Mercedes-Benz (MBGAF), a German luxury-vehicle manufacturer, climbed 3.5% in Tuesday's European trading after second-quarter operating profit increased 22% to 1.5 billion. The shares had advanced as much as 5.9% earlier in the session as investors assessed progress from cost reductions. Revenue declined 3%, showing that improved profitability was supported more heavily by cost control and other operating factors than by sales growth.
The company reported an adjusted return on sales of 4%, within its expected range of 3% to 5%. Results also included a 131 million gain from the disposal of Athlon, a vehicle-leasing and fleet-management business. Mercedes has been reducing expenses in Germany while shifting some production to lower-cost facilities in Hungary and Poland. However, vehicle sales in China declined 30%, increasing pressure on a company already facing intense competition and weaker luxury-car demand in the country.
Mercedes now expects annual revenue and vehicle sales to decline slightly, compared with its previous expectation for stable results. Management also anticipates that full-year margins will finish near the lower end of its range, partly because selling more electric vehicles in Europe could increase costs. The 131 million Athlon gain represented approximately 8.7% of Mercedes' 1.5 billion quarterly operating profit, suggesting investors may need to distinguish disposal-related support from the underlying benefits of the company's cost reductions. China's performance and the cost of meeting European electric-vehicle demand may remain important variables for future margins.