Q1 2016 Daimler AG Earnings Call
Apr 22, 2016 AM EDT
DAI.DE - Daimler AG
Q1 2016 Daimler AG Earnings Call
Apr 22, 2016 / 12:00PM GMT
==============================
Corporate Participants
==============================
* Bjorn Scheib
Daimler AG - Head of IR
* Bodo Uebber
Daimler AG - CFO
==============================
Conference Call Participants
==============================
* Jose Asumendi
JPMorgan - Analyst
* Patrick Hummel
UBS - Analyst
* Arndt Ellinghorst
Evercore ISI - Analyst
* Stephen Reitman
Societe Generale - Analyst
* Horst Schneider
HSBC Global Research - Analyst
* Kristina Church
Barclays Capital - Analyst
* Tim Rokassa
Deutsche Bank - Analyst
* Marc-Rene Tonn
Warburg Research GMBH - Analyst
* Sascha Gommel
Commerzbank - Analyst
* Stuart Pearson
Exane BNP Paribas - Analyst
* Michael Tyndall
Citigroup - Analyst
* Frank Biller
Landesbank Baden-Wurttemberg - Analyst
* Michael Punzet
DZ Bank - Analyst
* Juergen Pieper
Metzler Equities - Analyst
==============================
Presentation
------------------------------
Operator [1]
------------------------------
Welcome to the global conference call of Daimler. At our customer's request, this conference call will be recorded. The replay of this conference call will also be available as an on-demand audio Webcast in the Investor Relations section of the Daimler website. A short introduction will be directly followed by a Q&A session.
(Operator Instructions)
I'd like to remind you that this teleconference is governed by the Safe Harbor wording that you find in our published results documents. 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, and if the assumptions that are 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're made.
May I now hand you over to Bjorn Scheib, head of Daimler Investor Relations.
------------------------------
Bjorn Scheib, Daimler AG - Head of IR [2]
------------------------------
Good afternoon, this is Bjorn Scheib speaking. On behalf of Daimler, I would like the to welcome you both on the telephone and on the internet to this Q1 results conference call. I'm very happy to have today our CFO, Bodo Uebber with us here, who will be looking forward to discuss our Q1 numbers, and probably another topic that you may be interested in during this conversation.
In order to give you maximum time for your questions, Bodo will begin with a short introduction, which then will be followed by the Q&A session. In order to provide everybody on this call with the opportunity to raise questions, I would kindly ask you to limit yourself to you one or two questions for each time that you're in the row.
With this, I would love to hand over to Bodo. Thank you so much.
------------------------------
Bodo Uebber, Daimler AG - CFO [3]
------------------------------
Thank you, Bjorn, and good afternoon. Before discussing our first-quarter numbers, I want to give you some additional information relating to our communication last night.
Daimler AG conducted an internal investigation regarding its certification process related to exhaust emissions in the United States, upon the request of the US Department of Justice. Daimler is cooperating fully with the authorities. Daimler will consequently investigate possible indications of irregularities, and of course, take all necessary actions.
The Company's experience with the US authorities has clearly shown that the conservative communication supports a constructive dialogue with the authorities. In addition, the class actions are considered to be without merit, and Daimler will defend itself against them with all available legal means.
Let's continue with the first-quarter results. We published our first-quarter figures this morning, and as you can see, we continue with the consequent execution of our strategy. Daimler's unit sales grew by 7%, driven by Mercedes-Benz cars and Mercedes-Benz vans.
In the first quarter, we continued our product offensive with the world premier of the new Mercedes-Benz E-Class, the presentation of the new Mercedes-Benz VLC coupe and the C-Class convertible, and the debut of our new four-cylinder diesel engine, OM 654. We confirmed our forerunner role in connectivity, with the world premiere of three connected and autonomous driving trucks, driving as a platoon on the public highway. In addition, Daimler announced the next milestones in electric mobility, with the investment of EUR500 million in a second battery plant.
Let's move on to our financials. Group revenues increased by 2%, when adjusted for foreign exchange effects, they are up by 4%. EBIT from ongoing business decreased as expected to EUR2.7 billion mainly due to the changeover of the new E-Class, higher R&D investments, and unfavorable hedge rates.
Net profit reached EUR1.4 billion, which equates to an EPS of EUR1.26. Industrial free cash flow came in at EUR300 million in the first quarter. Apart from lower earnings in our industrial business, negative effects resulted from higher tax payments in the first quarter, as the prior-year period was influenced by tax refunds, as well as higher working capital and investments. As a result, the net liquidity position of our industrial business reached EUR18.5 billion at the end of the first quarter.
To sum up, in terms of profitability, the first quarter will mark the low point in the course of 2016. We expect a significantly stronger second half of the year, driven by the increasing availability of the new E-Class, seasonally higher volumes at Daimler Trucks, and improving hedge rates. Unchanged, we are committed to our full-year guidance, based on our current market expectations and exchange rate environment.
Let's take a closer look at major developments in our divisions. Mercedes-Benz Cars increased sales by 8% in the first quarter, and was again the strongest growing premium brand. The main drivers of growth were China, along with the success of our compact cars and renewed SUVs.
EBIT from ongoing business significantly decreased to EUR1.4 billion and a margin of 7.1%, mainly due to effects related to the renewal of the E-Class, life cycle related lower S-Class sales, and higher investments in new products and technologies. Daimler truck sales decreased by 6% in the first quarter, as a result of the very weak market environment in Brazil, Turkey, and Indonesia. The European truck market got off to a strong start for the year, and Daimler truck sales increased by 13%.
In the NAFTA regions, sales remained at the level of last year, as Daimler Trucks gained significant market share, especially in the Class 8 segment. The Brazilian and Indonesian markets turned out to be more challenging than initially expected. Sales in Latin America were down by 18%, and 26% in Indonesia.
Order intake in the first quarter indicates further growth potential for the European market, but a deceleration in the NAFTA. Accordingly, Daimler Trucks sales adjusted capacity in the first quarter and reduced the number of blue collar workers in the US plants by around 2,200.
EBIT from ongoing business slightly decreased to EUR517 million, and the margin of 6.3%. Burdens arose from lower sales in Latin America, Indonesia, and Turkey.
Mercedes-Benz vans had a strong start into this year. Sales increased by 20%, and revenue by 17%. Unit sales increased by double digits in all regions, with the sole exception of Latin America.
EBIT from ongoing business climbed by a full 52% to EUR336 million, with a corresponding profit margin of 11.9%. The main driver here was higher unit sales, due to strong demand for our new mid-sized vans. EBIT was negatively affected by adverse foreign exchange effects, and workforce adjustments in Germany.
Sales at Daimler buses decreased by 15% in the first quarter, due to very weak business in Latin America, that could not be offset by stronger demand in Western Europe. EBIT from ongoing business came in at EUR39 million, which equals a profit margin of 4.7%. Strong demand for our complete buses, a positive product mix in Europe, and positive exchange rate effects more than offset the negative impact in Brazil.
At Daimler Financial Services, new business increased by 4%. The portfolio reached EUR116 billion at the end of the first quarter, which is 1% lower than at the end of 2015. Adjusted for exchange rate effects, contract volume increased by 1%.
In the first quarter, the division achieved an EBIT of EUR432 million, which corresponds to a return on equity of 17.4%. The higher EBIT was mainly the result of increased contract volume in all regions. Net credit losses remain at a very low level of just 25 basis points.
Now let's look at our expectations for the full year 2016. Global demand for cars is likely to grow from its level by about 3% this year. We continue to expect slight growth in Western Europe, and significant growth in China. The passenger car market in the US will probably remain at about the same level as last year.
Moving to truck markets, we raised our expectation for the European market to around 5%, as we expect the recovery to continue. In the NAFTA region, we foresee demand for Class 6 to 8 trucks to drop around 10%, and the market in Japan to remain at last year's level. At the same time, we have updated our guidance for the Brazilian truck market to decline around 20%, and the Indonesian market to decrease around 15%. For van markets, we continue to foresee positive development, and expect markets in Europe and the United States to grow slightly in 2016.
Our market guidance for buses also remains unchanged. Western Europe is expected to grow slightly, but the market in Brazil is likely to significantly contract again this year.
Looking at our divisions, Mercedes-Benz should continue its success, building on a strong start into the year. Sales growth will largely be driven by new products, with a new E-Class as a major contributor from April on. Daimler Trucks is now expecting unit sales slightly below last year's level, as a result of the very weak market development in Brazil, Turkey, and Indonesia.
Mercedes-Benz vans plans to achieve significant growth in unit sales through significant sales increases in Western Europe, and continued momentum from its Mercedes-Benz vans global strategy. Daimler buses foresees unit sales around the level of last year, sales in Western Europe should increase significantly, but demand in Brazil would probably be significantly lower than in 2015.
Our EBIT guidance for Daimler Group remains unchanged. We continue to expect to slightly increase revenue and EBIT from ongoing business in 2016. We expect earnings in the second half of 2016 to be significantly higher than in the last -- in the first half of the year.
Mercedes-Benz Cars will increasingly benefit over the course of the year from continuously higher sales of the new E-Class, full availability of our new SUVs in the US, hedge rates that are getting better step by step, and ongoing favorable pricing. Daimler Trucks expects seasonally higher volumes in the second half of the year, a strong European and a continued good NAFTA business, together with further efficiency improvements, should support the EBIT development.
At the divisional level, we anticipate to slightly grow ongoing EBIT in 2016 at Mercedes-Benz Cars, Daimler buses, and Daimler Financial Services. Daimler Trucks continues to expect ongoing EBIT around the level of last year. Mercedes-Benz vans raised its outlook, and now anticipates a significantly higher ongoing EBIT.
We have updated our FX guidance for the full year, and at current spot rates, expect for Daimler Group a slight tailwind. Positive effects result from currencies such as the US dollar and Chinese renminbi, while negative effects arise from currencies like the Russian ruble, the Brazilian real and Turkish lira. The anticipated earnings development in our automotive business should also be positively reflected in our industrial free cash flow in 2016.
At the same time, we continue to invest considerably more in new products, autonomous driving, in particular, digitization. Therefore, our ongoing industrial free cash flow is likely to be significantly lower than in 2015, but significantly above the dividend payment of EUR3.5 billion.
To sum up, we are working to safeguard and further improve our current performance step by step, with the continuation of our product offensive in all divisions, structural optimization, and efficiency improvements within the entire Daimler Group, further increasing operational flexibility and continued comprehensive financial discipline. Our strategy is further paying off, and Daimler continues to make a promising investment case.
We want our shareholders to participate in the success of our Company, by driving shareholder returns, and continuing to target a pay-out ratio of 40% of net profit attributable to shareholders. The extensive investment in the future of this company, along with the drive for efficiencies and structural changes of our business model, should deliver long-term, sustainable, and profitable growth.
Now I look forward to your questions. Thank you.
------------------------------
Bjorn Scheib, Daimler AG - Head of IR [4]
------------------------------
Thank you very much. Ladies and gentlemen, you may ask your questions from now on. The operator will identify the questioner by name, but please kindly also introduce yourself, not only with your name but also with the name of the organization that you're representing.
(Caller Instructions)
Thank you very much and now we get started.
==============================
Questions and Answers
------------------------------
Operator [1]
------------------------------
Thank you. Our first question is from the line of Jose Asumendi of JPMorgan. Please do go ahead, sir. Your line is open.
------------------------------
Jose Asumendi, JPMorgan - Analyst [2]
------------------------------
Thank you very much. A couple of items, please. The first one on free cash. If you could please just give us maybe a bit of clarity behind the two categories, those other operating assets and liabilities, as well as the swing we had in income taxes. Understand there was possibly a year-on-year impact there.
The second element, in terms of the truck division, I think you show very strong, solid, I think, truck efficiency gains in the first quarter. Should we continue to see those truck efficiency gains flowing through over the next three quarters? And also maybe a little bit the nature behind that.
And if you could give also a bit of color on the share -- market share gain you have on Class 8 trucks in North America? Any color behind that as well. Thank you.
------------------------------
Bodo Uebber, Daimler AG - CFO [3]
------------------------------
Jose, thank you for your questions. First, for your question with regard to free cash flow in the first quarter, as already commented, it was impacted by the operational performance, by far most the biggest impact.
Secondly, last year we had a tax refund in our books of a couple of hundred millions, of course, which we can't have again this time. Our cash payments in this quarter are on pretty normal levels, so the effect was in Q1 2015.
And of course, you see in cash flow, the increase of working capital of course with the spring selling season on the one hand, but also for the, for example, European situation in trucks, where we need to produce more trucks, so to say, in light of the good order intakes. On top of that, we had, of course as we had planned, the higher investments in this quarter, and that is more or less all in all the effect we have in the first quarter.
Q1 came in according to our internal plan and expectations. So that is also so far good news that our cash flow should over time now over the quarters improve. Also with regard to the second half, and we will get in as we have also committed over and above the dividend payment, and also -- but somewhat underneath the ongoing cash flow in 2015.
The second question, with regard to the material cost efficiencies, you are right. So we had in Q1 a positive impact on the efficiencies. There are two elements, which we can reflect. One is on the material cost side, but also on ongoing quality improvements.
Both of these elements are kicking in, in first quarter. We expect this to hold on over the quarters to come. On top of that, the raw material situation is a pretty good one, and that also gives us some positive effects on the truck side, but also on the passenger car side, the raw material effects.
On the other hand, market share, as we already discussed in February, our full-year disclosure and before, the strategy in Daimler Trucks North America is also to increase market share. We have a very competitive product, including our powertrain components, where we have the potential to increase the take rates on the one hand for the heavy duty engine, but also for our transmission, where we have opened up the plant last year in November in NAFTA. So that gives us possibility to go for higher market share without jeopardizing, of course, our pricing.
But on the other hand, also going for higher sales contribution. The strategy is paying off. We have seen a huge effect now in Q1, and we keep the momentum. So we plan also to consider the higher end market share compared to last year in the quarters to come.
------------------------------
Jose Asumendi, JPMorgan - Analyst [4]
------------------------------
Thank you.
------------------------------
Operator [5]
------------------------------
Okay. Our next question is from the line of Patrick Hummel at UBS. Please do go ahead. Your line is open.
------------------------------
Patrick Hummel, UBS - Analyst [6]
------------------------------
Patrick Hummel from UBS. Thank you for taking my questions.
First one, regarding the margin in passenger cars. You've maintained your guidance, even though compared to the beginning of the year, it's probably fair to say that US market, in particular in sedans, has been somewhat weak. So what is it that is offsetting this weakness in the US market, that makes you still confident to deliver the earnings growth?
And in that regard, how should we think about the margin progression in the coming quarters? Will it be completely H2 skewed, or will we already see some positive momentum in the second quarter, with the availability of the E-Class in Europe?
And my second question relates to the other line. You had FX losses there in the first quarter, and I understand that this is not included in your guidance of a slight tailwind for FX for the full year. So I wonder what can be expected in this reconciliation line, as far as FX is concerned, for the remainder of this year? Thank you.
------------------------------
Bodo Uebber, Daimler AG - CFO [7]
------------------------------
Patrick, thank you for your questions. First of all, the first quarter came in as expected, and that holds true for the EBIT, for the absolute EBIT on the one hand, but also for the margin behind the first quarter. So we are running on our internal plan to achieve our targets, or commit to targets for the full year.
For the next quarters to come, of course what will drive the EBIT and the profitability, that is on the one hand, the E-Class availability. You know that we are starting in Europe to roll out the E-Class. You know that in September, we will come up with the Estate and you know too, also at the end of second quarter we will come to the United States, at the end of the year, we have the roll-out in China.
On the other hand, we have a strong SUV product line-up, so that will also support our sales in the next quarters to come. Also, the availability of the SUVs all over, for example also the face-lifted GLS will get into traction also in the United States. We will see some increase there also in the quarters to come. The main impact of course this year will be the GLC in volume growth compared to last year, but this is also something of course we have already discussed.
On top of this, we will, further along, we plan for further stable and positive net pricing. You have seen us also in the first quarter doing well in this regard. Some of these aspects are price increases, for example, normal price increases on the one hand, but also a situation in markets where we have weak currencies, like for example in Russia.
On top, from an other cost point of view, we will have potential in the next quarters to see reduced other cost changes in the quarters to come. Efficiencies will kick in the next quarters to come, also on the cost side. To say that will also drive us in the same direction.
With regard -- you know we don't give guidance for specific percentages in margin for the quarters to come, but yes, over the quarters, quarter by quarter, step by step, also our margin will improve, second, third and fourth quarter, especially the second half this year will be, with a higher EBIT than the first half of this year.
With regard to your foreign exchange rate question, in the first quarter, we were strongly impacted by emerging markets currency, including ruble, Brazilian real, but also the South African rand and so on and so forth, and we had less high impacts from the development of the US dollar and the renminbi.
For the total year we planned on the Daimler Group level for a slight tailwind for currencies, compared to 2015. This is mainly with regard to the higher negative impact from emerging markets currencies, the same I mentioned before, will impact the full-year guidance.
The emerging markets currency in total will be far above a EUR500 million impact for the total year. That has even deteriorated compared to the situation in January and February, even when you see these emerging market currencies in the first two months, were really at very negative levels. And that, therefore, we reviewed our fiscal year guidance for the currency.
------------------------------
Patrick Hummel, UBS - Analyst [8]
------------------------------
Thank you.
------------------------------
Operator [9]
------------------------------
Thank you. Our next question is from the line of Arndt Ellinghorst at Evercore ISI.
------------------------------
Arndt Ellinghorst, Evercore ISI - Analyst [10]
------------------------------
Arndt Ellinghorst from Evercore. Two questions, really. One is on the earnings. The BBAC contribution fell in the quarter year-over-year, just slightly to EUR114 million and I just wonder what's behind that, despite the increase in sales of more than 34% in Q1 in China.
And then also on earnings, provisions were down sequentially almost EUR900 million from the start of the year. That's really a change I've never seen in your numbers in a quarter, and I wonder whether you could talk a little bit about how much of that had an impact on earnings, and how much was just usage?
And then the other part is on trucks, and I wonder whether you could share your US truck inventories at Freightliner at the moment, and compared to last year. Thank you.
------------------------------
Bodo Uebber, Daimler AG - CFO [11]
------------------------------
Arndt, thank you for your questions. First off, the BBAC contribution, I do think is pretty much on the same level, so there's not big difference to of last year Q1. Of course, we had the ramp-up of the GLC, so to say, has an impact but the number is a very good number, EUR114 million I think is the right number, so we are staying on high levels, although we have the launch of the GLC, so I'm very much pleased with the situation at BBAC currently. Your question --
------------------------------
Arndt Ellinghorst, Evercore ISI - Analyst [12]
------------------------------
If I may interrupt there. Could you give us some color on you how you see the equity contribution to shape out for the full year versus last year?
------------------------------
Bodo Uebber, Daimler AG - CFO [13]
------------------------------
So it will be of course -- you know that we will increase our locally -- the E-Class launch will impact certainly the profitability or the EBIT level of BBAC, so we plan also for further increase in the BBAC at equity result. But this is also mainly with regard to the second half of this year.
------------------------------
Arndt Ellinghorst, Evercore ISI - Analyst [14]
------------------------------
Okay. Thanks.
------------------------------
Bodo Uebber, Daimler AG - CFO [15]
------------------------------
The second topic, provisions. I would say normal course of business, so to say. We have, in every second quarter, we do have usage of provision as we -- in the first quarter, sorry, because we spent for example bonus payments on the one hand, so we have normal payouts also, not extraordinary ones in the first quarter. This is mainly the direction we are taking. Others are fluctuations in -- of course in provisions for the product-related stuff, but nothing extraordinary I can tell you, nothing material.
The third question was with regard to the inventory situation, the two aspects for example. The internal stocks we do have are managed in the way we see our order flow coming in. There, we have done our jobs. We brought inventory in the right direction. There might be some necessary adjustments in the next upcoming weeks, but not big ones.
On the other hand, the dealer stocks are pretty low, which on the one hand is good news, so that means currently we are in discussions with the dealers about what to do. It could be the case, and we have positive discussions with some dealers, to increase inventories, which could lead to further momentum in the United States for ordering trucks.
So that is something we are watching right now closely, whether that is a trend already to be seen, but again, stocks are pretty low, and we regard this currently as a maybe turning point in terms of order discussions we have with dealers, and on top also with our fleet customers.
Again, we are watching the markets with regard to the situation, as you know. There's a lot of news in this market, so therefore, we need to stay very flexible in this market.
------------------------------
Arndt Ellinghorst, Evercore ISI - Analyst [16]
------------------------------
Thanks for that, Bodo. But that's interesting really. I mean, so you're saying you might see signs that the market in the US is getting somewhat better.
What is interesting, when I look at your book-to-bill or your orders, sorry, they were down 53% in Q4 and 56% in Q1. So that's really the direction of the question. It seems that the market is slipping further, and you're inferring that it might actually improve a little bit?
------------------------------
Bodo Uebber, Daimler AG - CFO [17]
------------------------------
Our guidance, market guidance is minus 10% and for Class 8 is minus 15%. Anyway, to make this guidance, we need some more order intakes to make it in this direction.
All of what we know, so as we come into this direction of minus 15%, and some of the -- of course, there's good discussions we do have with our dealers, leads to some more order intakes, and on top of it, will be supported by this low stock level. Therefore, we regard this as a positive sign that we will make our guidance finally.
------------------------------
Arndt Ellinghorst, Evercore ISI - Analyst [18]
------------------------------
Okay. Thanks.
------------------------------
Bodo Uebber, Daimler AG - CFO [19]
------------------------------
We believe that the order intake now over the months to come will anyway pick up. How far, we need to see because we need more order intakes of course, to make our full-year guidance. We have a good order backlog, yes, we do have. We need also some orders.
Again, first discussions in this direction, we will regard as good news, because no discussions of course is of course not so good discussions. On top of this, we have good -- we have also some beginning of ordering of big fleets, but at a very early stage. So, of course, you can turn it to the negative, or to the better. We believe that our -- due to these discussions and some regaining feed orders, that we will make our guidance of minus 15% market decrease, heavy duty Class 8.
------------------------------
Arndt Ellinghorst, Evercore ISI - Analyst [20]
------------------------------
Thank you very much.
------------------------------
Operator [21]
------------------------------
We're now over to Stephen Reitman of Societe Generale. Your line is open.
------------------------------
Stephen Reitman, Societe Generale - Analyst [22]
------------------------------
Stephen Reitman from Societe Generale in London. I have one question again on the EBIT bridges. In particular, looking at the other cost changes.
The negative EUR417 million you reported in the first quarter is about equivalent of 2.1% of margin at Mercedes passenger cars. Could you give us a little more color on how you see that developing, what your guidance is for the full year, in terms of the headwind you expect from this item? Thank you.
------------------------------
Bodo Uebber, Daimler AG - CFO [23]
------------------------------
Stephen, thank you for your question. First quarter was impacted by higher R&D, as we have also planned for. We have announced that we have a far higher R&D budget for this year. That is one element.
And the second of course, we preannounce also is the E-Class launch in the first quarter. So both of these topics are the main impacts in first quarter, are the cost changes. We plan as we have informed you in February, in our discussions about EUR500 million for the total year for other cost changes which means that over the quarters to come, we will see some improvement of course in this area.
That is mainly because we plan for further efficiencies on the material cost side kicking in over the quarters to come. We have less of these efficiencies in the first quarter, so there's more to come than in second, third and fourth quarter. Again, we have also the E-Class launch and this impact, not planned for every quarter, so therefore this number will improve over the quarters, second, third and fourth quarter. These are the main impacts.
------------------------------
Stephen Reitman, Societe Generale - Analyst [24]
------------------------------
That's very clear. Thank you.
------------------------------
Operator [25]
------------------------------
We're now over to the line of Horst Schneider of HSBC. Please go ahead. Your line is open.
------------------------------
Horst Schneider, HSBC Global Research - Analyst [26]
------------------------------
It's Horst from HSBC. I try to limit to two questions. First of all, on the truck business again, you stress that the situation might get better soon in the US. In that context, I want to ask again about the profitability of your North American business.
I mean, in your annual report 2015, you show that Daimler Trucks North America contributed EUR1.5 billion in terms of net profit, which suggests that you make roughly 80% of your truck earnings in North America, which highlights again the importance of the region. I want to know, is that the right way I should look at that business, or is here maybe then the single view on the North American profitability wrong? Is maybe the profitability of Europe higher than that what I see here at first glance.
And second question is related to hedging. Maybe you can give us an update. To which extent you are now hedged for 2016, and especially to which extent you are hedged for 2017? And I'd be particularly interested in your hedging on the renminbi. Thank you.
------------------------------
Bodo Uebber, Daimler AG - CFO [27]
------------------------------
Horst, thank you for your questions. So I will not talk against your comments you made. We have discussed North American profitability at many times, and I'm very pleased with the situation we have achieved there.
The business model in North America is in total a very flexible, a very profitable one we do have, and a very strong one, based on very strong products, but also with our component strategy and on top with high flexibility between Mexican and US plants. So that goes on. We are shooting for more market share, and I do believe we will get also a high contribution from Daimler Trucks North America into Daimler Trucks, as it was last year, so a very high contribution.
Please, I ask for your understanding that I do not want to comment on specific numbers, specific profitabilities. You I can tell you Daimler Trucks North America is better than their benchmark profitability, which we have pointed out. We have targets for the different regions.
------------------------------
Horst Schneider, HSBC Global Research - Analyst [28]
------------------------------
But that means in turn that there's huge room for improvement in Europe, is that correct?
------------------------------
Bodo Uebber, Daimler AG - CFO [29]
------------------------------
As we also discussed, I do think we have discussed the strategies in Daimler Trucks back and forth. You know that our situation in Brazil is according to the market. But also, in terms of product investments we need to do and restructuring, that we do have room for improvement there, but there will need also a little bit of help of the market.
But we will prepare for everything, what is necessary for the future, and we have also discussed as you know, that we have -- that we have also initiatives in place for the European business, as you know, also to improve long-term our margin potential and market share potential in this area. So it's nothing unusual to say, but anyway, these are the areas we need to focus on.
Your second question with regard to hedging, 90% we are hedged for the US dollar and the renminbi. Same numbers, and 50% in 2017. Of course, I will also tell you --
------------------------------
Horst Schneider, HSBC Global Research - Analyst [30]
------------------------------
For US dollar, as well 50% only?
------------------------------
Bodo Uebber, Daimler AG - CFO [31]
------------------------------
50% in 2017, yes. But also keep in mind that some markets like the ruble for example, or emerging markets, are less hedged, because the expenses for these markets to hedge is very expensive, so it makes no sense. That is also the reason why we get hurt in these markets. We do everything on the pricing side to offset these effects. Thank you.
------------------------------
Horst Schneider, HSBC Global Research - Analyst [32]
------------------------------
Okay. Thank you.
------------------------------
Operator [33]
------------------------------
We're now over to the line of Kristina Church from Barclays. Please go ahead, Kristina. Your line is open.
------------------------------
Kristina Church, Barclays Capital - Analyst [34]
------------------------------
Kristina Church from Barclays. I've got two questions. One, following on from your comments in terms of pricing.
Could you say how strong your pricing has been in Europe, in particular. So outside of emerging markets where you're dealing with the currency, what are you seeing in terms of net pricing in Europe?
And then my second question is on the credit side of things in the US. Have you seen any -- have you given a ride in your provisions as a result of the recent fall in residual values? And where did you say there needs to be any further provision anywhere, or are you comfortable with the stake in the financial services? I know your delinquencies are currently at very low levels. Thank you very much.
------------------------------
Bodo Uebber, Daimler AG - CFO [35]
------------------------------
Kristina, to your question of pricing, of course I gave an outlook that we expect stable and positive pricing for the quarters to come in total. Of course, one element, of course, and that kicks in, in Europe, I do think first is the E-Class. Of course, you can imagine that the E-Class run-out needs sort of save some support.
In Europe I expect even positive effects now, with the E-Class in the second quarter. All of the markets are of course competitive, but from a current point of view, we can differentiate us a bit also by our product line-up, no doubt and by the new product kicking in, so to say. But I do think the best I can tell you is stable and positive net pricing Q2 and until Q4. That is our plan of record we do have, supported also by the E-Class kicking in.
Your second question, pricing. Let's give you some information. Residual values, we are of course adequately provisioned. We're doing so every month, every quarter, also in the last year and this quarter, the markets are pretty stable in this regard. We have also our positioning in the market is pretty okay, with regard to residual values.
Markets which we are watching a bit more closer is United States, for example, because the passenger car business, as you know, the structure in the market is shifting somewhat. There, we are watching these markets more closely so to say.
As you know also, our volume in the US is driven by C and E-Class for example. That is what we need to watch, but nothing more special to say with regard to residual values, as of pretty good development and see us also well positioned with our product upcoming in this regard.
------------------------------
Kristina Church, Barclays Capital - Analyst [36]
------------------------------
Thank you.
------------------------------
Operator [37]
------------------------------
We're now over to the line of Tim Rokassa at Deutsche Bank. Please go ahead, Tim. Your line is open.
------------------------------
Tim Rokassa, Deutsche Bank - Analyst [38]
------------------------------
It's Tim Rokassa from Deutsche Bank. I also have two questions, please. The first one is just on the mix effect.
You spoke a lot about the new E-Class and SUVs, that should definitely be favorable in the second half. When we look at other models like the S-Class for example, that hasn't done too well year-to-date. It will still take some time before you replace it.
Is demand there developing, in line with your thoughts. Is this just the usual life cycle, or is there something else going on?
And then secondly, I guess you made it fairly clear that you don't want to comment around this too much, but I'd still like to touch a little bit on the news around the US from last night. Can you at least help us understand what the topic of discussion really is here, and just remind us of your diesel exposure in the US? Thank you.
------------------------------
Bodo Uebber, Daimler AG - CFO [39]
------------------------------
Tim, thank you for your questions. The answer to your first question is yes, this is normal life cycle effects we do see with the S-Class, even if you compare to the previous, that's also to say, of the S-Class, we are doing better than we did, I don't know seven years ago, with the former E-Class.
On top of this, also development in China is good, with regard to the Maybach, for example. So we have a pretty good situation with the Maybach S-Class, and on top the convertible is kicking in, I do think in the second half of this year, which will also support the segment development. But normal S-Class life cycle effects.
So to your diesel questions, the penetration in the US, in the market currently, what we are selling is about 1%, 1 point something percent. A level which was in the past a bit higher, last year, I do think it was at the end of the year, around 2% roughly. So that is a level of diesel we do have. We are selling currently in the market that is lower than it was in the past. That's it from a sales perspective.
To your other questions, please understand that we cannot -- that I will not comment on details, with regard to the investigation. Our experience with the US authorities has clearly shown that our conservative communication supports a constructive dialogue with the authorities, and please understand that we do not comment on either pending proceedings or further details. I'm sorry for that.
------------------------------
Tim Rokassa, Deutsche Bank - Analyst [40]
------------------------------
Okay. Thank you anyway. Thank you very much.
------------------------------
Operator [41]
------------------------------
We are now over to Marc Tonn at Warburg Research. Please go ahead. Your line is now open.
------------------------------
Marc-Rene Tonn, Warburg Research GMBH - Analyst [42]
------------------------------
Marc Tonn from Warburg Research. Coming back to the same issue, if I may. Just without going into detail, have you experienced any delays perhaps in introduction of new models in the US, or are you expecting any potential delays due to the fact that you are reviewing this certification process for the US, in this regard? Is there anything you have observed, or might observe in the future?
------------------------------
Bodo Uebber, Daimler AG - CFO [43]
------------------------------
Please understand that for many good reasons, as I've already pointed out in my last call, that we don't discuss this topic here. Sorry for this.
------------------------------
Operator [44]
------------------------------
Okay. We're now over to the line of Sascha Gommel at Commerzbank. Please go ahead. Your line is open.
------------------------------
Sascha Gommel, Commerzbank - Analyst [45]
------------------------------
First of all, the just coming news flow over the tickers for the German KBA study, and the wording sounds like that also Mercedes is joining this voluntary recall. Maybe you can comment on that, because it seems that you already agreed to recall the cars, and maybe you can share some details on how many cars, and the potential financial impact from that?
And the second one would be a question on your cash flow statement. There's quite a big swing in the industrial cash flow statement on other operating assets and liabilities. You had plus EUR572 million last year and now minus EUR409 million. Maybe you can also shed some color on the swing factor between those figures, please? Thank you very much.
------------------------------
Bodo Uebber, Daimler AG - CFO [46]
------------------------------
Thank you for your questions. One answer to the KBA report, first. We don't have currently, as far as I know, the KBA report currently in place to read it. It might be the case that other branches have it right now but I can't read this.
So if it is available here, in our Company of course, we certainly will read it, and we will draw our conclusions in the one area or the other. Also, we will make some information, but I can't tell you anything about the content as long as I don't have it officially in my hands, that I can read it. So that is one question.
Secondly, of course, as we already reported also in our annual report 2017, we have several authorities, especially in Europe and the United States, have inquired about test results of the emission control systems used in our vehicles. You know the discussion is currently being held, and the ongoing technical evaluations could result in measures being taken for the further improvement of the diesel technologies applied in our engines.
To a limited extent, this could affect vehicles already delivered with some versions of diesel engines in the car and the van segments. We currently anticipate only minor effects from that on our profitabilities, cash flows and financial situations. And we have also, what I said right now, disclosed in our interim report, so that you also can read this. Thank you.
------------------------------
Sascha Gommel, Commerzbank - Analyst [47]
------------------------------
On the operating --
------------------------------
Bodo Uebber, Daimler AG - CFO [48]
------------------------------
Sorry, your question with regard to the -- with the other liabilities. One is taxes, which is included here. What I already commented before, the impact in Q1 last year and on the other hand is normal earnings development. So that is reflected in our commented earlier on in the question.
------------------------------
Sascha Gommel, Commerzbank - Analyst [49]
------------------------------
The taxes line is an extra line?
------------------------------
Bodo Uebber, Daimler AG - CFO [50]
------------------------------
We are sorry, please call Investor Relations.
------------------------------
Sascha Gommel, Commerzbank - Analyst [51]
------------------------------
I will. Thank you very much.
------------------------------
Operator [52]
------------------------------
Okay. We're now over to Stuart Pearson at Exane BNP Paribas. Please go ahead, your line is open.
------------------------------
Stuart Pearson, Exane BNP Paribas - Analyst [53]
------------------------------
Just maybe to confirm, come back to one answer you just gave on the diesel penetration in the US, you said 1%. I presume you mean for the market overall, your diesel penetration would be materially higher than that, so maybe you could confirm on that point. Perhaps there is indeed a diesel issue, or maybe to put it this way, to rule out there's any gasoline issues involved here?
And can you just confirm as well separately to us you did already have an investigation internally, and declared that you're not using defeat devices, presumably that statement still stands.
And then, separate topic on US leasing just returning to the point Kristina started on there, maybe in terms of your commercial offer to customers, and how maybe that's evolved? I wonder if you could comment on the residual value assumptions you're making in the lease contracts in the US? How do they compare today to, say, two or three years ago, and have you started to bring down those residual value assumptions already, or as you say, is that something you're just watching at this stage? Thank you.
------------------------------
Bodo Uebber, Daimler AG - CFO [54]
------------------------------
First off, to your question with regard to the, Stuart, to the diesel penetration in the US, what I said was 1% and that's a percentage of our own sales, 1% of our own sales is diesel related in the first quarter of 2016.
------------------------------
Stuart Pearson, Exane BNP Paribas - Analyst [55]
------------------------------
Okay. That's the first quarter. Say for 2015 then, for instance, similar or --
------------------------------
Bodo Uebber, Daimler AG - CFO [56]
------------------------------
Before I tell you a wrong number, call Investor Relations. We have this number available, and they can tell you. I'm sorry to say so.
------------------------------
Stuart Pearson, Exane BNP Paribas - Analyst [57]
------------------------------
No worries.
------------------------------
Bodo Uebber, Daimler AG - CFO [58]
------------------------------
Your other question with regard to the investigation and so on, please, I ask for your understanding. Our experience with the US authority has clearly shown that our conservative communication supports a constructive dialogue with the authorities, and please understand that we don't comment on further details. We have at any point of time informed based on best knowledge, so please, that's what I can tell you for the time being.
The residual value question, of course I can't give you too many details in this regard, because every competitor would be happy if I would do so, and therefore I ask for your understanding as I have pointed out. Residual value development currently in all of our major markets is pretty stable, but we do have on our watch list is a passenger car development in the United States, due to the shift in the market that SUVs are, so to say, more in the preference than passenger cars for example.
But other than this, there's nothing to be reported. We are adequately provisioned for all our markets in all of our divisions, mainly in the passenger cars of course, is the highest leasing share in the business.
------------------------------
Stuart Pearson, Exane BNP Paribas - Analyst [59]
------------------------------
Okay. Thank you.
------------------------------
Operator [60]
------------------------------
We're now over to the line of Michael Tyndall at Citigroup. Please do go ahead. Your line is open.
------------------------------
Michael Tyndall, Citigroup - Analyst [61]
------------------------------
It's Mike Tyndall from Citi. Just a couple, if I may. The first one, just on the Takata air bag recall. Just wondering how that's progressing, whether or not it's in line with your costs or maybe if you could rule out the possibility of it extending anywhere else in the world.
And then second one on hopefully a brighter note, can you talk about the market reception to the new E-Class, anything you can give us in terms of details in terms of how it's performing versus your expectations? That would be terrific. Thanks.
------------------------------
Bodo Uebber, Daimler AG - CFO [62]
------------------------------
First of all, we have made provisions for the Takata recall in the beginning of February with respect to our FY15. What we have done right now is that we have increased our provision for the car and the van group.
With regard to the country coverage, so to say, the Canadian market and the US market are very close, and they are more or less from a process point of view ended in the same area. So we have increased our provisions with regard to the country coverage, so we have included also the numbers for Canada in this regard. Therefore, we increased the provisions.
I can't tell you anything right now about the further implication. We are in the face of informing the customer about the recall, so I cannot tell you so to say about anything out of this.
Secondly, for the time being, and from today's perspective, we have provisioned for US and Canada. We see no reason for other markets to do any action in this regard. Thank you, Michael.
E-Class incoming orders, positively. So of course we have in Europe the feedback is according to our plan, which is an ambitious plan for the E-Class. So we are in line with our internal plans for the E-Class order intakes.
------------------------------
Michael Tyndall, Citigroup - Analyst [63]
------------------------------
Brilliant. Thank you.
------------------------------
Operator [64]
------------------------------
We're now over to Frank Biller at LBBW. Please go ahead. Your line is open, sir.
------------------------------
Frank Biller, Landesbank Baden-Wurttemberg - Analyst [65]
------------------------------
Frank Biller at LBBW. It's just two questions.
One is a positive one on the van segment here, record margins here, 11.9% or 10.7% without one-offs. So given this margin here, and guiding a significantly higher earnings contribution in the course of the whole year, why should we expect for the van segment a lower margin of 9% as a strategic target against the cars with a margin of 10%? And maybe can you guide us for the full year, that 10% margin should not be here given?
And second one is on one-off items here. In further times, it was the Q3 report, you mentioned up to EUR400 million for restructuring charges of the sales organization, EUR116 million came in 2015, now EUR26 million in the first quarter of this year. What should we expect for the remainder of the year here?
------------------------------
Bodo Uebber, Daimler AG - CFO [66]
------------------------------
Okay, Frank. Thank you for your questions. The first question with regard to van, the van business, of course we are very pleased with the performance. It's one of the highest returns I do think I have ever seen in the van business.
It was based on the very good mix, but also very high impact on mid-size van, very huge numbers, so the product is very competitive in the market. We don't expect this margin to stay at this level for the quarters to come, because we are investing of course in new product, on the one hand the Sprinter, there's a new Sprinter on the one hand, but also as you know in the new pickup truck, which certainly will impact also the quarters to come, but is an investment into the future so to say, and in future growth.
Secondly was your questions with regards to the restructuring of the dealer network. We are planning for this year for up to EUR100 million charges for this project. The project is running very well. So we are, with speed in closing it so to say, over the quarters to come, up to EUR100 million is the number for 2016.
------------------------------
Frank Biller, Landesbank Baden-Wurttemberg - Analyst [67]
------------------------------
Thanks a lot.
------------------------------
Operator [68]
------------------------------
We're now over to the line of Michael Punzet of DZ Bank. Please go ahead with your question. Your line is now open.
------------------------------
Michael Punzet, DZ Bank - Analyst [69]
------------------------------
Michael Punzet. I'm coming back to the special item table, that you've shown a loss of EUR222 million coming from currency transactions. Maybe you can explain what is behind that figure, why it's now a special item, because I think in the last quarter you had also some losses, but that was not booked as a special item.
Last question on that issue is how this figure will develop in coming quarters, will that return to a positive figure in coming quarters, or what should we expect from that line going forward in coming quarters?
------------------------------
Bodo Uebber, Daimler AG - CFO [70]
------------------------------
So Michael, thank you for this question. This effect is related to the realignment of the foreign exchange management, and the adjustment to a more quarterly view arising with regard to the net exposure, and moreover due to the sales development in the export business in the course of the year, and the volatile exchange rates, regular fluctuations in the net exposure of the key currencies occur. Therefore, we separate it, so to say this effect on the reconciliation, because it's not related to the operating business of the divisions. These are EUR222 million.
We don't expect major impacts from this topic in the quarters to come, or next year, maybe minor items, but of course, it will not be as high as this number.
------------------------------
Michael Punzet, DZ Bank - Analyst [71]
------------------------------
So does that mean the high 5 figure this quarter is only related to the change of the accounting?
------------------------------
Bodo Uebber, Daimler AG - CFO [72]
------------------------------
There's no accounting change. It's just a separation because there's not an operating items.
Maybe a second topic of course, with regard to our hedge rates, as we're positively impact of course the currency development of the divisions, mainly Mercedes-Benz car group, so over the quarters to come, you will see positive effects from the dollar and renminbi and over the quarters impacting the divisions.
------------------------------
Michael Punzet, DZ Bank - Analyst [73]
------------------------------
Thank you.
------------------------------
Operator [74]
------------------------------
Our last question for today is from the line of Juergen Pieper of Metzler Capital Markets. Please do go ahead, your line is open.
------------------------------
Juergen Pieper, Metzler Equities - Analyst [75]
------------------------------
One question left, it's on the launch cost for the E-Class. You mentioned frequently, if the I look at your selling expenses, they are flat. If I look at your admin costs, they are going down. I would have expected some effects on these lines.
So what am I missing, or where am I wrong? And could it be that in the second quarter, we see a pretty big market income paying for the E-Class and as a consequence, we see higher selling expenses than in the second quarter instead of the first quarter?
------------------------------
Bodo Uebber, Daimler AG - CFO [76]
------------------------------
Juergen, thank you for this question. Well seen. I do think that shows that we do a good job in our efficiencies because the sales costs as a percentage of sales is going down over the quarters and years now. The same was true with our administrative costs, which certainly makes our Company more efficient.
One thing of course, the E-Class launch is impacted by R&D, also by R&D costs, which is not sales cost, and not admin costs, on the one hand, but also of depreciation costs when you come in, and you're starting so to say production more and more, you have more depreciation. This is mainly impacting our launch costs besides some incentive spending, as you know, in the first quarter.
------------------------------
Juergen Pieper, Metzler Equities - Analyst [77]
------------------------------
So some more effects to be seen in the second quarter, or will we see a similar picture there?
------------------------------
Bodo Uebber, Daimler AG - CFO [78]
------------------------------
As I already said, I commented on the further cost development, that we expect further positive developments due to with regard to efficiencies and other elements of the cost delta to what last year will of course is lower, and we are aiming for EUR500 million year-over-year impact on the costs in total.
------------------------------
Juergen Pieper, Metzler Equities - Analyst [79]
------------------------------
Okay. Thank you.
------------------------------
Operator [80]
------------------------------
Gentlemen, could I please pass the call back to you for any closing comments?
------------------------------
Bjorn Scheib, Daimler AG - Head of IR [81]
------------------------------
So ladies and gentlemen, thank you very much for your questions today. Also, Bodo, thank you very much for hosting the call today and taking all these questions.
To all of you on the phone, you probably have already received our invitation for the Track Capital Markets day on the 7th and 8th of June in Stuttgart, and please don't forget over here you not only will have the opportunity to talk and discuss with management, but you will also have the opportunity to ride on our autonomously driving F-Class on the A8, the German Autobahn.
Something undisputed where others are only talking about it, with us you can already ride on a German highway. And on top, please don't forget we're also going to host a China Capital Markets Day on the 6th and 7th of December in Beijing. You will in due course be informed about further details.
So enjoy your day. Have a great afternoon. For all of you around the world either in the evening or the morning have a great evening and morning. IR stays at your disposal. Goodbye, and we'll talk soon.
------------------------------
Operator [82]
------------------------------
This now concludes today's call, so thank you all very much for attending, and you may now disconnect.
------------------------------
Definitions
------------------------------
PRELIMINARY TRANSCRIPT: "Preliminary Transcript" indicates that the
Transcript has been published in near real-time by an experienced
professional transcriber. While the Preliminary Transcript is highly
accurate, it has not been edited to ensure the entire transcription
represents a verbatim report of the call.
EDITED TRANSCRIPT: "Edited Transcript" indicates that a team of professional
editors have listened to the event a second time to confirm that the
content of the call has been transcribed accurately and in full.
------------------------------
Disclaimer
------------------------------
Thomson Reuters reserves the right to make changes to documents, content, or other
information on this web site without obligation to notify any person of
such changes.
In the conference calls upon which Event Transcripts are based, companies
may make projections or other forward-looking statements regarding a variety
of items. Such forward-looking statements are based upon current
expectations and involve risks and uncertainties. Actual results may differ
materially from those stated in any forward-looking statement based on a
number of important factors and risks, which are more specifically
identified in the companies' most recent SEC filings. Although the companies
may indicate and believe that the assumptions underlying the forward-looking
statements are reasonable, any of the assumptions could prove inaccurate or
incorrect and, therefore, there can be no assurance that the results
contemplated in the forward-looking statements will be realized.
THE INFORMATION CONTAINED IN EVENT TRANSCRIPTS IS A TEXTUAL REPRESENTATION
OF THE APPLICABLE COMPANY'S CONFERENCE CALL AND WHILE EFFORTS ARE MADE TO
PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS,
OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE CONFERENCE CALLS.
IN NO WAY DOES THOMSON REUTERS OR THE APPLICABLE COMPANY ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER
DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN
ANY EVENT TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S
CONFERENCE CALL ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE
MAKING ANY INVESTMENT OR OTHER DECISIONS.
------------------------------
Copyright 2018 Thomson Reuters. All Rights Reserved.
------------------------------