Mercedes loss dents Daimler's profit

FRANKFURT - DaimlerChrysler's first-quarter operating profit fell 59 per cent but still beat analyst expectations, even though its ailing Smart minicar brand dragged former cash cow Mercedes Car Group to an operating loss.

The world's fifth-biggest carmaker today reiterated a forecast for slightly higher 2005 operating profit, excluding well-flagged restructuring costs of up to 1.2 billion euros (US$1.55 billion) for Smart, set to break even only in 2007.

DaimlerChrysler posted overall operating profit of 628 million euros. Heeding warnings that first-half results would be weak, 18 analysts polled by Reuters had on average forecast operating profit down 79 per cent to 323 million euros.

Net profit dropped 30 per cent to 288 million euros on revenues of 31.74 billion, down 2 per cent.

Mercedes Car Group, the company's luxury division, plunged to an operating loss of 954 million euros -- its first red ink since an annual loss in 1993 -- from a profit of 639 million.

DaimlerChrysler shares, the worst performer this year among European peers, seesawed before shedding 0.2 per cent to 30.42 euros by 1439 GMT, in line with the car sector index.

"The (size of the) loss at Mercedes was a still a shock, even if that's happened before. Still there's probably a bit of relief out there since some people had expected a profit warning," said Philippe Houchois at JP Morgan.

"Daimler was cautious on all sorts of issues like currencies and raw materials but these are all issues we already know. The story is still on track," he said, keeping the stock "overweight."

Mercedes was stung by 800 million in restructuring costs for Smart, the urban chic minicar that has lost money since the brand made its debut in 1998. Smart has scaled back ambitions after losing nearly 4,000 euros on each car sold last year.

Nearly 500 million euros spent on fixing quality problems at Mercedes-Benz, which last month launched its biggest-ever recall, also hit profits at the division, which is laboring under a strong euro and the costs of launching new models.

The profit collapse at Mercedes has prompted a new efficiency drive that aims to boost earnings at the division by more than 3 billion euros and restore an operating margin of 7 per cent by 2007, goals that it repeated in its report.

"The division expects the turning point in profitability as soon as in the second quarter this year and a further substantial improvement in the third quarter," the group said.

Chief Financial Officer Bodo Uebber told a conference call that things were looking up as Mercedes rolls out new models, its provisions for addressing quality issues go down and the efficiency drive codenamed CORE starts bearing fruit.

US auto arm Chrysler, where hot products such as the boldly designed Chrysler 300 sedan and minivans with stow-flat rear seats have fueled growth, saw operating profits fall to 252 million euros from 303 million, lagging market expectations.

This was primarily the result of lower factory unit sales and the euro's rise against the dollar, it said.

Both divisions were seen boosting unit sales this year.

Uebber dismissed talk that high US petrol prices would crimp sales of big pickup trucks and sport utility vehicles.

"There is no impact. There is a fierce competition in the US in that field, but...from our analysis and from our point of view that does not reflect the higher (gas) prices," he said.

The group's market-leading commercial vehicles business boosted first-quarter operating profit to 714 million helped by a global boom for trucks and 276 million euros in added income from a compensation payment from Asian partner Mitsubishi.

Uebber said the North American truck market remained strong and Europe was seeing lower growth but had not yet peaked.

DaimlerChrysler stock has lagged the DJ Stoxx European car sector index by around 11 per cent so far in 2005.

It trades at over 11 times estimated 2005 earnings, a premium to arch-rival BMW's 10 times, according to Reuters Knowledge estimates. But BMW trades at a premium based on estimated 2006 earnings.

(Additional reporting by Christiaan Hetzner, Rolf Benders, Andrea Lentz and Ulf Laessing)

- REUTERS