10/27/2011 02:31 EDT | Updated 12/26/2011 05:12 EST

Daimler profits slip as model changes, fall in Renault investment dent bottom line

FRANKFURT - German automaker Daimler AG said net profit fell 16 per cent in the third quarter to €1.36 billion ($1.9 billion) as a troubled economy in Europe and model changeover costs held back earnings at its mainstay Mercedes-Benz division.

Company revenue rose 9 per cent to €26.4 billion ($36.8 billion) and the Mercedes division hit a record for unit sales in the quarter with 315,400 worldwide.

But the company pointed to growing headwinds from Europe's debt crisis and an increasingly unstable global economic environment.

For the company as a whole, revenue from Western Europe rose a bare 1 per cent and fell by 2 per cent in the United states.

"In Western Europe ... there is little sign of any significant growth impetus," the company said Thursday in the earnings report, citing the impact on confidence of the crisis over too much debt in some European countries.

Emerging markets are seeing slowing and more uneven growth as central banks in those countries raise interest rates to combat inflation, the company said. China's auto market continues to grow, but vehicle registrations fell in India and growth slowed in Brazil.

Earnings from Mercedes-Benz, measured before interest and taxes, fell 15 per cent to €1.11 billion due to "a number of factors with negative impact on earnings." Those included upcoming model changeovers, higher raw-material costs, and increases in research and development expenses.

CEO Dieter Zetsche, who also heads the Mercedes division, said the company remained on course and reaffirmed its profit target for the year, saying operating earnings would show a "very significant" increase over last year.

"Daimler operated very successfully also in the third quarter," Zetsche said in a statement. "All the divisions are pursuing their goals very consistently and are right on track."

The company missed estimates from analysts surveyed by Factset of €1.40 billion, in part because it took a writedown of €110 million ($153 million) for its investment in Renault and another, €23 million ($32 million) charge for its investment in Russia's Kamaz because both companies' share prices have taken a sharp fall.

Analyst Max Warburton at Bernstein Research wrote that "these are solid results, but obviously slightly light versus consensus."

He said Mercedes profit margins were good at over 8 per cent but after 10 per cent in the first half, "they're not standout" — especially as competitors BMW AG and VW's Audi run at double-digit margins.

Mercedes sold a record 337,200 vehicles globally in the quarter, but upcoming model changes in the B-Class and M-Class models held sales in Western Europe below last year's level, and sales in the U.S. came in 200 units under last year's level of 55,100. China showed strong growth, as that market passed the United States in unit sales with 56,000 vehicles, up from 39,200 the year before.

The company said the global economy was still growing but had entered "rough waters" marked by sudden swings on financial markets and concerns about high levels of government debt in the U.S. and the euro currency zone that were weighing on confidence. Europe's debt crisis and attempts to cut government spending in indebted countries "are an increasing burden on economic developments."

Eurozone leaders arrived at a deal early Thursday to reduce Greece's debt by having banks holding the country's bonds take larger losses, but spending reductions in Greece and other countries with high debts such as Ireland, Portugal, and Spain continue to weigh on those economies.