Model-launch expenses weigh on Daimler earnings

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By DAVID McHUGH, Associated Press

FRANKFURT, Germany (AP) — The costs of launching the new A-class compact and B-class hatchback hurt earnings at German automaker Daimler AG. Net profit fell 11 percent in the second quarter to €1.51 billion ($1.83 billion) from the same period a year ago, despite strong sales.

The company nonetheless described the earnings as "very good" Wednesday and stuck to its earnings target — but added a cautionary statement that "economic uncertainty and risks exist in nearly all regions."

"We therefore remain vigilant in our monitoring of general economic developments and the volatile markets," it said.

Some analysts had speculated the company might have to abandon its profit forecast, which says this year's earnings before interest and taxes, or EBIT, from continuing operations will equal last year's. Yet this year's EBIT has lagged last year's over the first two quarters of this year, raising questions about whether the company can make up that lost ground by year end.

The company's results for the quarter beat analyst expectations, and investors were relieved there was no profit warning. Daimler shares rose 3.7 percent to €37.47 in midday trading in Europe.

During a conference call with journalists, CEO Dieter Zetsche dismissed talk about a profit warning, saying that "this speculation was wrong."

He said, however, that simply "opening the newspaper in the morning, we have an intensive discussion every day about economic clouds in the sky, which are floating especially over Europe."

Added to that were questions about the sustainability of the economic recovery in the U.S., a key market for Mercedes, and whether China would undergo a moderate slowdown in growth or a "hard landing," he said.

Europe is struggling to contain a crisis over too much debt in some countries; fears that Spain may need a bailout from other governments, or that Greece may leave the euro, have weighed on consumer demand in many markets in Europe, and a financial implosion could deepen what is already a mild slowdown in Europe. Mercedes sales fell 4 percent in Europe during the second quarter, while they increased 14 percent in China and 21 percent in the United States.

Although Daimler's second quarter net profit of €1.51 billion fell from €1.70 billion in the same period the year before, it beat the expectation of €1.40 billion among analysts surveyed by FactSet.

Revenue grew 10 percent to €28.9 billion. The biggest division — its Mercedes-Benz Cars division that makes both Mercedes and Smart brands — saw operating earnings fall 16 percent to €1.31 billion despite record unit sales globally for the Mercedes brand. Unit sales for Mercedes rose 4 percent to 370,384.

Daimler, based in Stuttgart, cited added expenses for launching the new A-Class and B-Class. Both cars have been top sellers but the company said it had incurred additional costs, including expanding production capacity.

The company expressed optimism about the new A-class, which goes on sale in September and already has 40,000 orders. The company has reached deal to outsource production of 100,000 or more A-classes to Finland's Valmet Automotive starting next year, saying its own plants in Rastatt, Germany, and Kecskemet, Hungary, were fully booked. Handing off some production will ensure the shortest possible delivery times to customers, the company says.

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