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DaimlerChrysler 2006 financial results highlight $7.0 billion of R&D

DaimlerChrysler has published its preliminary Group and divisional results for the year 2006 revealing that the organisation spent $7.0 billion for the year on research and development. This figure was down from $7.5 billion in the previous year but included the further development of powertrain technologies, alternative propulsion systems such as hybrid drive and fuel cells, and electronic systems for the improvement of vehicle safety.

The most important projects at the Chrysler Group were the development of the new minivan generation as well as on hybrid vehicles. The Mercedes Car Group meanwhile spent its R&D euros on the new generations of the E-Class and CL-Class. DaimlerChrysler's Truck Group focused on major projects including the successor models for the Mercedes-Benz Actros and Axor, for the Freightliner Premium Class and for the Mitsubishi Fuso Super Great.

DaimlerChrysler would probably like me to add that they had an operating profit for 2006 of $7,281 million, up from $6,843 million achieved in 2005, on the back of $4.3 billion in net income.

Analysis: Chrysler dragged the numbers down but Mercedes is raking in the cash. For me though, I'm always more interested in what a company is doing tomorrow, not yesterday. It seems that Chrysler thinks hybrids are the way forward and Mercedes has its money on fuel cells. I wonder if their powertrain bets will be as successful as their respective financial performance?

Complete press release with all the juicy figures after the jump.

[Source: DaimlerChrysler]
DaimlerChrysler Achieves $7.3 Billion Operating Profit in 2006
  • Net income of $4.3 billion (2005: $3.8 billion)
  • Earnings per Share of $4.17 (2005: $3.70)
  • Revenues up 1% to $200.1 billion
Stuttgart, Germany/Auburn Hills, Mich., Feb 14, 2007 - DaimlerChrysler (stock exchange abbreviation DCX) today published its preliminary Group and divisional results for the year 2006.

DaimlerChrysler recorded an operating profit of $7,281 million in 2006, compared with $6,843 million in 2005.

The development of the Group's operating profit was primarily impacted by the significant decline in earnings at the Chrysler Group. This was more than offset by the substantial earnings improvement at the Mercedes Car Group and the repeated increase in earnings at the Truck Group and the Financial Services division. The contribution to earnings from the Van, Bus, Other segment was lower than in the prior year. The earnings trend was affected by special items in both years, which are shown in the table on pages 14 and 15.

Net income increased by $0.5 billion to $4.3 billion (2005: $3.8 billion). Based on the reported net income, earnings per share amounted to $4.17 compared with $3.70 in 2005.

The Board of Management will propose to the Supervisory Board that a dividend of €1.50 per share should be distributed for the year 2006 (2005: €1.50). This proposal takes account not only of the development of operating profit and cash flow in 2006, but also of expectations for the coming years.

Unit Sales and Revenues
DaimlerChrysler sold a total of 4.7 million vehicles in 2006 (2005: 4.8 million), while the Group's total revenues increased by 1 percent to $200.1 billion. Adjusted for exchange-rate effects and changes in the consolidated Group, the increase in revenues amounted to 2 percent.

The Workforce
As of December 31, 2006, DaimlerChrysler employed a workforce of 360,385 people worldwide (2005: 382,724). Of this total, 166,617 were employed in Germany (2005: 182,060) and 94,792 in the United States (2005: 97,480).

The implementation of the new management model is running according to plan. By the end of January 2007, approximately 2,000 employees worldwide had either signed voluntary severance agreements or had already left the Group. DaimlerChrysler has been working with the new structures since August 1, 2006. Important processes have been made faster and more efficient, allowing substantial efficiency gains. The total expenditure for the implementation of the program in the years 2006 through 2008 is likely to be in the region of $2.6 billion. Of this total, $519 million was incurred in the year 2006.

Investing to Safeguard Future
Worldwide, the DaimlerChrysler Group invested a total of $7.8 billion in property, plant and equipment in 2006 (2005: $8.7 billion). Capital expenditure at the Mercedes Car Group of $2.2 billion was slightly higher than in the prior year ($2.1 billion). To continue its product offensive and to make its production facilities more flexible, the Chrysler Group invested $3.8 billion in property, plant and equipment (2005: $4.1 billion). The Truck Group invested $1,197 million in 2006, mainly related to new technologies, powertrains and safety concepts (2005: $1,275 million).

Expenditure for research and development totaled $7.0 billion in 2006 (2005: $7.5 billion). The most important projects at the Mercedes Car Group were the new generation of the E-Class, the new version of the CL-Class, and preparations for the model change for the C-Class in 2007. The Chrysler Group's focus was on the development of the new minivan generation as well as on hybrid vehicles. The Truck Group's major projects included the successor models for the Mercedes-Benz Actros and Axor, for the Freightliner Premium Class and for the Mitsubishi Fuso Super Great. Additional key areas of R&D activities at DaimlerChrysler were the further development of powertrain technologies, alternative propulsion systems such as hybrid drive and fuel cells, and electronic systems for the improvement of vehicle safety.

During the planning period of 2007 through 2009, DaimlerChrysler will presumably invest a total of $23.1 billion in property, plant and equipment and $21.4 billion in research and development activities. This adds up to total of investment in safeguarding the future of $44.5 billion.

Mercedes Car Group
The Mercedes Car Group division, comprising the brands Mercedes-Benz, Maybach, smart, Mercedes-Benz AMG and Mercedes-Benz McLaren, sold 1,251,800 vehicles in 2006 (2005: 1,216,800).

Revenues of $72.0 billion were 9 percent higher than the prior year's level.

The Mercedes Car Group achieved an operating profit of $3,187 million in 2006, compared with an operating loss of $666 million in the prior year. The results of both years were significantly affected by special items. There were expenses of $1,248 million in connection with the discontinuation of production of the smart forfour in 2006, while the realignment of the smart business model in 2005 resulted in charges of $1,466 million. Charges relating to staff reductions at Mercedes-Benz Passenger Cars in the context of the CORE program decreased to $377 million in 2006 (2005: $752 million). Additional special items with effects on the results of both years are shown in the table at the end of this release.

The substantial increase in the division's operating profit is due in particular to the efficiency improvements achieved in the context of the CORE program. Other positive factors were the higher unit sales of Mercedes-Benz passenger cars and the improved model mix due to the launch of the new S-Class as well as the M- and GL-Class models. A negative impact on operating profit in 2006 resulted from currency effects.

The Mercedes-Benz brand increased unit sales in the year under review by 5 percent to 1,149,100 vehicles. As a result, the brand was able to boost its market share in key regions, despite tougher competition. This positive result was primarily due to the very successful new model launches in 2005, particularly of the new S-Class, which went on sale in the United States in February 2006. Like the new CL- and GL-Class models, the updated E- and SL-Class vehicles launched in 2006 were also very well received by the market and contributed to the Mercedes-Benz brand's success in the year under review. On October 15, 2006, the division launched the E320 BLUETEC - the world's cleanest diesel passenger car - in the United States and Canada.

The extensive measures being implemented to further improve the quality of DaimlerChrysler's vehicles are having very positive effects. This claim is supported by internal analyses and many external studies. The J.D. Power Initial Quality Study 2006 concluded that the Mercedes-Benz brand has a positive trend in the category of initial quality. Improvements were achieved in nearly all of the issues that were addressed in last year's study (IQS 2005).

Unit sales of the smart brand totaled 102,700 vehicles in the year under review (2005: 124,300). Unit sales of the smart fortwo developed especially well throughout the year, with the model's production volume once again exceeding the planned target in the vehicle's ninth year of production. More than 750,000 smart fortwos have been sold since the vehicle's market launch. Despite an increase in production at the beginning of the year, nearly all smart fortwo models built had been sold by the end of 2006. Sales of the last smart roadsters and smart forfour models proceeded according to plan; nearly all remaining stocks of these vehicles had been sold by the end of the year under review.

In November 2006, smart unveiled the new smart fortwo, which will be launched in Europe in April 2007. Starting in 2008, the new smart fortwo will also be available in the United States, which has become a promising market for smart due to increasing traffic volumes and rising fuel prices. The second-largest automobile retail organization in the United States - the UnitedAuto Group - will act as the exclusive importer of smart brand vehicles.

Chrysler Group
Worldwide, the Chrysler Group shipped 2.7 million Chrysler, Jeep® and Dodge branded passenger cars, sports tourers, minivans, SUVs and light trucks to its dealerships in 2006 (2005: 2.8 million). Worldwide retail sales decreased by 5 percent in 2006 to 2.7 million units.

As a result of lower volumes and a weaker U.S. dollar on average for the year, the Chrysler Group's revenues for the year of $62.2 billion were significantly lower than in 2005 ($66.1 billion).

The Chrysler Group posted an operating loss of $1,475 million in 2006, compared with an operating profit of $2,024 million in 2005.

The deterioration in operating results was primarily the result of negative net pricing, unfavorable product and sales market mix, and a decline in factory unit sales in the United States. These factors reflect the continuing difficult market environment in the United States during 2006 marked by an overall decline in market volume, a shift in consumer demand towards smaller, more fuel-efficient vehicles due to higher fuel prices, as well as the impact of higher interest rates. These negative factors were partially offset by the market success of the new models, most of which were launched in the second half of the year. Several of these vehicles target this shift in consumer demand, resulting in a positive contribution to earnings in the fourth quarter of the year.

In addition, the financial support provided to supplier Collins & Aikman led to a charge of $87 million in 2006, compared to $131 million in 2005. The Chrysler Group's prior-year operating profit was positively impacted by a $317 million gain on the sale of the Arizona Proving Grounds vehicle testing facility. Further special items that affected earnings in 2005 are shown in the table at the end of this release.

The Chrysler Group launched a total of 10 attractive new models in 2006, and significantly expanded its sales outside the NAFTA region (+22 percent to 214,400 vehicles). Dodge launched its compact five-door car – the Dodge Caliber, as well as its first mid-size SUV – the Dodge Nitro, and the new Dodge Ram 3500 Chassis Cab. The new positioning of the Jeep brand portfolio continued with the launch of the compact Jeep Compass. Other new models launched were the Jeep Grand Cherokee SRT8, the new Jeep Wrangler, the four-door Jeep Wrangler Unlimited and the Jeep Patriot. The Chrysler brand launched the Aspen, its first full-size SUV, while the new Chrysler Sebring is intended to strengthen the Chrysler Group's competitive position in the mid-size sedan category.

The Chrysler Group also made more progress in the field of vehicle quality in 2006. Internal measurements show that the quality of the division's vehicles is better than ever before, a fact which is confirmed by external quality studies: The Chrysler brand ranked in the top ten in the 2006 J.D. Power Initial Quality Study.

All three Chrysler Group brands also made gains in the 2006 J.D. Power Vehicle Dependability Study, showing that customer perception of quality continues to improve as new vehicles replace older models in the product range.

The new manufacturing flexibility strategies have helped to improve the Chrysler Group's efficiency, allowing the division to better utilize its assets, such as the Belvidere (Illinois) Assembly Plant, where the Dodge Caliber is built with the use of highly flexible robots and free of vehicle-specific heavy tooling. Over the four years of 2002 through 2005, the Chrysler Group posted a cumulative 24 percent productivity improvement, with a 6 percent improvement in 2005, as confirmed by the 2006 Harbour Report, a recognized industry study that measures the productivity of North American automotive manufacturers.

One year after the start of production by the Global Engine Manufacturing Alliance (GEMA), the second World Engine plant opened in Dundee (Michigan) in October 2006. The two plants in Dundee are part of a five-factory global venture developed by DaimlerChrysler, Hyundai Motor and Mitsubishi Motors.

Truck Group
In 2006, the Truck Group built on the very successful developments of the prior year, increasing unit sales by 1 percent to a new record of 537,000 vehicles.

The higher sales volume and an improved model mix also led revenues to rise sharply by 5 percent to $42.2 billion.

The Truck Group achieved an operating profit of $2,666 million in 2006, a significant increase from the previous year's result of $2,119 million. The operating profit posted in 2005 included exceptional income of $364 million from the settlement reached with Mitsubishi Motors Corporation relating to expenditure for quality actions and recall campaigns at Mitsubishi Fuso Truck and Bus Corporation. The impact of other special factors on the earnings of the two years is shown in the table at the end of this release.

The increase in operating profit was primarily the result of efficiency improvements realized in the context of the Global Excellence Program as well as improved product positioning and model mix. In addition, higher unit sales, which were mainly the result of purchases brought forward because of stricter emission limits in important markets, contributed to the higher earnings. Higher expenses for new vehicle projects, for the fulfillment of future emission regulations as well as currency effects had a negative impact on operating profit.

Trucks Europe/Latin America (Mercedes-Benz) once again increased its unit sales in the core markets of Western Europe. However, due to a market downturn in Brazil and lower sales in the Near and Middle East, total unit sales of 142,100 vehicles were slightly below the prior year's high level. Operating in a very positive market environment, the Trucks NAFTA unit (Freightliner, Sterling, Western Star, Thomas Built Buses) increased its sales by 3 percent in 2006 to the record level of 208,300 vehicles. Trucks Asia (Mitsubishi Fuso) sold 186,600 vehicles in 2006, a sharp increase (+4 percent) on the prior year.

In the summer of 2006, as part of a roadshow through 12 major European cities the division presented the Mercedes-Benz Safety Truck, which combines all of the currently available assistance and safety systems, including Active Brake Assist (emergency braking support), Lane Assistant, Adaptive Cruise Control, and the Stability Program. Large-scale trials have shown that accident frequency can be reduced by 50 percent by the Mercedes-Benz Safety Package. Furthermore, The Truck Group's Hybrid Technology Competence Center passed one of its first milestones with the introduction of Fuso's Canter Eco Hybrid in Japan.

In 2006, to ensure that it is ideally prepared to face future challenges, the Truck Group began to build a Development and Testing Center in the vicinity of the Wörth, Germany, truck assembly plant. The first stage of construction is scheduled to be completed during the year 2007.

Coinciding with Group-wide implementation of the new management model, the Truck Group was launched on August 1, 2006 with a modified organizational structure. The division now consists of three operating units: Trucks Europe/Latin America, Trucks NAFTA, and Trucks Asia, each of which is responsible for production and sales operations in its respective region. In order to more extensively exploit synergies as early as the product creation phase - and to allow the enhanced harmonization of parts and components - the former Truck Product Creation unit was split into two powerful units: Truck Product Engineering, which is responsible for the three vehicle development centers in Stuttgart, Portland and Kawasaki as well as the integrated development of large components, and Truck Powertrain Operations & Manufacturing Engineering, which oversees worldwide component production and production planning for vehicle and component plants.

Financial Services
The Financial Services division once again developed positively and further improved its market position in 2006. Financial Services significantly improved its operating profit from $1,937 million in 2005 to $2,262 million in 2006, thus achieving record earnings for the fifth consecutive year. The increase in operating profit was the result of higher new business and ongoing efficiency improvements. These factors more than offset higher expenses resulting from higher interest rates and increased cost of risk. In addition, the business development at Toll Collect also contributed to the positive earnings trend.

New business increased by 10 percent to $69.9 billion, while contract volume of $149.5 billion was 4 percent lower than in the prior year. Adjusted for exchange-rate effects, contract volume rose by 5 percent. At the end of 2006, Financial Services' portfolio comprised 6.5 million leased and financed vehicles.

The Americas region (North and South America) managed a total contract volume of $106.1 billion at the end of 2006 (end of 2005: $113.4 billion). This was once again the highest volume recorded by any Financial Services region, accounting for 71 percent of the total portfolio. Adjusted for exchange-rate effects, the portfolio in the region expanded by 4 percent. The Europe, Africa & Asia/Pacific region also developed positively in 2006. Contract volume of $43.4 billion was 3 percent higher than the prior year's level.

In Germany, DaimlerChrysler Bank further improved its market position: contract volume at the biggest European national company rose by 5 percent to $21.1 billion. DaimlerChrysler Bank welcomed its one-millionth customer in May 2006.

DaimlerChrysler Financial Services expanded its financing activities for commercial vehicles in Japan by establishing the new Fuso Financial business unit. Since September 2006, Fuso Financial is in charge of Mitsubishi Fuso's entire dealer network in Japan.

Van, Bus, Other
Within the framework of the new management model, DaimlerChrysler decided that the vans and buses activities, which until 2005 were part of the Commercial Vehicles division, would be directly managed as separate units. In addition, the Corporate Research department and the development departments of the Mercedes Car Group were merged; as a result, they are now directly allocated to the Mercedes Car Group.

The Van, Bus, Other segment recorded an operating profit of $1,205 million in 2006 (2005: $1,440 million). Operating profit in 2006 includes charges of $519 million for the implementation of the new management model. These charges were mainly incurred for workforce reductions in the DaimlerChrysler Group's administrative areas. Exceptional income was achieved in 2006 from the sale of real estate not required for operating purposes $176 million) and the consummation of the sale of the off-highway business ($327 million). Operating profit for 2005 included a positive contribution from the off-highway business of ($190 million). The Van and Bus operating units again achieved positive results. The impact of special items on the earnings of both years is shown in the table at the end of this release.

Unit sales at the Vans unit totaled 256,900 vehicles worldwide in the year under review (2005: 267,200). This slight decrease in sales was due to the Sprinter model changeover and associated production bottlenecks at the Düsseldorf plant. DaimlerChrysler Buses comprises the bus operations of the Mercedes-Benz, Setra and Orion brands. The unit sold 36,200 buses and chassis worldwide in 2006 (2005: 36,200). The Buses unit thus repeated the high level of unit sales it achieved in the prior year and maintained its position as the global market leader.

EADS contributed $856 million to the segment's operating profit, which was below the prior-year result of $999 million. The reduction is primarily related to delays with the delivery of the Airbus A380. EADS will publish its results for the 2006 financial year on March 9, 2007.

On the basis of the divisions' planning, DaimlerChrysler expects the Group's total unit sales to increase slightly in the year 2007. DaimlerChrysler assumes that total revenues in 2007 will be at least in the magnitude of the prior year.

Based on the divisions' projections, DaimlerChrysler should achieve a significant increase in profitability in the planning period of 2007 through 2009.

A fundamental condition for the targeted increase in earnings is a generally stable economic and political situation, as well as the moderate rise in the worldwide demand for passenger cars and commercial vehicles expected for the years 2007 through 2009. Opportunities and risks may arise from the development of currency exchange rates and raw-material prices.

In the year 2007, DaimlerChrysler will change over its accounting and financial reporting to the International Financial Reporting Standards (IFRS). The present main performance measure, operating profit according to US GAAP, will then be replaced with EBIT (earnings before interest and taxes). The earnings outlook will be put into more detail with the publication of the interim report on the first quarter of 2007.

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