Q3 2015 Daimler AG Earnings Call
Oct 22, 2015 AM EDT
DAI.DE - Daimler AG
Q3 2015 Daimler AG Earnings Call
Oct 22, 2015 / 12:00PM GMT
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Corporate Participants
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* Bjorn Scheib
Daimler AG - Head of IR
* Bodo Uebber
Daimler AG - CFO
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Conference Call Participants
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* Tim Rokossa
Deutsche Bank - Analyst
* Jose Asumendi
JPMorgan - Analyst
* Arndt Ellinghorst
Evercore ISI - Analyst
* Stephen Reitman
Societe Generale - Analyst
* Fraser Hill
BofA Merrill Lynch - Analyst
* Juergen Pieper
Metzler Capital Markets - Analyst
* Daniel Schwarz
MainFirst Bank AG - Analyst
* Horst Schneider
HSBC Global Research - Analyst
* Marc-Rene Tonn
Warburg Research GMBH - Analyst
* Sascha Gommel
Commerzbank - Analyst
* Alex Haissl
Credit Suisse - Analyst
* Frank Biller
Landesbank Baden-Wurttemberg - Analyst
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Presentation
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Operator [1]
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Welcome to the global conference call of Daimler. At our customer's request, this conference will be recorded.
(Operator Instructions)
I would like to remind you that this teleconference is governed by the Safe Harbor wording that you find in our published results document. Please note that our presentations contain forward-looking statements that reflect management's current views with respect to future events. Such statements are subject to many risks and uncertainties. If the assumptions underlying any of these statements prove incorrect, then actual results may be materially different from those expressed or implied by such statements. Forward-looking statements speak only to the date on which they are made.
I will now hand over to Bjorn Scheib, Head of Daimler Investor Relations. Thank you very much.
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Bjorn Scheib, Daimler AG - Head of IR [2]
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Good afternoon. This is Bjorn Scheib speaking. On behalf of Daimler, I would welcome you both on the telephone and the Internet to our Q3 results conference call. Today, I am very happy to have with us Bodo Uebber, the CFO of the Daimler AG. In order to give you later on maximum time for your questions, please shorten your questions and a minimum of one question, please.
Bodo, now let's begin with a short introduction, and then we head on to the Q&A session.
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Bodo Uebber, Daimler AG - CFO [3]
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Thank you, Bjorn, and good afternoon. In the third quarter, we proved once again that we are pursuing the right strategies and are progressing with the right products and technologies. Revenue in the third quarter increased by 13% to EUR37.3 billion, and EBIT from ongoing business by 31% to EUR3.7 billion. All divisions contributed to this success, with higher EBIT compared to the third quarter of last year.
Mercedes Benz cars reported a profit margin from ongoing business of 10.4%, Daimler trucks, 8.3%, Mercedes Benz vans, 7.1%, and Daimler buses, 8.8%. Industrial free cash flow in the first three quarters came in at EUR4.8 billion, mainly driven by improved earnings. Industrial net liquidity stood at a comfortable level of EUR19.5 billion at the end of September.
These strong financials show that our investment in new products are paying off, and our efforts to improve efficiency continue bearing fruit in all divisions. At the same time, we are moving forward on our strategic course and are preparing Daimler for the future. Let me cite our three prominent examples.
We broke ground for new joint venture plan with Renault-Nissan in Mexico, where our next generation Compact class will be produced. We had the world premier of a partially autonomous driving Mercedes Benz Actros on public roads. And we reached an agreement with Nokia on the joint acquisition of the Here digital mapping business, together with Audi and BMW. To sum up the third quarter, we continue to grow profitable, and are continually developing our business model.
In light of the recent news, I would like to say a few words about our diesel technology. Daimler does not use and has never used defeat devices, which illegally limit the effectiveness of the emission control system. This applies to all of our diesel and gasoline engines worldwide.
We place great importance on conducting our business with integrity, and comply with ethical laws and regulations. We consider the diesel engine to be and remain an important fuel-efficient technology that plays a crucial part in achieving the climate goals. At the same time, current discussions also confirm our strategy to invest in and develop a broad portfolio of future power train technologies.
Now, let's take a closer look at how our divisions performed in the third quarter. Mercedes Benz cars sales were up 18% in the first quarter. Sales increased significantly in all regions. China continued to be a major contributor, with sales up 39%, mainly driven by the new and locally-produced C-Class and GLA. EBIT from ongoing business increased to EUR2.2 billion, with a profit margin to 10.4%. Apart from higher sales, EBIT benefited from efficiency enhancements and net pricing, while the regional structures has a negative impact.
Let's turn to Daimler trucks. Despite weak truck markets in Latin America and Indonesia, Daimler trucks was able to slightly increase sales by 2%. At the same time, with an ongoing EBIT of EUR805 million and a corresponding profit million of 8.3%, the division achieved significantly higher EBIT from ongoing business, compared to same period last year. EBIT benefited from higher unit sales in the NAFTA region and in Europe, efficiency enhancements, and foreign exchange rates. At the same time, we continued investing in new technologies, future products, and additional capacity.
Mercedes Benz vans also increased sales by 5% in the first quarter. EBIT from ongoing business rose by 11% to EUR196 million, driven both by higher unit sales and better net pricing. Despite lower unit sales, Daimler buses increased EBIT from ongoing business to EUR90 million and grew its profit margin to 8.8% in the third quarter, thanks to strong positive foreign-exchange rate effects which offset the week business in Latin America.
Daimler Financial Services revenue grew in line with our automotive divisions. Contract volume was up by 12% to EUR111 billion compared to the year-end, 14%. EBIT increased by 6% to EUR378 million, benefiting from foreign exchange rate effects while we spent more in growing the business.
Let's briefly discuss our expectations for the remainder of this year. Driven by the strong product portfolio, Mercedes Benz car sales in the fourth quarter will reflect the same pattern as in the third quarter. We expect ongoing EBIT in the fourth quarter to be significantly above the level of the previous year. The positive development comes as a result of a strong product portfolio and continued disciplined efficiency management.
At Daimler trucks, we expect EBIT from ongoing business in the fourth quarter to be significantly higher, further supported primarily by strong sales in the NAFTA region, as well as continued efficiency measures. At the same time we expect further headwinds from weak markets in Turkey, the Middle East, Indonesia, and Brazil. Mercedes Benz vans expects fourth quarter ongoing EBIT to be significantly higher than last year, due to higher expected unit sales.
At Daimler buses, declining sales in Latin America, due to the economic situation in Brazil will negatively impact EBIT. At Daimler Financial Services, we expect EBIT from ongoing business in the fourth quarter to be significantly above the previous year, mainly driven by higher portfolio volume. As you know, for all these divisions we anticipate a periodic year-end cost similar to those of previous years.
Let's turn now to our expectations for the full year 2015. We updated all market assumptions for the passenger car markets, and now expect the global market around the prior-year level. In light of the normalization of the Chinese markets, we now expect slight growth in 2015. For Europe, we have raised our guidance to significant growth, and for truck markets, our guidance is lower, for Brazil to be down by as much as 50%, and Indonesia to be down by as much as 35%.
Our EBIT guidance for the group remains unchanged. We expect to significantly increase our group EBIT from ongoing business in 2015. For Mercedes Benz cars, Daimler trucks, Mercedes Benz vans, and Daimler Financial Services, we aim to achieve ongoing EBIT, significantly above the prior-year level. Daimler buses expects EBIT slightly below the prior-year level, due to the weak business in Latin America.
Based on the current foreign exchange environment, we have updated our guidance. We now expect a positive EBIT effect for our industrial business to total around EUR800 million. The number reflects headwinds resulting from several emergent market currencies, mainly the ruble, as well as variation effects. The key divisions benefiting from this affect are Mercedes Benz cars with around 40% and Daimler trucks with around 60%.
In respect of this year's special reporting items, we are expecting expenses for the restructuring of the sales organization in Germany of up to EUR400 million in total in 2015 and 2016. The anticipated favorable earnings development in our automotive business in 2015 should also be reflected in our industrial free cash flow. Despite our investments in CapEx and R&D we assume industrial free cash flow would be slightly above last year's level. Both our earnings development and free cash flow provide a good basis for an attractive dividend for the year 2015, and we continue to target a payout ratio of 40% of net profits attributable to Daimler shareholders.
We rely on our financial strength and strong balance sheet to safeguard our ability to invest in products, technology, innovation, and production activities. In 2016, we will continue to renew our product portfolio and will benefit from our strong new SUV fleet. With the new E-Class Mercedes Benz, we'll take another significant step towards autonomous and connective driving next year.
Additionally, the new C-Class will come with a highly efficient new engine technology. We also keep pressing forward with our alternative drive train strategy. Of the ten plug-in hybrid models we will bring to the market by 2017, five will be launched by the end of this year.
Additionally, we are working on intelligence, the [IKA] concept with a range of 400 kilometers and more, as basis for an electric vehicle architecture. Overall, we are working to safeguard and improve our current performance by continued product portfolio renewal and expansion, keeping investment in innovation, product, markets, brands, and growth at a high level, leveraging the potential in mobility services, new business, and digitalization. And by continued implementation of efficiency enhancements and structural change to sustain and improve our flexibility and operating performance, and thus make us -- our business overall more robust. I am convinced that our strategy is paying off, and that Daimler continues to be a promising investment case.
Thank you and now I look forward to your questions.
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Questions and Answers
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Operator [1]
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(Operator Instructions)
Tim, Deutsche Bank.
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Tim Rokossa, Deutsche Bank - Analyst [2]
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Thanks for taking my questions. I will put it into one, but it's a bit long, and I hope it's okay. Can help us understand where we are in the US truck cycle? Earlier this year, you said some of the weakening in order intake expressed that you didn't have open your books for 2016 yet. That should have probably changed.
Orders are still down 16% in Q3. Can you shed maybe some light on this, and also tell us about the your 2016 order intake, how it currently looks like? And taking that to a global level as well, with Western Europe really being the only market that is currently growing in orders, how should we think about trucks and the 8% margin in the coming quarters? Thank you.
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Bodo Uebber, Daimler AG - CFO [3]
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Thank you for your questions. First of all, of course, we have seen the book to bill ratio in NAFTA for the third quarter, which is on the one hand, based on a very high sales number, which is due to the fact that we have increased capacity, that we are all working on the order backlog to bring it to the customers, the trucks to the customers. That is one thing. The increase was very high.
On the other hand we see order intakes, less dynamic order intake in the third quarter. That's the second part. The third part based on this, I do think we are pretty optimistic for the year 2016. We believe that with this order intake development, that the market could stay at the high-level of 2015, which is a very strong level, or it will be slightly down compared to 2015. Finally, we will make up our minds in the February discussion of the fiscal year end.
So that means we are optimistic for the US, because then the market would be between the year 2014 and 2016, which is a very high level so to say, and would be a very good starting point for the year 2016. On the other hand, of course, we are also, as you know, building up capacities for our captive automatic transmissions, therefore that we can also increase our take rates for the US.
Your second question with regard to Europe, order intake in Europe was quite promising, to stay in line with our market guidance of 10% to 15% for this year. That gives us a hint that we are also optimistic for the year 2016 within Europe, but also here, it has to be said that we will finally update you in February for the market assumptions of 2016. What we saw is a weaker market in third quarter in order intakes with Turkey, because Turkey slowed it down so much. And Middle East, I do think with some good reasons, I don't think that I have to point out the reasons for the Middle East, but slows down a bit.
All in all, for the year 2016, we are somewhat optimistic, as I already said, for the NAFTA region. We are also somewhat optimistic for Europe, but of course there are other regions like Brazil and Indonesia, of course, which are in different stage, and finally update will be also given in February. Margin development, of course, we are not giving all four quarters. Finally, we will give you also guidance in February towards the EBIT development of trucks in 2016.
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Tim Rokossa, Deutsche Bank - Analyst [4]
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Great, thank you.
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Operator [5]
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Jose Asumendi, JPMorgan.
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Jose Asumendi, JPMorgan - Analyst [6]
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Just one question please, on currency. If you could just give us an update a little bit around the currency hedging strategy for next year? And also, it looks to me there is like a large implied tailwind on currency for the auto division for the fourth quarter. If you comment, please on that velocity on that earnings tailwind for Q4? Thank you.
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Bodo Uebber, Daimler AG - CFO [7]
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Thank you, Jose, for your questions. First, of course, we don't give guidance now today for the year 2016. I do think the volatility is too high as to put a number for currency guidance out now. We would do the same as I said before, we will update you in February on this topic.
As you know, our hedging policy is a constant one, so to say, so the current hedge book for the dollar is two-thirds, you have two-thirds hedged in 2016 and the year after by roughly 40%. Of course, you can take it in your own numbers, so to say. What currently is happening, therefore we adjusted also our currency guidance that we had impacts on the very volatile emerging markets, development in currency, mainly the ruble, of course, which led to the decision that we have our adjusted currency guidance from EUR1 billion to EUR800 million. The second reason is that we had valuation effect on the receivables and payables which led to the second reason to reduce our guidance to EUR800 million.
Anything else, of course, you know the numbers year to date. We have updated you where the currency is, and the remaining piece, so to say, you can expect for trucks and cars for the fourth quarter. 40% of EUR800 million is related to cars, 60% to trucks which is of course, a change to the formal guidance, but I explained the reasons to you. One thing we have to say that, for the ruble for example, in some other weaker currencies, if we are able, quite successful to offset some of these effects which are negative in our pricing strategy, which is well done from cars also in the third quarter.
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Jose Asumendi, JPMorgan - Analyst [8]
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Thank you very much.
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Operator [9]
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Arndt Ellinghorst, Evercore ISI.
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Arndt Ellinghorst, Evercore ISI - Analyst [10]
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Just a quick one on your excess liquidity. It is standing at around EUR19.5 billion, industrial net cash right now probably more than EUR20 billion year end. If you're sticking to your payout ratio target of 40% you are probably going to pay out EUR3 billion to EUR3.5 billion in ordinary dividends, and you are going to generate quite a bit of cash next year, I hope. What is your strategy, early? Other companies are talking about share buybacks, special dividends. We haven't heard anything from Daimler, and you are currently running the best momentum I have seen this Company operating in, but you're a little bit quiet on how your shareholders can participate in terms of cash return. It would be good to get an update here. Thank you.
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Bodo Uebber, Daimler AG - CFO [11]
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Thank you, Arndt for your question. I do think I was not quiet, even in my introduction, I pointed out that the earnings development is a good basis for a discussion with our Supervisory Board about the dividends. I gave a small hint that I am a bit positive about this development. I confirmed the 30% to 40% payout ratio, and when you look to our year-to-date numbers and EPS, I do think you come up with a nice number, so that goes into the right direction.
Of course, the EUR19 billion is quite a high number, but I do think it's smart, from today's point of view, to stick to this number, it is a comfortable number, no doubt. Of course, we have seen so much volatility in the market, and I don't think I have to name the different events we have seen over the last three months, which certainly gives us a hint of volatility also, somewhat in the future.
Therefore, I do think it is smart to keep liquidity on board for this unknown, so to say, higher flexibility, to keep our rating strong and stronger, to -- even also to make sure that we have our financial services for our industry and for sales. That is decisive from my point of view, to stick to their strengths, and you know the 12 month flexibility. And the third element is of course, our Company will be strong to invest into product technology and investments in the future, and that will also mean for the next couple of years, we do more in investments and R&D to keep our Company on the product site running and on services. That is a reason don't hear anything from us, so to say, from special dividends or share buybacks, and anyway you know our arguments also for this too.
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Arndt Ellinghorst, Evercore ISI - Analyst [12]
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Thanks, Bodo.
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Operator [13]
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Stephen Reitman, Societe Generale.
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Stephen Reitman, Societe Generale - Analyst [14]
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As we get to the beginning of next year, we are moving to the replacement of the E-Class, obviously built on the MRA platform. Do you think the lessons you have learned with the C-Class will be rewarding in terms of launch costs and the cadence of how you increase output on the E-Class next year?
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Bodo Uebber, Daimler AG - CFO [15]
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Stephen, I do think we will see, not, so to say, different launch costs as we've seen it also now in 2014 and 2015, with regard to the C-Class launch. Of course, you will see -- of course, we have not as many plans in E-Class than in C-Class no doubt, and therefore it might be somewhat easier, but anyway, I don't expect next year launch costs being a major headwind or tailwind.
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Stephen Reitman, Societe Generale - Analyst [16]
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Thank you.
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Operator [17]
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Fraser Hill.
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Fraser Hill, BofA Merrill Lynch - Analyst [18]
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Fraser Hill from Bank of America Merrill Lynch. My question was just going to be around your China business, which obviously is performing very well this year unit-wise, but I did notice that you downgraded your view of the market growth from I think, significant to slight growth. How does that adjusted view feed into the thoughts around your own growth in China? I mean, you clearly are still going to outperform the market sharply, but are you seeing any impact of that slower view on the market in your own business at all around the fringes, and could you broaden your comments into the development of your pricing and discounts, because obviously, your major capacitors are discounting fairly heavily now in the region? Thank you.
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Bodo Uebber, Daimler AG - CFO [19]
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Of course. I'm very pleased with our China sales development, no doubt. Of course, we are very positive on our localization strategy. We know we have localized our GLA as of this year. On the one hand, we have introduced the rebase of the C-Class in July.
Based on this, of course, we created a strong momentum for our products. The C-Class is pretty strong in the market, and differentiates itself from competitors, not only as a product, but also in pricing, which is something we wanted to achieve, as you go back to history, where we were with the previous C-Class, therefore we can say, based on this product, based on our dealership expansion, we can separate from our competitors. On the other hand, of course, you see lifecycle effects on the S-Class, for example. You have seen it in the third quarter, and of course, the same pattern for the fourth quarter, in terms of structure of the business.
But yes, it is right. We decouple somewhat from the market or from competitors' developments, which is of course, the situation which will hold on also in the fourth quarter. I think it is quite clear that we can't go for 30% to 40% every year, no doubt. But again, it depends on the lifecycle, product effects and so on and so forth. And, of course, there are localization strategies bearing fruit that have higher growth potential, of course, for our localized products.
It's not only product, as I have said before. I do think our management in China is doing a very good job. They have brought together this very famous two organization into one. We have a very good relationship to our dealers, which I do think in today's time, is decisive. I do think also our concentration on price premium and acting on this with our inventory management and production is pretty good, and therefore, I am pretty optimistic that we can further grow our business on the one hand, but also in terms of profitability.
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Operator [20]
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Juergen Pieper, Metzler Capital Markets.
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Juergen Pieper, Metzler Capital Markets - Analyst [21]
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Yes, gentlemen, I have one question on productivity. On your recent capital markets day, your colleague, Michael Schaeffer, gave a quite impressing presentation, highlighting that you produce Mercedes cars, basically it was the same number of people, but your output is 10% to 15% higher. Does it mean looking forward to 2016 that we will see consequences of these measures, and also maybe with some additional measures in productivity gains nets are will be quite high at least in the order of 5% to 10% or so?
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Bodo Uebber, Daimler AG - CFO [22]
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Thank you for your question, Mr. Pieper. I do think the general approach, I do think we have outlined in many capital markets days, but also in the last one, that we would like to get our efficiencies over a longer term up and running. Also to go further for restructuring measures. That holds true for the whole Company, but also for our plants.
In all of our plans, the target pictures were defined and agreed with the different stakeholders, and this is the basis, of course, for each and every plant to go forward, also with efficiencies but also on the other hand by investments we are taking into our driven events, but also that holds true for Tuscaloosa and other plants. So, the efficiency, the general target is of course, to do as much, as many same increase with the same sort of, say, workforce. Whether that holds true now forever, it's hard to say, because it depends on our growth perspective, but anyway I do expect that we have the same efficiency gains, so to say, in this year, also for the years to come. So same direction.
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Juergen Pieper, Metzler Capital Markets - Analyst [23]
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Okay. Thank you.
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Operator [24]
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Daniel Schwarz, MainFirst.
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Daniel Schwarz, MainFirst Bank AG - Analyst [25]
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I have one question following the Volkswagen issues. Do you see any impact on residual values on your diesel cars, and do you see any risk that maybe ABS transactions could on that term become less attractive are more expensive for you?
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Bodo Uebber, Daimler AG - CFO [26]
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No. Of course, we have some competitors' product in our portfolio, which we are watching. But anyway, other than this, we don't see any impact.
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Daniel Schwarz, MainFirst Bank AG - Analyst [27]
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Okay. Thank you.
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Operator [28]
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Horst Schneider, HSBC.
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Horst Schneider, HSBC Global Research - Analyst [29]
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I have got a more short-term oriented question. What I look at the Q4 outlook and we have got this foreign exchange gain in Mercedes cars, and we have got the ramp-up of the GLC, you talk about a significant increase in earnings year-on-year in Q4, but given that the top line should continue to accelerate, and should be higher than in Q3, is it fair to assume that the Q4 adjusted EBIT or the EBIT from ongoing business will be a Q4 higher than in Q3, or do we have to expect some, the usual year-end effect which could drag down earnings to some extent?
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Bodo Uebber, Daimler AG - CFO [30]
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I could make it very simple, what you said is true. At least keep in mind we have the same, made the same message, we have the same pattern on mix in the fourth quarter on the one hand, and please to be in mind that we are growing in China with locally produced cars, where we have higher sales, and you know that the revenue behind it in the consolidation is not 100%, so the sales, because we have a joint venture, which we are consolidating. Please keep this in mind, and you have given more of the answer by all.
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Horst Schneider, HSBC Global Research - Analyst [31]
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Great. Thank you very much.
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Operator [32]
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Marc Tonn, Warburg Research.
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Marc-Rene Tonn, Warburg Research GMBH - Analyst [33]
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Just as a follow-up on pricing. You mentioned that you have experienced pretty strong pricing in the first three quarters. Is this more driven by the new products you have launched? It is driven by the regional mix due to the price increases you had in Russia, for example? And how does pricing develop for those models, which are in the run-out phase, please.
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Bodo Uebber, Daimler AG - CFO [34]
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The positive pricing is based mainly on our new C-Class, which is developing strong. Secondly, we do always inflationary pricing over all products and countries. And thirdly, of course, I mentioned before in one answer that we try, in the countries where we have weak currencies, to act on the pricing side, and what we found here as a major example is Russia.
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Marc-Rene Tonn, Warburg Research GMBH - Analyst [35]
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Thank you.
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Operator [36]
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Sascha Gommel, Commerzbank.
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Sascha Gommel, Commerzbank - Analyst [37]
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I have one follow-up to Stephen's questions on the launch of the E-Class. I understand that the net effect will be zero in terms of year-on-year change, but can you maybe share your view or give us some more color on how we should expect this phase, and is it expected to already start, or has it already started in the third quarter, and increase in the fourth and the first quarter 2016, or how should we think about the, let's say, ramp up curve of the costs?
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Bodo Uebber, Daimler AG - CFO [38]
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Thank you for your question. Of course, it is true. In the first quarter, of course, we have a -- so year over year, we don't see it launch costs are the same but of course, in the run-out of the lifecycle, of course we have more impact in the first quarter. We introduced the E-Class, and that was also to say, over time, and over the quarters in September, we are launching the Estate and we will come to the launch in China in the fourth quarter with the E-Class. Therefore, the bigger impact would be, if you look to quarters, in the first quarter, but launch cost wise over the total year, we don't see huge differences.
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Sascha Gommel, Commerzbank - Analyst [39]
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Helpful, thank you.
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Operator [40]
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Alex Haissl, Credit Suisse.
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Alex Haissl, Credit Suisse - Analyst [41]
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My question would be on the Mercedes Benz margin on the slide 27, you also show like 8.6% last year and 10.4% this year. If you just take a look on the cost side, you have some deliverance from higher capitalization of development costs. You have taken down SG&A costs by 150, 160 basis points year-over-year. And also, D&A costs are down 20 basis points. If you just add up the savings on the cost side year-over-year I would end up more than 11% margin. Given the comments that you made on pricing positive 18% volumes year over year, can you help me to understand what are the main negative drivers for margins in the third quarter? I do understand that your Chinese revenues, consolidated, are down 7% year-over-year, but it would be great to get more color why they are not more offsetting the negative factor, instead of the regional structure that you mentioned.
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Bodo Uebber, Daimler AG - CFO [42]
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Of course, we are pretty happy with our cost developments so far. And, of course, we have worked a lot to bring the Company into this position. If you go back years ago, where our other cost changes were, and where they are now, we are pretty happy with all the efforts of leadership. What are negative, so to say, which are going against the positive developments as you have said like SG&A which is going down for example. As you know, we have higher depreciation in our Company, we have launched, so to say, more plans on the one hand. We have invested more, and that you can clearly see on the depreciation side of our business.
Of course, we have inflationary costs. You can also imagine worldwide that our payroll does increased by year, but also, it fits into other cost changes. That makes, that is what we are able to offset, under the EBIT walk of cost changes. Other than this, across the mix, it has somewhat changed in the third quarter, and it will go down.
Also in the fourth quarter, you're seeing S-Class, so to say, you are seeing compact cars on the other hand. And I mentioned before, with China, part by part, business is going up over proportionately to the say, to the import business. These are the main effects why we are currently on 10.4%. And, why, of course, there are reasons that the business should sustain at this level of 10%.
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Alex Haissl, Credit Suisse - Analyst [43]
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Sorry, just a quick follow-up question. When do think you get an inflection point when basically the savings can no longer offset really the cost increases, or the other way around? How much cost can you really take out in the next one to two years to compensate for this increased cost you have just mentioned?
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Bodo Uebber, Daimler AG - CFO [44]
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It is a good question you have. I think we should wait to the next division day where we might give a next outlook for longer-term development costs. As we always pointed out on the material costs side, of course, there our target is a net zero approach for future products, but to discuss this further in detail, I think the division day would be the right way to answer your question.
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Alex Haissl, Credit Suisse - Analyst [45]
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Thank you very much.
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Operator [46]
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Frank Biller, LBBW.
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Frank Biller, Landesbank Baden-Wurttemberg - Analyst [47]
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Another one on the Chinese business. Maybe you can share with us your view on the Chinese market in the mid-to longer-term run rate, especially on the volume growth expectations you have, especially premium cars, against mass-market or budget cars. What is your expectation here?
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Bodo Uebber, Daimler AG - CFO [48]
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Of course we are generally positive in the long run for the Chinese markets. Of course, there are high volatilities, as you know by your own. We have seen a lot of that in the second quarter and third quarter. But in general, the Chinese market, as you know, the density of cars is 100 divided by 1,000 inhabitants. We see a stronger growing middle class in China.
I read an article a couple weeks ago that the middle class now in China, is the biggest one of the world. I do think it will stay there, due to the growth effects we see. I'm also positive the see that the service industry in China is doing well, on the one hand, it gives possibilities to further develop this middle class into the right direction, and it should lead from our perspective, the premium car business in China should be over proportionately growing to what the volume market, or the market in total.
Which kind of percentage it is, of course I do think it might be a little bit lower than compared to last year's perspective, but I do think it is 5% to 6% on average. I do think that is the current expectation of many analysts for long-term growth in China, and that would be something, of course, where the premier market can over achieve in the long run.
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Frank Biller, Landesbank Baden-Wurttemberg - Analyst [49]
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Thank you.
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Bjorn Scheib, Daimler AG - Head of IR [50]
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Ladies and gentlemen, thank you very much for your questions, and being with us today. As always, investor relations remains at your disposal to answer any of your additional questions you may have. We hope to talk, to see you soon, and thanks and goodbye.
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Operator [51]
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Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may now disconnect.
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