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MercedesBenz prepares for more headwinds - Savings program
In both the passenger car and van business, profitability is likely to continue to dwindle, while investments in facilities as well as research and development services are expected to increase. Källenius is countering this with a cost-cutting program in production costs. Although the dividend is decreasing, the Stuttgart-based company also plans to launch a new share buyback program of up to 5 billion euros. The DAX-listed stock came under pressure.
Expectations in the Upper Range
The stock fell by over two percent at the start of trading to 59.91 euros. Nevertheless, the price has gained around eleven percent so far this year. Last year, the share was worth more than 75 euros at its peak before it fell in April. Analyst Jose Asumendi from JPMorgan rated the cash flow in the fourth quarter as strong, and the forecast for the new year met expectations.
The operating margin in the car business, adjusted for special effects, is expected to be between 6 and 8 percent of sales by 2025, the company announced. After last year's weak performance, analysts had already feared that the operational margin, closely watched in the capital market, would continue to fall in the most important business segment. On average, expectations for this year have so far been at the upper half of the new range.
Fewer Buyers in China
Mercedes CFO Harald Wilhelm also stated in a presentation that possible new tariffs could reduce margins by another percentage point. US President Donald Trump is threatening higher import tariffs that could take effect from April.
In 2024, the margin in the passenger car division at Mercedes already fell to 8.1 percent - from 12.6 percent a year earlier. Before interest, taxes, and special items, the operating profit of the division dropped by 39 percent to 8.7 billion euros. The Chinese market, in particular, is currently proving to be a problem.
On the most important individual market, China, wealthy customers are buying fewer expensive cars from Mercedes, which has caused the high profitability of previous years to evaporate. Revenue fell by 4.5 percent for the full year to 145.6 billion euros. Earnings before interest and taxes dropped by almost a third to 13.6 billion euros, but this was slightly better than experts had feared.
Savings program to help
The new savings program aims to reduce the group's production costs by one tenth by 2027.
"To ensure the company's future competitiveness in an increasingly volatile world, we are taking steps to make the company leaner, faster, and stronger," said Källenius according to the announcement.
To achieve this, the production structure worldwide should be made more efficient and flexible. According to earlier statements, the program has a scope of around 5 billion euros. The direct sales model, which Mercedes intends to use to curb discount competition among dealers, should also contribute to this.
The group’s revenue is likely to remain slightly below the previous year's level this year. The Stuttgart-based company also expects a slight decline in passenger car sales. Earnings before interest and taxes for the group are expected to fall significantly. The free cash flow in the industrial business - calculated without financial services - should, according to forecasts, be significantly below the previous year's figure of 9.2 billion euros. "Significant" means at least a quarter less for Mercedes - this time, a maximum of around 6.9 billion euros should flow into the coffers.
The so-called free cash flow is particularly relevant for Mercedes-Benz for the possible repurchase of its own shares. Last year, the management made it a guideline that remaining free cash flow funds, after dividend payments are deducted, be used for stock acquisition.
This is popular with investors because the profit share per remaining stock increases and, in the short term, price increases can also occur. However, there is also criticism of this approach - as funds are then lacking for investments in new products or new technology that could secure business success in the future. Senior executive bonuses are often measured by the stock price as well. In the past two years, Mercedes-Benz has already spent a sum of 6.8 billion euros on share buybacks.
In 2024, the Swabians, who were spoiled by success in previous years, had to cope with a significant drop in profits. The group's earnings fell by a good 28 percent to 10.4 billion euros compared to the previous year. The dividend is to be reduced by one euro to 4.30 euros per share. The planned further share buyback still needs to be approved by the general meeting.
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