July 28, 2005 – DaimlerChrysler 2nd Quarter 2005 Interim Report

 

Management Report

Moderate demand for automobiles worldwide

Compared with the very positive performance of the world economy in 2004, growth rates decreased significantly in the second quarter of 2005. Whereas economic expansion was still fairly strong in North America, Japan and most of the emerging markets, developments in some European countries were disappointing. Growth was dampened in particular by the sharp increase in the price of oil during the second quarter. Prices of other raw materials stabilized or decreased slightly, however.

The global demand for automobiles developed moderately in the second quarter of this year. Market volumes decreased slightly in Western Europe and China, while demand dropped sharply in the new countries of the European Union. Demand increased in the United States and Japan, however, and there was a continuation of the positive sales trend in South America. Growth in worldwide unit sales of commercial vehicles was less dynamic than in the prior-year period, but remained at a high level.

Increases in unit sales and revenues

In the second quarter of this year, DaimlerChrysler increased its worldwide unit sales compared with the same period of last year by 4% to 1.3 million vehicles.

Due to decreases for some important vehicles related to modelcycles, the Mercedes Car Group’s unit sales of 308,100 vehicles were lower than in the second quarter of 2004. Second-quarter shipments of 812,200 passenger cars and light trucks by the Chrysler Group were 4% higher than last year, and retail sales increased by 3% to 783,000 vehicles. The Commercial Vehicles Division boosted its unit sales by a strong 20% to a total of 221,600 trucks, vans and buses.

DaimlerChrysler’s second-quarter revenues increased by 4% to €38.4 billion. Adjusted for currency-translation effects and changes in the consolidated Group, revenues grew by 6%.

In the second quarter, the sale of our 45% equity interest in debis AirFinance was completed for a price of €325 million. The sale resulted in a small positive contribution to the Group’s net income.

Group operating profit significantly affected by developments at Mercedes Car Group

DaimlerChrysler recorded an operating profit of €1,671 million in the second quarter of 2005, compared with €2,091 million in the same period of last year. As previously announced, the realignment of the smart business model caused additional expenses during the second quarter. Excluding these charges, the Group's second-quarter operating profit amounted to €1,982 million, which was close to the level recorded in Q2 2004.

Operating profit was burdened by the strength of the euro, especially against the US dollar, and increased material prices. The Mercedes Car Group was particularly impacted by exchange rate effects. The Chrysler Group, Commercial Vehicles and Financial Services divisions were affected by changes in exchange rates mainly through the translation of their results into euros.

The Mercedes Car Group achieved a slightly positive result in the second quarter, thus achieving the turning point. Despite tough competition, the Chrysler Group’s operating profit was slightly higher than in the same period of last year. The Commercial Vehicles Division once again increased its operating profit, primarily due to positive developments in the truck business. Financial Services also developed positively, although operating profit did not reach the high prior-year level, mainly as a result of increasing interest rate levels in the United States. Other Activities improved its earnings and made a positive contribution to the DaimlerChrysler Group’s operating profit.

The Mercedes Car Group recorded slightly positive earnings in the second quarter, compared with an operating profit of €703 million in the second quarter of 2004. The result included further expenses of €311 million for the realignment of the smart business model; in the first six months of the year, these charges totaled €1,111 million. Excluding these expenses, the division’s result would have been an operating loss of €154 million in the first quarter and an operating profit of €323 million in the second quarter, indicating the turning point in operating performance due primarily to new models and the efficiency improving actions taken as part of the CORE program.

Lifecycle-related decreases in unit sales of the S-Class and M-Class, a less favorable model mix and the ongoing strength of the euro impacted the earnings of Mercedes-Benz Passenger Cars. In addition, increased raw material prices and the launch costs of the new M-Class reduced earnings.

The expenses incurred for the realignment of smart’s business model mainly comprised compensation payments to dealers and suppliers as well as measures taken relating to the workforce. During the rest of this year, only a small impact on earnings is expected from the adjustment of our current assumptions to actual developments. The smart business unit recorded a loss from ongoing operating activities in the second quarter.

The Chrysler Group posted an operating profit in a difficult market environment of €544 million in the second quarter of 2005, compared with an operating profit of €521 million in the second quarter of 2004. The increase in operating profit resulting from increased shipments and cost reductions was partially offset by negative net pricing, shifts in product and market mix and the appreciation of the euro against the US dollar.

Operating profit in the second quarter of 2004 was negatively impacted by restructuring charges totalling €81 million. In addition, operating results for the second quarter of 2004 were favourably impacted by an adjustment of €95 million to correct the calculation of an advertising accrual.

With a second-quarter operating profit of €524 million, the Commercial Vehicles Division once again achieved an increase in earnings compared with the prior year (+12%).

The continuing positive development of unit sales in nearly all of the division’s business units, particularly for trucks, and the successful continuation of the efficiency improvement programs were the primary factors behind the increase in operating profit. These factors more than compensated for charges on earnings resulting primarily from more expensive raw materials and exchange rate effects.

The Financial Services division recorded an operating profit of €385 million, compared with €472 million in the second quarter of 2004.

The negative impact on profits resulting from the strength of the euro against the US dollar and rising interest rates, particularly in the United States, was partially offset by a lower cost of risk. The contribution to earnings from Toll Collect was a small operating loss of €20 million due to additional development expenses.

Other Activities’ operating profit of €144 million represented an improvement of €59 million compared with the second quarter of 2004.

This improvement was mainly the result of the increased operating profit at EADS due to higher deliveries of Airbus aircraft. An additional factor was a higher profit contribution than in the prior-year quarter from DaimlerChrysler Off-Highway due to positive market developments, improved revenue structures and measures taken to improve efficiency.

Financial expense amounted to €138 million in the second quarter (Q2 2004: expense of €478 million). The improvement was primarily due to income from equity investments, which increased by €404 million to €12 million. This increase was almost solely due to the fact that the result for the prior-year quarter included a negative contribution from Mitsubishi Motors (€410 million), which was caused by operating losses as well as impairment charges recognized on deferred tax assets.

Net interest expense and net other financial expense of €84 million and €66 million, respectively, were nearly of the same magnitude as in the prior-year quarter.

Net income of €737 million is reported for the second quarter of 2005, which is €160 million higher than in the same period of last year. The decrease in operating profit was more than offset by the improved financial income (expense), net, and lower income taxes. The positive development of the tax position resulted from a changed composition of income before income taxes, which in the prior-year quarter included the high, nondeductible loss contributed by MMC.

Earnings per share amounted to €0.73, compared with €0.57 in the second quarter of 2004.

Cash provided by operating activities in the first half of 2005 of €7.0 billion was slightly lower than in the same period of last year (€7.6 billion). In addition to the effects of currency translation, the decrease was also caused by the higher volume of cash tied up through increases in inventories and trade receivables. There was a positive effect compared with the prior-year period due to the decrease in net cash outflows for tax payments, mainly resulting from tax refunds, especially in the NAFTA region.

Cash used for investing activities decreased significantly to €4.7 billion from €9.2 billion in the same period of last year. The reduction was primarily caused by higher proceeds from the sale of receivables from financial services provided to end customers. There were opposing effects increasing the cash used for investing activities caused by net additions to equipment on operating leases, net acquisitions of securities and additions to property, plant and equipment.

Cash used for financing activities amounted to €2.9 billion. This was primarily a result of the (net) repayment of financial liabilities of €1.3 billion and the dividend distribution for the 2004 financial year of €1.5 billion. In the prior-year period, the dividend distribution was partially offset by a cash inflow from net borrowing.

Cash and cash equivalents with an original maturity of three months or less decreased by €0.1 billion compared with December 31, 2004. Total liquidity, which also includes marketable securities with an original maturity of more than three months, increased from €11.7 billion to €12.6 billion.

 

Compared with December 31, 2004, total assets increased by €14.5 billion to €197.2 billion. €12.0 billion of the increase was attributable to currency translation effects.

Equipment on operating leases and receivables from financial services totaled €92.2 billion, equivalent to 47% of total assets. The increase in inventories was a result of the fluctuating production volumes in the vehicle business during the year in connection with model changeovers. The intensely competitive situation in the Group’s sales markets also had the effect of increasing vehicle inventories. Other assets decreased, mainly due to the valuation of derivatives.

On the liabilities side, minority interests decreased due to the Group’s increased equity interest in MFTBC. As of June 30, 2005, 15% of MFTBC’s stock was held by shareholders outside the Group (December 31, 2004: 35%). The increase in trade liabilities resulted primarily from the increase in production volumes compared with the fourth quarter of 2004.

Stockholders’ equity increased from €33.5 billion to €34.0 billion at June 30, 2005, due primarily to the positive net income and currency translation effects. Opposing effects resulted from the distribution of the dividend for the 2004 financial year and the valuation of derivative financial instruments.

The Group’s equity ratio as of June 30, 2005, was 17.3% (December 31, 2004: 17.5%). The equity ratio for the industrial business was 24.3% (December 31, 2004: 25.3%).

 

At the end of the second quarter of 2005, DaimlerChrysler employed a workforce of 388,758 people worldwide (+1%). Of this total, 184,029 were employed in Germany and 100,442 in the United States (end of Q2 2004: 184,973 and 100,369 respectively).

The workforce expanded for operational reasons, due in particular to new recruitment by the Commercial Vehicles Division in North America and Europe. Employment levels also rose in the Mercedes Car Group as a result of the expansion of the plant in Tuscaloosa, USA. There were increases and reductions due to changes in the consolidated Group, following the acquisition of dealerships and the sale of component plants by the Chrysler Group. Adjusted for changes in the consolidated Group, the number of employees increased by 2%.

 

DaimlerChrysler assumes that the global economy will expand at a stable rate along its long-term growth path in the second half of this year. Nonetheless, the high oil price and rising interest rates in the United States are risks for investment and consumption. The European economies will also have the disadvantage of the low value of the US dollar.

Demand in the automotive industry is likely to remain rather moderate in the second half of the year. Whereas demand for passenger cars will go on rising in most of the emerging markets, we expect unit sales at last year’s levels in the world’s three major markets of North America, the European Union and Japan, although there may be very strong seasonal fluctuations from one quarter to the next. Demand for commercial vehicles should remain at its present high level. In view of further reductions in model lifecycles and ongoing over-capacity, we expect a continuation of the intensely competitive pressure in the automobile industry.

DaimlerChrysler anticipates a slight increase in unit sales in full-year 2005 compared with 2004.

At the Mercedes Car Group, the general availability of numerous new models and engines should stimulate unit sales in the second half of the year. This will be boosted by the extremely positive response to the new S-Class, with the first cars being delivered to customers in September. In addition, the new R-Class will be launched in the United States this fall. With these new vehicles, the Mercedes-Benz brand will have its broadest and youngest product range. For the full year, we expect a slight increase in unit sales compared with 2004.

The Chrysler Group anticipates a continuation of the tough competition in the North American market during the rest of this year. Total market volume in the United States is likely to be around 17.2 million vehicles. In particular, the success of our new models should help us to increase our unit sales compared with the year 2004.

In the second half of 2005, the Commercial Vehicles Division expects unit sales to continue the pleasing development shown in the first half, so that a significant increase should be achieved for the full year. There will be positive impetus in particular from the strong demand (evident since last year) for Freightliner’s heavy-duty trucks in the NAFTA region, as well as for Mercedes-Benz trucks.

The Financial Services division assumes that levels of new business and contract volume will hold stable during the rest of the year. At Toll Collect, preparations for the changeover from On-Board Unit 1 (OBU 1) to OBU 2 are making good progress.

EADS expects the recovery of the market for civil aircraft to continue in the second half of the year. In full-year 2005, EADS plans to deliver more than 360 Airbus aircraft (2004: 320).

The DaimlerChrysler Group continues to expect higher revenues in 2005 than in 2004. The development of revenues remains highly dependent on changes in the exchange rate between the euro and the US dollar.

The size of the workforce is expected to increase slightly during the rest of this year. Employment levels should rise compared with the end of 2004 particularly in the Commercial Vehicles Division.

Despite the recent rise of the US dollar against the euro, operating profit for full-year 2005 will be impacted by the less favorable dollar-euro exchange rate compared to the prior year. In addition, the development of earnings will continue to be impacted by increases in raw-material prices during the further course of this year.

After increasing our earnings in the second quarter by more than originally anticipated and achieving the turning point at the Mercedes Car Group, for full-year 2005 we continue to expect a slight increase in operating profit compared with the prior year, excluding charges related to the realignment of the smart business model.