earnings before interest and tax (EBIT) 3.46 billion 4.04 billion (14%)
Net profit 2.27 billion 2.73 billion (17%)

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What happened with Daimler this quarter?

  • Daimler's Mercedes-Benz Cars division, which makes and sells Mercedes-Benz brand luxury cars and SUVs, as well as the small Smart-brand cars, posted a 6% gain in global sales and delivered record sales totals in most areas of the world aside from the United States. Strong demand for profitable SUVs helped boost earnings, but the gain was offset by a combined 453 million euros in spending on recalls and emissions-related issues.
  • Sales at Daimler's heavy-truck unit (Daimler Trucks) rose 30% on strong results in North America and Asia, driving gains in revenue (9.2 billion euros) and EBIT (614 million euros).
  • The Mercedes-Benz commercial-vehicle division (Mercedes-Benz Vans) increased sales by 9% from a year ago, on strong demand in Europe, the United States, and Latin America. While revenue was flat at 3.1 billion euros, EBIT fell 30% to 218 million euros on product-development costs and higher raw-material prices.
  • Sales at Daimler Buses increased 17% on a big jump in demand in Latin America. Revenue rose 11% to 1 billion euros, but EBIT of 26 million euros was down significantly from the year-ago result (45 million euros) on negative exchange-rate and inflation effects associated with Latin American currencies.
  • New-contract volume at Daimler Financial Services rose 11% from a year ago to 17.4 billion euros. EBIT rose 15.7% from a year ago to 507 million euros on higher contract volume and lower risk-related costs, offset somewhat by higher interest rates.

What management had to say

Daimler is exploring a corporate reorganization that would separate its vehicle divisions into two legally independent entities: one for the two Mercedes-Benz units, and a second that would house the Daimler Truck and Bus divisions. (Daimler's Financial Services unit is already a separate business, legally speaking.)

CEO Dieter Zetsche said that with sales strong, now is the right time to examine whether the company can position itself better for the future. "This project [the reorganization] aims to strengthen the future viability of the business units in order to better utilize the potential for growth and earnings in the various markets."

CFO Bodo Uebber said that the revamped structure aims to create more value for stakeholders:

For us, safeguarding Daimler's future is based on three elements: protecting and increasing the Group's success, pushing forward with shaping the future for the employees, and ensuring the long-term commitment of investors. With these three factors, we will achieve -- from a position of strength-the best-possible structure for the future, enabling us to continue along our successful path. In this way, we will create value for our employees, customers and investors.

Looking ahead: Daimler maintained upbeat full-year guidance

In its guidance for the full year, management reiterated the positive expectations it had previously set. For 2017, it continues to expect "significant" year-over-year increases in vehicles sold at all four vehicle divisions, in new financial-services business, in overall revenue, and in EBIT.

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John Rosevear has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.