Daimler Sees Mercedes Margins Surging to Highest in Years

(Bloomberg) -- Daimler AG forecast that its main Mercedes-Benz unit will be more profitable than it's been in years thanks to resurgent vehicle demand in the midst of the global pandemic.

The world's biggest luxury-vehicle maker said it expects a 10% to 12% annual return on sales for its cars and vans division, raising its forecast from 8% to 10%. That would be a historically strong showing -- the car operation came up short of double-digit margins every year following Daimler's 2007 sale of Chrysler.

“We are very confident that we can keep up the pace to improve our margins on a sustainable basis and at the same time expand our electric-vehicle lineup,” Chief Financial Officer Harald Wilhelm said. Plans to spin off and list the Daimler truck unit before year-end are “well on track.”

A year after the auto industry's worst crisis in decades, business for German premium-car makers has roared back to record levels. Both Mercedes and BMW AG reported all-time high sales for the first quarter, driven by red-hot demand in China. Getting earnings back on track will be pivotal to financing investments in electrification and software development as the industry segues to more technologically advanced, battery-powered vehicles.

Daimler shares rose as much as 1.9% on Friday in Frankfurt trading and have climbed almost 30% this year.

Daimler's supervisory board Friday extended the contracts of Wilhelm and truck chief Martin Daum until 2027 and 2025 respectively. It also appointed former Siemens AG Chief Executive Officer Joe Kaeser to the supervisory board of the truck division and plans to nominate him as chairman.

China Boost

Strong demand in China has continued during the second quarter, Wilhelm said on a call with analysts. Sales in the company's largest market soared 60% in the first three months of the year.

The higher guidance for cars was “encouraging,” especially in light of production curbs related to the global semiconductor shortage, RBC Capital Markets analyst Tom Narayan said in a note. Premium carmakers appeared to be faring better than mass-market peers in the supply crunch, he said.

What Bloomberg Intelligence Says

Mercedes is already hitting 2025 targets as a result of robust China sales, the new S-Class and SUVs ahead of increased lower-margin BEV sales in 2022. A separately listed Mercedes business by year-end -- focused on BEVs and tech -- is aimed to close the valuation gap with Tesla.

-- Michael Dean, BI automotive analyst

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Mercedes this month revved up its electric-car rollout with the new EQS sedan, the battery-powered sibling to its flagship S-Class, as traditional carmakers broaden their attack on Tesla Inc. Daimler expects the truck spinoff to help the company better tackle diverging technology trends in the passenger-car and commercial-vehicle industries.

The company will update investors on its commercial-vehicle strategy on May 20. The unit's margins are likely to reach the upper end of the target corridor for this year of 6% to 7%, Wilhelm said.

Chip Crunch

While carmakers around the world are benefiting from customers returning to showrooms, the global shortage of semiconductors that's hampered production since late last year may deliver the biggest blow to output this quarter.

The chip crunch has led Daimler to prioritize making its highest-returning models. This contributed to profitability for the cars division rising to 15.2% during the first quarter, up from 2.2% a year ago.

“Although visibility is limited at present, Daimler assumes some recovery in the third and fourth quarter,” the company said.

Daimler also raised the expected operating return for mobility services to between 14% and 15%, up from 12% to 13% previously. Improving business conditions prompted the company to release preliminary first-quarter earnings last week.

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