Thursday, July 27, 2006 – DaimlerChrysler 2nd Quarter 2006 Interim Report

Management Report

Overall positive development of world economy and automotive industry

The global economy continued its positive development in the second quarter of this year, although the overall rate of growth was lower than in the first quarter. This was due to rising interest rates and the continuation of high raw-material prices, some of which actually rose further. Growth slowed in the U.S. and Japan compared with the first quarter, partially offset by a slight revival in Western Europe and continued positive developments in the emerging markets.

Worldwide demand for automobiles continued to be very buoyant. Despite repeated increases in the prices of crude oil and fuel, global unit sales of automobiles developed positively. While demand for passenger cars and commercial vehicles increased in Western Europe, market volumes in the United States and Japan were smaller than in the second quarter of last year. In the U.S., the minivan, SUV and light-truck vehicle segments suffered in particular due to high fuel prices. However, sales in the car segment grew. The emerging markets within Asia recorded significant growth rates once again. There was an increase in the worldwide demand for commercial vehicles, especially in the segment of heavy trucks. Revenues at prior-year level

DaimlerChrysler sold 1.3 million vehicles in the second quarter. This was 3% lower than in Q2 2005.

The Mercedes Car Group increased its unit sales by 6% to 325,500 vehicles, continuing the positive trend of the first quarter. The Chrysler Group shipped 761,700 passenger cars and light trucks to its dealers in the second quarter (Q2 2005: 812,200). Unit sales by the Truck Group of 138,600 vehicles nearly reached the high level of the prior-year quarter (-2%). Mercedes-Benz Vans sold 65,600 units worldwide (Q2 2005: 72,300), while the Bus unit boosted its sales by 9% to 10,300 buses and chassis. The Financial Services division increased its new business by 9% to €14.1 billion and its contract volume by 1% to €115.3 billion.

The Group’s total revenues of €38.6 billion were of the same magnitude as in the second quarter of 2005.

 

Group operating profit reflects positive earnings trend at Mercedes Car Group

DaimlerChrysler posted a second-quarter operating profit of €1,857 million, an increase of 11% compared with the second quarter of last year.

The earnings improvement was primarily due to the significant increase in operating profit achieved by the Mercedes Car Group. The Truck Group and Financial Services also improved their operating profit. In total, these increases more than offset the decrease in operating profit recorded by the Chrysler Group.

The reduced operating profit of the Van, Bus, Other segment was mainly related to the corporate-level expenses of €145 million for the implementation of the new management model in the second quarter of 2006. These expenses resulted from staffreductions in the Group’s administrative functions.

Exchange-rate effects due to less favorable currency-hedging rates than in the prior-year quarter had only a slight negative effect on operating profit during the reporting period.

The development of the Group’s earnings was affected by the special items shown in the following table:

The Mercedes Car Group reported an operating profit of €807 million, a substantial improvement compared with the second quarter of last year (€12 million). The increase was caused by the division’s higher unit sales (+17,400 vehicles) and an improved model mix due to the full availability of the new S-Class and M-/R-Class. Within the framework of the CORE program, additional important efficiency-improving actions were implemented, which also had a significant positive effect on earnings.

The staff reductions planned at Mercedes-Benz Passenger Cars in the context of the CORE program led to additional expenses of €20 million. By the end of the second quarter, more than 8,300 employees had signed voluntary severance agreements or had taken advantage of early retirement. Furthermore, charges arising from the discontinuation of the smart forfour model reduced operating profit by €13 million; in the prior-year quarter, expenses of €311 million arose in connection with the realignment of the smart business model.

The Chrysler Group posted an operating profit of €51 million in the second quarter of 2006, compared with an operating profit of €544 million in the second quarter of 2005.

The decrease in operating profit was primarily the result of a decrease in worldwide factory unit sales, a higher mix of fleet vehicles and negative net pricing.

The Truck Group increased its second-quarter operating profit by 34% to €551 million.

An improved model mix as well as the efficiency-improving measures taken as part of the Global Excellence program contributed to these increased earnings. These factors more than offset higher expenses for new vehicle projects and the fulfillment of future emission regulations.

The Financial Services division achieved an operating profit of €422 million in the second quarter (Q2 2005: €385 million).

This increase in earnings was aided by the increased volume of business and the positive earnings trend at Toll Collect. These effects compensated the negative impact from the higher level of interest rates.

The Van, Bus, Other segment posted a second-quarter operating profit of €159 million (Q2 2005: €277 million). Second-quarter operating profit included expenses of €145 million incurred for staff reductions in administrative functions in connection with the new management model.

Vans and Buses both achieved positive results in the second quarter. The operating profit of the Mercedes-Benz Vans unit was negatively affected by the launch of the new Sprinter. The Buses unit improved its operating profit, primarily as a result of higher unit sales and efficiency improvements.

The contribution to earnings from EADS also increased, mainly due to higher Airbus deliveries, to €231 million from €154 million in the prior-year quarter.

The segment’s operating profit for the second quarter of 2005 included a contribution of €45 million from the off-highway business, which was sold to Swedish financial investor EQT in the first quarter of 2006.

Financial income amounted to €845 million in the second quarter compared to a financial expense of €138 million in the prior-year quarter. The result includes an increase of €165 million in income from investments to €177 million, primarily due to higher contributions to earnings from our investments, which are accounted for using the equity method. The net interest expense of €101 million was slightly lower than in the second quarter of last year (expense of €84 million). Other financial income increased by €835 million to €769 million. This increase is related to the derivative contracts to hedge the price risks of EADS shares. The contractual agreements to sell EADS shares starting in the year 2007 for certain prices combined with the decrease in the stock-market price of EADS shares in the second quarter of 2006 led to a valuation gain of approximately €800 million. Future fluctuations in the price of EADS shares will also have an effect on earnings from the mark-tomarket valuation of those derivatives.

Second-quarter net income amounted to €1,810 million (Q2 2005: €737 million). The mark-to-market valuation of derivatives to hedge the price risks of EADS shares had a positive impact on net income of approximately €800 million (after taxes).

Earnings per share amounted to €1.77, compared with €0.73 in the second quarter of 2005.

 

Cash provided by operating activities of €5.8 billion was lower than in the first half of 2005 (€7.0 billion). The decrease was due primarily to a rise in inventory-related receivables from financial services, but also to severance payments connected with the headcount reduction at the Mercedes Car Group (€0.7 billion), payments related to the realignment at smart, and higher tax payments. On the other hand, there was an increase in the cash inflow from operating activities in the financial-services business due to a higher proportion of operate- lease contracts. The development of working capital also led to higher cash provided by operating activities. Inventories and trade receivables increased at a much lower rate compared with the prior year, so negative effects from trade liabilities were more than compensated for.

Cash used for investing activities in the first half increased by €2.5 billion to €7.2 billion, due not only to the increase in equipment on operating leases, but also to the development of receivables from financial services provided to end customers. This was mainly a result of lower payments received on existing receivables and lower proceeds from the sale of these receivables. Although cash outflows for new financing contracts decreased, this did not compensate for the aforementioned effects. Capital expenditure for property, plant and equipment was slightly higher than in the prior-year period. Higher proceeds from the sale of businesses reduced the cash outflow for investing activities. This was mainly due to the sale of the off-highway business, which gave rise to a net cash inflow of €0.8 billion. The increase in net proceeds from the sale of securities (2005: net purchases) also reduced the cash outflow for investing activities.

Cash used for financing activities amounted to €0.6 billion. This was primarily the result of the dividend distribution for the year 2005, partially offset by a cash inflow from the (net) increase in financial liabilities. The main factors in the first half of last year were the dividend distribution and the (net) repayment of financial liabilities.

Cash and cash equivalents with an original maturity of three months or less at June 30, 2006 decreased by €2.3 billion compared with December 31, 2005, after taking currencytranslation effects into consideration. Total liquidity, which also includes deposits and marketable securities with an original maturity of more than three months, decreased from €12.6 billion to €9.6 billion as a result of optimized processes in the Group’s liquidity management.

 

Compared with December 31, 2005, total assets decreased by €6.0 billion to €195.6 billion. After adjusting for currencytranslation effects of €8.9 billion, there was an increase of €2.9 billion, primarily due to the expansion of the leasing and sales-financing business.

Equipment on operating leases and receivables from financial services totaled €95.8 billion (December 31, 2005: €95.3 billion), equivalent to 49% of total assets. An increase in the portfolio of operate-lease and sales-financing contracts was partially offset by the effects of currency translation. Inventories increased, after adjusting for the effect of exchange-rate effects. This was a result of the development of production volumes over the year, as was the increase in trade payables. The change in other assets was primarily due to an increase in the positive market values of derivative financial instruments. These financial transactions were undertaken to hedge against foreign-exchange risks and the price risks of EADS shares.

Accrued liabilities decreased, mainly due to the effects of currency translation, which also resulted in lower accrued liabilities for derivative financial instruments. There was also an impact from the utilization of accrued liabilities for product guarantees. There was a rise, however, related to the discontinuation of the smart forfour and the planned headcount reduction in the context of implementing the new management model. Accrued liabilities for sales incentives also increased. The change in financial liabilities was almost solely due to currency-translation effects. After adjusting for these effects, there was an increase resulting primarily from a higher refinancing requirement for the leasing and sales-financing business.

Stockholders’ equity of €36.3 billion at June 30, 2006 was almost unchanged from the level at December 31, 2005. The positive effects on stockholders’ equity from net income and the valuation of derivative financial instruments (with no effect on earnings) were offset by the negative effects of currency translation and the distribution of the dividend for the year 2005.

The Group’s equity ratio at June 30, 2006 was 18.6% (December 31, 2005: 17.3%). The equity ratio for the industrial business was 27.6% (December 31, 2005: 24.8%). The increases in the equity ratios were primarily due to the decrease in total assets and the increased net income.

 

At the end of the second quarter of 2006, DaimlerChrysler employed a workforce of 368,321 people worldwide (end of Q2 2005: 388,758). Of this total, 169,603 were employed in Germany and 97,518 in the United States (end of Q2 2005: 184,029 and 100,442 respectively).

The total number of employees decreased compared to June 30, 2005, primarily due to the staff-reduction measures initiated at the Mercedes Car Group at the end of September 2005 (-7%) and the sale of the off-highway business with approximately 7,000 employees. Employment levels at the Chrysler Group, Truck Group and Financial Services were also lower than at the end of Q2 2005.

The implementation of the new management model is running according to plan. On July 18, we reached an agreement with the Group Labor Council on the details of a settlement of interest. The organizational structures have been approved, so we will be able to work with the new management model as of August 1. The majority of the entirely planned reduction of management positions will already be achieved by the end of 2006.

 

DaimlerChrysler assumes that the rate of world economic expansion will slow down slightly during the second half of the year. Further rises in interest rates and the continuing burden of high raw-material prices, especially of oil, are likely to lead to weaker global growth. But due to positive economic developments in the first six months, we assume that growth in 2006 will be slightly stronger than in the prior year.

Parallel to the development of the world economy, the dynamics of global demand for automobiles will probably decrease slightly. For full-year 2006, we therefore anticipate a growth rate similar to that in 2005. Whereas automobile sales in the United States, the world’s largest market, are likely to decrease slightly, demand should slightly increase in Western Europe and Japan. Car sales are expected to increase in nearly all of the larger emerging markets this year, with significant growth rates in some of those countries. Worldwide demand for commercial vehicles is likely to remain at a high level in the second half of 2006. However, risks will arise if oil and fuel prices continue to rise. We assume that competitive pressure in the automotive industry will remain intense as a result of worldwide over-capacity.

DaimlerChrysler continues to anticipate unit sales in 2006 in the magnitude of the prior year (2005: 4.8 million vehicles).

The Mercedes Car Group expects full-year unit sales at least as high as in 2005. We assume that unit sales by Mercedes- Benz will exceed last year’s figure due to the brand’s new products. Unit sales by the smart brand will be lower than in 2005. We will continue to effectively implement the CORE efficiency-improving program. We therefore anticipate further earnings improvements in the coming quarters. The Mercedes Car Group is thus on track to achieve the 7% return on sales targeted for 2007.

In an unchanged difficult market environment, the Chrysler Group assumes that unit sales (shipments) in 2006 will be in the range of last year. The division will launch a total of ten new models this year, although a large number of them will not be available at dealerships until the second half of the year. The Chrysler Group will continue to implement its activities to improve productivity, quality and customer satisfaction. Due to high dealer inventories the Chrysler Group intends to reduce production volumes and shipments to dealers in the third quarter. In addition, the upcoming model changeovers will cause downtime in certain plants. The development of earnings in the second half of the year will also be impacted by the launch costs of the eight new models. The division therefore anticipates a third-quarter operating loss of up to €0.5 billion. We then expect positive earnings once again in the fourth quarter as a result of the new models to be launched in the second half of the year. For full year 2006, the Chrysler Group plans for a positive result.

The Truck Group assumes that full-year unit sales will remain stable. A high level of earnings should continue to be achieved, due not least to the efficiency improvements resulting from the Global Excellence program. There will be a positive impact on demand for trucks from upcoming stricter emission regulations planned in our core markets of Europe, the United States and Japan. The Truck Group is very well prepared for these changes, not least due to its innovation leadership in Bluetec diesel technology.

The Financial Services division anticipates a continuation of its stable business and earnings development during the second half of the year. However, rising interest rates will be a challenge. We intend to further improve our competitive position as a result of optimized processes, enhanced efficiency, comprehensive market coverage and even closer cooperation with the vehicle divisions and their dealerships.

The Vans unit expects lower unit sales than in 2005 due to the Sprinter model change. Unit sales of buses are likely to exceed the high level of the prior year. EADS continues to plan for a stable market for civil aircraft in the year 2006; Airbus deliveries are expected to increase again compared with the prior year.

The DaimlerChrysler Group anticipates a slight increase in revenues in full-year 2006 (2005: €149.8 billion).

Due to the implementation of the staff-reduction program, the number of persons employed by the Group will continue to decrease until the end of this year.

For full-year 2006, DaimlerChrysler continues to anticipate an operating profit in excess of €6 billion.

This figure includes charges for the implementation of the new management model (€0.5 billion), the focus on the smart fortwo (€1 billion), the staff reductions at the Mercedes Car Group (€0.4 billion), as well as gains on the disposal of the off-highway business (€0.2 billion), on the sale of real estate no longer required for operating purposes (€0.1 billion) and the release of provisions for retirement-pension obligations (€0.2 billion).