Profits up - Quality focused

http://www.reuters.com/newsArticle.jhtml ;jsessionidSWBTE1ORF3OCRBAELCFEY?type=businessNews&storyIDX16885&pageNumber=1
FRANKFURT (Reuters) - A turnaround at U.S. arm Chrysler helped
DaimlerChrysler AG more than triple second-quarter operating profit to 2.1 billion euros ($2.53 billion), the world's fifth-biggest carmaker said on Thursday.
It also upgraded its full-year outlook, saying it expected "significant improvement" in operating profit excluding one-off factors even though its flagship Mercedes Car Group no longer thought it could match 2003 earnings, as forecast in April.
DaimlerChrysler's group operating profit beat the second-quarter forecast of 1.87 billion euros on average from a Reuters poll of 22 analysts.
But its stock reversed earlier gains after Chrysler's boss said that third-quarter sales could weaken before rebounding again in the final quarter and results at Mercedes disappointed.
The shares closed down one cent at 37.10 euros while the DJ Stoxx European car sector index rose 1.0 percent. The share has underperformed the index by some 2.2 percent in 2004.
Chrysler, long a problem child at the group, swung to an operating profit of 516 million euros thanks to a rejuvenated product line-up -- featuring models such as the big-grilled 300 saloon and Dodge Magnum -- supported by a U.S. economic rebound.
It sold eight percent more units in the second quarter than a year earlier despite intense pricing pressure that showed little sign of abating.
The division reiterated its forecast of "considerable positive earnings" in 2004 despite generous and margin-eroding incentives that U.S. carmakers are using to entice customers.
Chrysler chief Dieter Zetsche said the third quarter was traditionally soft due to low output.
"Altogether we expect that the third quarter is a weaker quarter. And we intend to be considerably stronger in the fourth quarter again," he told analysts in a conference call.
Helped by Chrysler and DaimlerChrysler's market-leading booming commercial vehicles business, group sales advanced nine percent to 37.07 billion euros in the quarter. Net profit rose more than fivefold to 554 million euros, but trailed the Reuters poll forecast of 820 million.
"We are still not where we want to be but we are on the right track," Chief Executive Juergen Schrempp said.
MITSUBISHI A DRAG
The company said losses at its Japanese ally Mitsubishi Motors Corp hit its bottom line by almost 500 million euros in the quarter.
Daimler in April pulled the plug on further financial aid to Mitsubishi, and it said new accounting treatment for its remaining 24.7 percent stake meant the holding would no longer weigh on operating earnings.
Daimler's Mercedes Car Group said operating profit slipped 18 percent on sluggish car sales, adverse exchange rates, launch costs for new products and stepped-up spending to end quality problems that have tarnished its cars' elegant image.
The division's quarterly operating profit fell to 703 million and it said it now expected its full-year earnings to decline rather than hold steady.
Mercedes, which this month sealed an agreement with its workforce to save 500 million euros in labor costs in Germany, hopes new models will boost profit significantly by 2006, the year it aims to seize top spot in customer satisfaction polls.
Fund manager Karl Huber at Activest Investments said he was encouraged that Mercedes was focused on boosting quality.
"What does Mercedes live from, after all? It's image," he said. "Compared with its European peers, though, I'd rather put my money first into Peugeot and then into BMW," he added.
"DaimlerChrysler -- like Renault and Peugeot -- has de facto raised its earnings forecast. But the markets found a fly in the ointment with Mercedes," said analyst Georg Stuerzer at HVB Research.
Earlier, its supervisory board named turnaround expert Eckhard Cordes -- a company veteran who heads its trucks and buses business -- to succeed outgoing Mercedes chief Juergen Hubbert as of October.
Daimler's commercial vehicles division more than doubled second-quarter operating earnings after rivals such as Volvo ratcheted up European market forecasts due to renewed demand in the highly cyclical industry.
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