Q4 2016 Daimler AG Earnings Call
Feb 03, 2017 AM EST
DAI.DE - Daimler AG
Q4 2016 Daimler AG Earnings Call
Feb 03, 2017 / 08:00AM GMT
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Corporate Participants
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* Bjorn Scheib
Daimler AG - Head of IR
* Dieter Zetsche
Daimler AG - Chairman of the Board of Management/Head of Mercedes-Benz Cars
* Bodo Uebber
Daimler AG - Finance & Controlling/Daimler Financial Services
* Wolfgang Bernhard
Daimler AG - Daimler Trucks & Buses
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Conference Call Participants
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* Patrick Hummel
UBS - Analyst
* Arndt Ellinghorst
Evercore ISI - Analyst
* Mike Raab
Kepler Cheuvreux - Analyst
* Jose Asumendi
JPMorgan - Analyst
* Tim Rokossa
Deutsche Bank Research - Analyst
* Horst Schneider
HSBC Global Research - Analyst
* Philippe Houchois
Jefferies - Analyst
* Stephen Reitman
Societe Generale - Analyst
* Harald Hendrikse
Morgan Stanley - Analyst
* Stefan Burgstaller
Goldman Sachs & Co. - Analyst
* Stuart Pearson
Exane BNP Paribas - Analyst
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Presentation
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Bjorn Scheib, Daimler AG - Head of IR [1]
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Good morning, ladies and gentlemen; this is Bjorn Scheib speaking. On behalf of Daimler, I would like to welcome you all here in Stuttgart, as well as on the Internet, to our full-year 2016 investors and analysts conference.
We are very happy to have with us today Dr. Dieter Zetsche, the Chairman of the Board of Management and Head of Mercedes-Benz Passenger Cars; as well as Bodo Uebber, our CFO and Member of the Board of Management responsible for finance and controlling and the Financial Services; and Dr. Wolfgang Bernhard, Member of the Board of Management, responsible for the Daimler trucks and buses.
Yesterday, at the end of the press conference, Dr. Zetsche and Bodo Uebber presented our financial figures for 2016, as well as the strategy and details; all relevant materials in the respective presentations can be found on the Daimler Investor Relations website.
In order to give you maximum time for your questions on our today's conference, we will begin with a short introduction by Dr. Zetsche, directly followed by Q&A where Dr. Bernhard and Bodo Uebber will be available to answer your questions.
Having said this, I would like to remind you that this investors' conference is governed by the Safe Harbor wording that you can find our published documents. Please note that all of our presentations contain forward-looking statements that reflect management's current view 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 the actual result 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. Please be aware that this conference will be broadcasted, recorded and then will be available for replay on our website.
A few practical points for our Q&A session later on; before asking your question, please identify yourself with your name and the name of the organization that you are representing. Please ask your question in English and, as a matter of fairness, please limit the amount of questions that you are about to raise to a maximum of one, okay accepted, two, so we have everybody with the chance to raise questions.
Last, but not least, please don't forget to switch off your mobile phones. With this, thank you very much, and I would love to pass on to Dr. Zetsche.
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Dieter Zetsche, Daimler AG - Chairman of the Board of Management/Head of Mercedes-Benz Cars [2]
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Okay. Good morning, ladies and gentlemen, and welcome to our analyst investor conference. First things first; Daimler did better in sales, revenues and earnings than ever before. But, equally important, in the best year in our Company's history, we also embarked on the greatest change at Daimler. Anyone who wants to shape the future of the car needs both financial strength and innovative power. In 2016, we proved that the combination of both factors [is stronger at] Daimler today than ever before.
As investors and analysts, I know you've already gone through our numbers in detail, so I'll simply review the major highlights. Let's begin with Mercedes-Benz cars. We've already achieved our 2020 goal in 2016. Mercedes is on top of the premium segment. Our positive sales dynamic is largely the result of the strength and attractiveness of our products, including, for example, the newly-introduced E-Class, or GLC coupe.
In total, Mercedes-Benz cars sold 2.2 million vehicles, 10% more than in the previous year. We were able to gain market share in almost all regions, and we continue to move forward on a profitable path; adjusted for special items, EBIT climbed 7% to EUR8.9 billion, and with a 10% return on sales, made our margin target. Higher sales, along with improved pricing, were key to the higher earnings. Expenditures for investments in new technologies were counter-effects.
Let's turn to Daimler trucks. Our commercial vehicles were on [difficult terrain] in 2016. We maintained our leadership in important markets, but overall, sales declined by 17%. Positive impulses came from Europe, while sales in Latin America sharply declined again, largely due to the recession in Brazil. Asia was also a mixed bag; in Japan we were able to slightly increase sales; in India and in the, once again, strongly declining Indonesian market, our sales decreased.
In the NAFTA region, sales were significantly below the exceptionally high level of the previous year, but with a market share of 39%, we maintained our strong market leadership position in classes 6 to 8. We have responded to the market changes in the NAFTA region and Brazil by taking steps to adjust our production capacity. As a consequence to the market-related sales declines, Daimler trucks was unable to sustain its prior year's results. Adjusted for special items, EBIT fell from EUR2.7 billion to EUR2.1 billion.
In view of the overall very difficult market environment, our truck division achieved good results in 2016. We are aiming to bring Daimler trucks up to its target level of profitability on a sustainable basis. To that end, we continue implementing measures to increase efficiency and optimize our fixed costs, especially of the Mercedes-Benz brand.
Mercedes-Benz vans also continued its success story, exceeding previous year's sales by 12%. We'll expand our van portfolio this year with the first premium pickup; sales will start at the end of this year. Adjusted for special items, EBIT reached a new high of EUR1.3 billion, and with a 10.1% return on sales, we over-achieved our target of 9%. Those results were shaped by positive sales growth, particularly in Europe, the NAFTA region and China, as well as the efficiency improvements.
Business developments at Daimler buses were affected by difficult market conditions, especially in Latin America; therefore, sales declined by 7%. At the same time, we managed to increase our adjusted EBIT to EUR258 million, and with the 6.2% return on sales, we were above target.
Daimler financial services had yet another very good year. 2016 new business grew by 7%. For the first time ever, we financed more than 4 million vehicles; total contract volume is now EUR133 billion. The acquisition of the leasing specialist, Athlon, contributed to the increase in contract volume. This strategic investment makes us a strong player in the European fleet business. The increased contract volume, and our disciplined risk management, led to a return on equity of 17.4%, and earnings of EUR1.7 billion.
That brings me to our FY16 Group results. Group revenues increased by 3% to EUR153.3 billion. Group EBIT was EUR12.9 billion; adjusted for special items, it was EUR14.2 billion. With that, we confirmed last year's guidance and were able to slightly increase our earnings by more than EUR400 million. Due to the fact that the decline in truck and bus markets alone had a negative earnings impact of around EUR1.6 billion in 2016, that our research and development activities increased by around EUR500 million, this is a remarkable result.
Net profit reached EUR8.8 billion in 2016. Free cash flow from our industrial business amounted to EUR3.9 billion in 2016, slightly lower than in the previous year, but above the 2016 dividend payment. To allow our shareholders to share in the success of our Company, we will propose a dividend of EUR3.25 per share, equivalent to the previous year's dividend. It will bring the total dividend distribution to EUR3.5 billion. This is a dividend yield of more than 4.5%. In the current [difficult] environment, this corresponds to a very attractive rate.
So now to our outlook. Looking ahead, we'll continue to work hard on the things that have made us successful today. We're making targeted investments in new products and services, we are focusing sales and production on global growth, and we continuously improve our efficiency. At the same time, we see several fundamental changes in the auto industry; connectivity, autonomous driving, sharing, and electric mobility, any one of these has the potential to set our industry on its head. At Daimler, we aim to lead in all four fields.
In terms of electric mobility, we have flipped the switch; Daimler will invest EUR10 billion in electric vehicles, and another EUR1 billion beyond that in our world-wide battery production. With our new Mercedes brand, EQ, we are creating an entire electric ecosystem from inductive charging to private energy storage. By 2025, we will have introduced more than 10 new electric models to the market. By that time, we expect 15% to 25% of all newly registered cars from Mercedes to be powered by electric drive.
But our understanding of [first generation] cars goes far beyond the new drive system. We are convinced it's all about having the best overall package. At Mercedes, we are focusing on two strategic pillars. We will consistently optimize our core business, and with our new unit, CASE, we will approach the four future key topics at Mercedes in an integrated way.
The same [applies to Daimler] as a whole; in all areas we want to not only enhance today's business, but also heavily invest in our future business. By the beginning of next decade our first heavy duty electric truck will be ready for production. Meanwhile, 300 of our colleagues are working on new ideas for connected trucks.
Our van division is transforming from a manufacturer to a provider of holistic logistic systems. Our Vision van shows how we aim to connect the entire delivery process. To this end, we will invest around EUR0.5 billion in digitalization, automation and robotics by 2020.
Our largely autonomous Future bus shows how our public transit system could look in the future. In addition, we will launch our first electric bus in 2018, and beyond that we're expanding our mobility services.
In the long term, the greatest potential lies in combining the topics of connectivity, autonomous driving, sharing, and in mobility. In order to drive this forward, we are also strengthening our cooperation with external partners. The most recent example is our announcement to join forces with Uber in terms of autonomous driving. At the same time, we are reinventing ourselves at Daimler. For this reason, we are further developing our corporate culture.
So much for the outlook, now what does all of this mean for our expectation and guidance for the year 2017. Global demand for passenger cars is expected to pick up by another 1% or 2% in 2017. In the case of vans and buses, we expect slight market growth across our core markets. Demand for trucks will likely remain challenging in the regions that are relevant to us.
Overall, we aim to slightly increase our unit sales. Financial services is also looking for further growth. On this basis, we have set the following EBIT goals for individual business units: cars significantly above the prior-year level; trucks slightly below prior-year level; vans significantly below prior-year level; buses slightly above prior-year level; financial services in the magnitude of the prior year. Overall, we expect Group EBIT in 2017 to again slightly increase; in other words, Daimler will remain in the fast lane.
Yesterday, we've published the first indicator of that; our retail sales in Mercedes-Benz increased by more than 18% in January. In China, sales grew by nearly 40%. The basis for our success today is change, from the renewal of our products to our repositioning in China. The basis for our future success will be the even more fundamental changes we are making now.
In 2017, we continue with the implementation of our growth strategy, with our work on the technologies of tomorrow, with the transformation of our entire enterprise. The mobility of the future offers a whole universe of opportunities for Daimler, and we will take full advantage of them.
With that, ladies and gentlemen, I appreciate your attention and welcome your questions. Thank you.
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Bjorn Scheib, Daimler AG - Head of IR [3]
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Thank you very much, Dieter. Now we are going to start the Q&A session.
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Questions and Answers
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Patrick Hummel, UBS - Analyst [1]
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Patrick, UBS. My two questions relate to R&D. First, you're increasing your R&D budget for the coming years, compared to what you spent last year, and what you budgeted before for 2016/17. Can you give us a better understanding where the incremental spend goes into, what has driven the decision to go even higher with R&D spending, and what the time horizon is that we should expect to see returns on those investments? Is it all of very long-term nature when it comes to autonomous driving, etc., without any immediate returns, or is there something that also yields a near-term return?
And the second question just links the R&D budget to your expectations for profitability of Mercedes car Group. Is it fair to say that you're doing this increase in the R&D budget as a result of your confidence that you can maintain a 10% [MPG] margin anyway in 2017/18? Thank you.
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Dieter Zetsche, Daimler AG - Chairman of the Board of Management/Head of Mercedes-Benz Cars [2]
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Thank you for this question. When we had the financial crisis, or the [world-wide] crisis, we decided to maintain a relatively high level of spending in R&D, and in CapEx. And the good development we took over recent years is, to quite some extent, due to that positioning of ourselves, that we do believe the long-term success of our Company has to be our priority.
We are now in the different situation, we are in a position of strength, but we see lots of change driven by new technology. There are opportunities ahead of us and we want to make sure that in this transition we are leading the change, and are not driven by the change.
That's why we increase -- or let me start the other way around, in our, if you want, traditional field, our objective is to ever increase our efficiency and effectiveness. That means our growing portfolio of soon 40 vehicles within there, if you want traditional Mercedes cars portfolio, we developed these vehicles, for a vehicle ever more efficient, and in combination at a flat rate.
But on top of that, we're investing into the future and these are, with the acronym of CASE, the four main areas I don't have to explain here. And yes, of course, when we talk, for instance, about sharing, I think nobody here would responsibly tell you, yes, in 3.5 years we get a return of [7.8%] on the investment we are doing there. I think this would be totally unrealistic.
And when I hear from some of the colleagues who say that with their mobility services they will make half of their profits there in three years, or some are in five years, whatever, this can only be a statement about the remaining profits, because nobody can tell, at that point of time, how this will develop.
But we have to understand what's going on there. The potential disruptive nature of some of these fields we have to understand, and if they are disruptive we have to be the disrupters. And we do believe that we are in a position of strength, that we can afford to be sure we are ahead in these fields, even if we then get criticism at the day of our reporting because we think that the long-term future is more relevant.
Clearly said, this does not mean that we are changing our strategic profitability targets. They are valid, and they stay valid, and we're working hard to make that happen.
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Arndt Ellinghorst, Evercore ISI - Analyst [3]
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Arndt Ellinghorst, Evercore. Dr. Zetsche, I think it's fair to say the Mercedes-Benz turnaround, product and brand-wise, has been one of the most impressive ones in amongst the German brands over the last year, so that's been really, really fantastic to see. The question I have is, in the past you talked about this year, next year, the coming years, the brand being on a bit of a plateau.
With the knowledge you have today do you think that's still fair, or do you think you can further outgrow your peers and, more importantly, you can do it in a really profitable way? So for us to assess when we try to forecast your volume mix and pricing momentum for the coming years, how would you describe that?
And then, Bodo, you've given guidance on the currency with more than EUR0.5 billion tailwind this year. How conservative is that assessment? And secondly, if you patch in raw material headwinds, how would the balance look like? Thank you.
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Dieter Zetsche, Daimler AG - Chairman of the Board of Management/Head of Mercedes-Benz Cars [4]
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We had this discussion when we launched the new S-Class car in Generation, that after that things might go south; we added when we launched the C-Class that after that things might go south. Of course, beyond the economic cycles, we have our product cycles. But as I said, going from 30 to 40 products, of course this is much more stabilized now, plus it's pretty interesting that, for instance, if you take our compact cars, last year we were, I think, in the fifth year of the lifecycle of this generation, and in the fifth year we were, again, selling more compact cars than the year before, which is not a classical product cycle.
So because of those reasons, one that there is, even in years where are launching less new products, still a number of new products will be launched. And secondly, because we see the same with our SUVs, the classical lifecycles of starting a decline after the second year, are by far not as pronounced, if at all, any more in many of our car lines.
We have a much better feeling of a constant growth opportunity parallel to our target of profitability in the range of 10%. Yes, there are years where it's easier to get both growth and profitability and there are years where a little more challenged; that is, for instance, when we change over our compact car which, meanwhile, has a pretty big part of our total business.
The good news is new compact cars will be even more attractive, will be even more profitable. But, yes, we have to go through this changeover which, at least, as the capacity of our plans is giving us some limitation in the growth we do there. But overall, I'm very confident that this is not a one-time nice event but that we are constantly growing at this level of profitability.
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Bodo Uebber, Daimler AG - Finance & Controlling/Daimler Financial Services [5]
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On to your question of currencies, of course, from the current point of view our best estimation we can do, it reflects the current environment of currencies. And as you have seen, they are volatile; when you see the dollar development the last three months it strengthened on the last couple of days. Of course, the euro strengthened again a bit, but on the lower level.
So the volatility is high so it's our best estimation. Keep in mind that we have also an exposure in the emerging markets which gave us a big headache last year. That should stabilize this year as the currencies stabilized somewhat, the ruble for example. So our best estimation is more than EUR500 million for this year as a guidance.
Tailwinds; from raw materials, a headwind of a couple of hundred million for Daimler.
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Mike Raab, Kepler Cheuvreux - Analyst [6]
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Mike Raab, Kepler Cheuvreux. I have two questions. First of all, when we look at your outlook it's suggesting you're yet bound for another year of earnings growth. A year ago, with a fairly similar outlook, you flagged it with what we thought was positive dividend signaling. This time around, you the 2016 dividend going sideways. I understand you're facing, like the rest of the industry, a tsunami of upfront spending for future technologies, but besides this, is there any other reason why you kept the dividend flat year over year in 2016?
And then, secondly, a question to Dr. Bernhard. Could you please explain what exactly happened with the margins of the truck division in the fourth quarter specifically? I'm asking because I think trend-wise, that direction to be taken was to be expected; however, we have one competitor out there who went exactly into the opposite direction. I'm just trying to understand the discrepancies here. Thank you.
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Bodo Uebber, Daimler AG - Finance & Controlling/Daimler Financial Services [7]
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Michael, in relation to dividends, last year when we were here I do think we did not know about a lot of headwinds in trucks on the market sides which we have pointed out this is EUR1.6 billion, but on top we had a somewhat special reporting items which we reported, which we haven't had not in mind. I remind you a little bit on the Takata development, for example, and others, on legal proceedings.
On top, of course, we tried also to offset this with a strengthening of the pension asset, as you know, so the flat development of the dividend, from my point of view, shows you the confidence in our business. Also for the future, as Dieter's actually pointed out, we are very confident to grow the Company further and the dividend reflect this. Of course, we are sticking to our 40%, slightly above the 40%, policy which shows you, again, that we are confident about the future.
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Wolfgang Bernhard, Daimler AG - Daimler Trucks & Buses [8]
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The earnings in the truck division in the fourth quarter do not reflect any substantial changes in profit margins from products. So these things were primarily driven by things that always happen at the fourth quarter, and some special items that we had to book, so there's no special development on the truck margins; not in Europe, not in America. These are basically flat.
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Mike Raab, Kepler Cheuvreux - Analyst [9]
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In this context, if I may follow up, could you remind me again what those items are that usually occur in the fourth quarter on the standing side? Just a few examples.
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Wolfgang Bernhard, Daimler AG - Daimler Trucks & Buses [10]
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Can you one more time please repeat?
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Mike Raab, Kepler Cheuvreux - Analyst [11]
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Yes, sure of course. Since you mentioned there's a couple of things that usually occur in the fourth quarter, could you please refresh my memory what those items are that you spend on the fourth quarter and that led to this decline or contributed to it?
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Wolfgang Bernhard, Daimler AG - Daimler Trucks & Buses [12]
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We always get, in the fourth quarter, update on the final year closing with respect to Brazil, for example, where things basically, in the fourth quarter, were even more difficult than we ever expected. And, obviously then we adjust our view on things like quality development, and so on and so forth, because these are the things that we do by the end of the year.
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Mike Raab, Kepler Cheuvreux - Analyst [13]
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So, in a way, you have like provisions additionally to account for upcoming risks you perceive in 2017, notably in Latin America, perhaps also NAFTA?
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Wolfgang Bernhard, Daimler AG - Daimler Trucks & Buses [14]
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No.
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Mike Raab, Kepler Cheuvreux - Analyst [15]
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Okay. Thanks.
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Bodo Uebber, Daimler AG - Finance & Controlling/Daimler Financial Services [16]
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But maybe to give you a little bit of transparency for the fourth quarter in trucks, of course, we are mainly hurt by the sales development in the fourth quarter. As you have seen, the decrease in sales was the major one we had in the fourth quarter, on the one hand. On the other hand, our after sales business always has, in the fourth quarter, not 30 days or 20 days of income; it closes roughly, I don't know, mid of the month, so to say, and that is also a reflection which we have always in the fourth quarter.
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Mike Raab, Kepler Cheuvreux - Analyst [17]
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Very helpful. Thank you.
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Dieter Zetsche, Daimler AG - Chairman of the Board of Management/Head of Mercedes-Benz Cars [18]
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On top to talk about the Company altogether on the car side, there are typically higher spending on dealer payments which they accrue and earn by their performance; therefore, this is something which is not paid on a monthly basis but quarterly and especially in the end of the year.
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Jose Asumendi, JPMorgan - Analyst [19]
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Jose Asumendi, JPMorgan. A couple of questions. To start off with on trucks, Wolfgang; when I think about the structural improvement of the truck division, I think about three buckets. So one the work you're doing on components, and the modules across the different brands. Second, maybe the potential you have to reduce -- the reduction of the vertical integration across some of the regions. And the third bucket which is the reduction in fixed costs in Europe. Can you comment on those three opportunities you have and how much [work] have you done since the Capital Markets Days last year?
And then the second one for Dr. Zetsche, please. As we think about the electric car and what it means for the supply chain and your production internally, can you comment on which components do you think are core for Daimler within the electric car, especially thinking about transmissions, battery technology and electric motors?
And then I would love to get your comments on if you have decided which suppliers are going to be core, and basically what it means for Daimler, and also the workforce of Daimler. Thank you.
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Wolfgang Bernhard, Daimler AG - Daimler Trucks & Buses [20]
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You're right. First of all, let me a little bit talk about last year in respect of volumes. Obviously, Dieter already said it that last year we had, in most of our markets, significant headwind starting with NAFTA but also Brazil, that we thought cannot get lower, proved that it can get lower. And, last year was, in most of the markets in most of the areas, we had to work hard with respect to efficiency, so we reduced our workforce in Brazil by another 2,000 people, and we are continuing, since 2012, to work in all our plants.
When you look at the numbers, you can see that the downfall of the markets in the truck accounted for roughly EUR1.6 billion of basically margin decrease, and we were able with EUR600 million, EUR700 million to counter that. These are basically due to all those programs that are running since 2012.
What we do here is, basically, in our plants in Europe we are working hard to reduce our vertical integration. Here, we are getting rid of our parts manufacturing that we do not think are strategic and important where we can make a difference. We sold a foundry in South Africa. We reduced manufacturing areas where we do parts. This is ongoing stuff in our German plants, as well as the plants in Brazil.
Our new manufacturing in Brazil footprint will be like this. In Juiz de Fora we will do only body and paint; in the main plant in Sao Paulo we will do all the assembly. Most of the power trains that we do, axles, transmission and engines, we will get rid of the machining parts of those main components. We will maintain a stronghold doing our own engines. We will doing our own transmissions because we believe that we have a competitive edge there; we proved to have that in Europe and in the US. And these operations will be basically reduced to assembling the parts.
On top of it, in the European plants, we are also streamlining our operation. We're getting rid of operations, let's say logistics that we don't think we have to be in where we can make a big difference. We're also streamlining across all the plants and, when you put that together, that resulted in the EUR600 million and other cost changes where we believe we're able to counter those margin decreases.
These efforts will continue through the next years and, on top of those efforts, there will be another effort we've specially targeted with respect to Mercedes-Benz trucks. That means Europe and Brazil where we try to find another EUR400 million in efficiency improvements. For that, we will reserve throughout this year, in the second half of this year, up to EUR500 million to make sure that any one-time cost that we might incur throughout the year that we are covered.
We believe, at the end of this exercise, not only the American but also the European and Brazilian business system will be much, much stronger and much more profitable than it is today. We will be then right-sized and perfectly prepared if those markets might come back at any point of time. So this is what we're trying to do. That means our suppliers will play a much bigger role, not only as part suppliers, but also as service suppliers. And with that, we are maintaining our strategic competencies at the same time.
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Dieter Zetsche, Daimler AG - Chairman of the Board of Management/Head of Mercedes-Benz Cars [21]
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As far as electric cars are concerned, the assembly part of our manufacturing system is basically not affected, as for flexibility reasons as well, we will design these cars in a way that we can produce them in our more and more flexible assembly, existing assembly, lines.
This is different for the component side, of course, for the power train. Here, we do not only see that an electric power train has less labor content than a combustion engine power train, but we see as well that the chance for differentiation between electric motors, for instance, is much smaller than with combustion engines. And this should be the guiding principle for us, what we do in-house and what we don't and, therefore, there is certainly not total agreement. We do believe that we will not increase our vertical integration in the declining power train business which, obviously, the labor representatives would prefer, but we do the opposite which will compound the impact.
The good part of the story is that we have time. It's a longer period and that's why we are starting this adjustment by now. We do not hire any people with increasing sales volumes for power train either. And we will use every opportunity of reduction there as early as possible, which means we see a responsibility to safeguard the future of the people on board, but we do not see a responsibility to safeguard the jobs there on board. And that's where we are in a constructive discussion, making our way forward.
You might have noticed that the significant volume growth in recent years at Mercedes has not been paralleled by a similar or almost any headcount growth either, driven, on the one hand, by really satisfying improvements in productivity, and secondly, as Wolfgang just described on the truck side, parallel on the car side, continuous reduction of our vertical integration. Not with big items, now we stop doing axles, but with continuous reduction of all the parts we're doing underneath this assembly level across the board. And this is a very effective way which we intend to continue.
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Tim Rokossa, Deutsche Bank Research - Analyst [22]
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Tim Rokossa, Deutsche Bank. I would have two questions, please. The first one refers to trucks as well, Mr. Bernhard. When we think about the fourth quarter, you have underperformed Volvo in almost every region. First of all, I'm curious to understand if we should read anything into this. Are you using your technological edge, or was this just a yearend impact or were they more price aggressive, something like this?
But more importantly, we have actually seen quite a good order intake from the European region, particularly. You are guiding for a slight decrease in the full year; might that be too conservative? Are we on an opposite position compared to early last year where you were relatively positive on trucks, and particularly on the earnings side of things; turned out to be slightly worse. Now you appear to be a little bit more cautious. Maybe this year's the other way around.
And then my second question, just on the investment side, coming back to that; Mr. Zetsche, I think it is clear that you are impressively showing that you are at the forefront of technology for most main entrants, whether this is autonomous driving or electrification. There's obviously all to come for the costs. You're developing a lot of things at the same time. When do you think it is time to focus again?
And maybe Mr. Uebber as well, you are printing a record earnings result but, obviously, your free cash flow, while it is covering the dividend, impressive considering all the investment, cannot really be what you have in mind, printing these sort of EBIT numbers. Will there be a point in time post 2017, 2018, maybe where we start to see an improvement in the conversion rate again and where you can focus your investments? Thank you.
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Wolfgang Bernhard, Daimler AG - Daimler Trucks & Buses [23]
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So let's start with trucks. I would like just to keep for everybody in mind what the outlook for the market is this year. We think that Europe will slightly decrease. Brazil is not going anywhere for this year; we just say a little bit uptick but not much. In the NAFTA region, we believe that it might be slightly down, with the class 8 even further down, 10%. This is what we believe what's going to happen. Also Japan is slightly down and Indonesia is basically around prior-year level. That basically means, when we look into the future, we don't see great tailwind; we just see primarily headwind.
You're right when you're saying that book-to-bill rates have been improving and we have started into this year quite promising. When I look at NAFTA, we see that our January order intake was very, very, very good, which surprised us, to some extent. We don't know whether this is a one-timer, whether this is an industry thing, or it's just us. We don't know yet; we will find out in a couple of days.
Also, the order intake in Europe has been good in January, so we're happy to say that the start into this year has been positive and we're not starting with a deficit on years that we're basically having a little bit of a good start in this year. However, I need to say there is a lot of work that needs to be done, especially when we look at Brazil. We still don't believe that we are where we should be; we have to continue to right-size the business. And also in Europe we see opportunities with respect to our fixed costs, as I said; this is where we have to work on.
So is there a chance that the world will develop much better than we anticipate, at this point of time? Yes, there is. Is there a chance that things might happen, happen adversely? Yes, there is. So we don't know yet how it's going to be, but I can assure you, at this point of time, that the start into this year has been promising.
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Tim Rokossa, Deutsche Bank Research - Analyst [24]
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And on Volvo perhaps, for the trucks?
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Wolfgang Bernhard, Daimler AG - Daimler Trucks & Buses [25]
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Normally, we don't comment too much on competitors in our press conference.
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Dieter Zetsche, Daimler AG - Chairman of the Board of Management/Head of Mercedes-Benz Cars [26]
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You have been asking when we start to focus again. I can tell you we are pretty focused, and what we are doing, we are doing consciously. Two years ago there was some discussion going on around R&D rate of less than 5% would be sufficient, and if we would not set the stage for another fallback against our competition. Now, a year later, 5.3% is perhaps too high. I'm totally fine to discuss that.
And of course, [a turn] rate on our cash flow side higher than the one we're having at that point of time is desirable, on the one hand. On the other hand, I think our task is to invest into the future, profitable future. And one problem of this world is that, in many places, people don't have ideas any more how to invest into the future.
We can print money no end if nobody has an idea what to do with it, to earn more money with it. This is part of our problem in the GDP development on the global basis. So we have, at least, proven in the recent history that the money we invested turned into growth, and growth at a profitable level. And the same is our intention, going forward.
I have to admit, and I said that before, that there are some areas where we cannot clearly define today the exact return and the timing of the return. And this is mainly true for areas, as I mentioned, like mobility services and sharing and things like that. But in all the other areas, we are knowing very well what we are doing. And we do believe that we are in a very high investment phase, as far as R&D and CapEx is concerned, and that the ratio will get better again.
But we do not want to constrain us, at that point of time, because we think we have the strength to do that from opportunities we can plant and harvest tomorrow. But of course, an absolute mandatory for us is that we pay an attractive dividend out of our cash flow, and intend to, on top of that maintain, some cash, as we obviously did in the last year. And that this gap can even grow is certainly is a target we share.
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Horst Schneider, HSBC Global Research - Analyst [27]
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Horst, HSBC. My questions would be; first of all, when you think yesterday to the market reaction regarding the share price, the suspicion was that consensus was too high, etc. When I hear you talking this morning, it gives the impression rather that the things could be eventually better than thought. So from today's perspective, would you say that maybe the risk is more on the upside, or rather on the downside? Maybe some indication would be helpful.
In that context also, last year you explained that H2 going to be stronger than H1 in terms of earnings performance. It would be helpful to get such a statement also this year. My impression is, is that for Mercedes, for example, H1 going to be stronger than H2, just for lifecycle reasons. For trucks it is the opposite, because you do more cost cutting, which could have an impact in H2.
And the last question is on volume structure net pricing. Q4 was a little bit weak, weaker than the quarters before, at Mercedes in particular. Is there any particular reason for that? And in that context, do you think that the net pricing can get at all any better than it was in 2016? Thank you.
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Dieter Zetsche, Daimler AG - Chairman of the Board of Management/Head of Mercedes-Benz Cars [28]
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Answering first about passenger cars, which of course covers a significant part of the Daimler piece altogether, and then adding what can be added in the other areas, of course, our objective is to give you a guidance which is -- and we only know afterwards, as realistic as possible; not positive, not conservative, not aggressive, but as realistic as possible again. Afterwards we will see if that's true or not.
At the same time, and we have said that, the year is starting very good. Starting very good, and certainly rather supporting an upside than a downside. But it's just --
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Bodo Uebber, Daimler AG - Finance & Controlling/Daimler Financial Services [29]
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One month.
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Dieter Zetsche, Daimler AG - Chairman of the Board of Management/Head of Mercedes-Benz Cars [30]
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One month; it's 1/12th of the year, and that's what is already in the pocket. And on that basis, we do not see any developments which would be controversial to that start, at that point of time, whatever events might happen tomorrow. Therefore, I think after January sales our confidence into the year has certainly grown, and not been reduced. I think that's a fair statement.
On the van side, we have a special effect first of all, that last year was unbelievably good. And secondly, that the business of providing Volkswagen with almost entire vehicles for their brand have ended at the end of the year; plus with the start in the new pickup and the heavy investment phase in the next Sprinter we are -- and in vans we still have pronounced cycles, because the lifecycles are much longer, and the number of vehicles is much smaller, we have a heavy spending year in 2017.
So that is independent of the market, where we are looking very optimistic into the future, and impact on our earnings in 2017. Trucks, you can hear directly. I don't quite understand, if I got you right, why we had a not-so-good fourth quarter on the passenger car side --
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Horst Schneider, HSBC Global Research - Analyst [31]
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Don't get me wrong, it was an excellent result. When I just divide the earnings change coming from volume structure mix by the revenue change in Mercedes, it is a fairly low operating leverage compared to the quarters before. And when I see, at the same time, that the E-Class share has never been higher than in Q4, I ask myself why is that?
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Dieter Zetsche, Daimler AG - Chairman of the Board of Management/Head of Mercedes-Benz Cars [32]
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Right. To look at this ratio, of course, makes a lot of sense; perhaps not necessarily on a daily, or weekly, or monthly, or even quarterly basis. Of course, we're trying to understand very clearly what is our net pricing doing and there again, we were talking about fourth-quarter effects. You look at your leasing book at the fourth quarter more severely than throughout the year. All of these things have an impact which is not ongoing. Altogether, as you have mentioned, we had a positive net pricing in 2016 and we have striven for that in recent years; we are striving for that in 2017. There, obviously, the competition has a major [say in], if ultimately we will accomplish that.
And we are looking very strongly at the mix of our sales, which is, on the one hand, a product mix where we have higher margin/lower margin product and which, on the other hand, a regional mix, where we have higher margin regions/less high margin regions. We do not see negative developments in this regard, going forward.
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Horst Schneider, HSBC Global Research - Analyst [33]
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But at least you want to improve the net pricing in 2017. That's right, yes?
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Dieter Zetsche, Daimler AG - Chairman of the Board of Management/Head of Mercedes-Benz Cars [34]
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That's what we wanted to do in 2015; we have accomplished it. That's what we wanted to do in 2016; we have accomplished it. That's what we want to do in 2017, and we will tell you in a year from now if we have accomplished it.
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Horst Schneider, HSBC Global Research - Analyst [35]
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Of course. But at least the aim is there.
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Bodo Uebber, Daimler AG - Finance & Controlling/Daimler Financial Services [36]
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We will see, both in trucks and in cars, more seasonal developments. In 2017, Q1 will be not as pronounced in cars as it was last year. You know we had a very weak Q1 in 2016. Other than this, we have seasonal developments, as you know, in trucks, for example. The first quarter's always a weaker quarter, but you have to be careful because we get this one-time gain from the sale of the premises in Japan, which is roughly EUR250 million.
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Dieter Zetsche, Daimler AG - Chairman of the Board of Management/Head of Mercedes-Benz Cars [37]
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But we do not see any reverse of our first half/second half pattern of recent years in this year.
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Horst Schneider, HSBC Global Research - Analyst [38]
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Okay. Thank you.
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Philippe Houchois, Jefferies - Analyst [39]
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I've got two questions. The first one is on the border tax adjustment in the US. I'm assuming that you've done simulation about what the impact of that would be on your (multiple speakers)
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Dieter Zetsche, Daimler AG - Chairman of the Board of Management/Head of Mercedes-Benz Cars [40]
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Sorry, I can't understand you. It might be my ears.
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Philippe Houchois, Jefferies - Analyst [41]
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Right. I've got two questions. The first one is on border tax adjustment in the US, trying to understand that. I'm assuming you've done simulation of what the impact would be. I assume you're [probably a gainer] of that, because you're a slight net exporter. But I'm just wondering in an environment where the dollar would appreciate, which is what people are talking about in those adjustments, would that put at risk your strategy of being a net exporter out of the US, especially in terms of single sourcing. Some of your SUVs are single sourced out of the US for export to world markets; will that put your strategy at risk there?
The other question I have is on financial services. I know you're going to talk to us more about this in a couple of weeks. But for several years, we've seen -- years ago, financial services business used to pay a dividend to the parent. Then they stopped a few years ago because of the crisis and then because of having to retain cash for capital ratios. This year, part of your cash came from a dividend from the financial services. Is that a trend that we're going to see, going forward, or is it a one-off? I'm just trying to understand if the financial services will become maybe less capital intensive, or if that was just a special situation for 2016. Thank you.
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Bodo Uebber, Daimler AG - Finance & Controlling/Daimler Financial Services [42]
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To your first question, I ask for your understanding that we do not discuss publicly the impacts of border tax and so on and so forth. We do our job internally, we are discussing things, and once we do have facts, or alternative facts, yes,(laughter) we will come up with something and make decisions or whatsoever. But please understand it's not a public discussion about it.
Secondly in financial services, normally we get from financial services a dividend to the industry because we don't need the net profit totally to strengthen our equity ratio. We might need half of it or so. We do special contributions for China, for example, because it's a fast growing market in financial services business, and the legal requirements are higher than in some other markets.
Or for example, the Mercedes-Benz Bank is regulated here in Germany, therefore, we need to provide, once in a while, with capital contribution. But normally we get dividends. Last year, it was about EUR700 million. We had roughly EUR900 million of dividends going to the industry and we put in EUR200 million in equity, so net EUR700 million. You see that in the net liquidity [walk]. It strengthened the net liquidity of the industry.
For 2017, I don't expect this amount of money because we need to put in equity for China and for the Mercedes-Benz Bank to support regulatory requirements and growth. The equity ratio is currently 7.4%, end of the year, and we have EUR10 billion of equity in the financial services portfolio.
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Stephen Reitman, Societe Generale - Analyst [43]
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Stephen Reitman, Societe Generale. Question about capacity utilization in China and the United States; obviously, the growth you've had in China has been phenomenal, from a retail perspective. You must be bumping against the capacity limits you have in your production base in China. Could you talk about utilization rates you have at the moment, and do you think you need to put in more capacity in China?
Secondly, obviously in the United States, as the primary source of SUVs for the rest of the world, I would guess also there you must be running at very high utilization rates. So it must be quite tempting to put in extra capacity there as well, which would also be, I guess, well received by the new administration.
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Dieter Zetsche, Daimler AG - Chairman of the Board of Management/Head of Mercedes-Benz Cars [44]
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Talking about China, we have seen significant growth in China, and at the same time during the last years, the percentage of sales there have been locally produced has grown as well. So obviously, the production in China has almost exploded, probably not the right word. We are constantly adding capacity, and even plants. We have a north plant; we have a south plant; we have all the activities in componentry there. And it's almost surprising how smooth this build-up of huge manufacturing units is going, both in the sense of supply, as much, and that is as important, a sense of quality.
Let's say the last two years we are on top of that, focusing on productivity. We are making huge strides forward in getting closer to levels of productivity we are having at other parts of the world. It's a very strong focus by today as well. I apologize because I just don't know it, that I can't give a specific utilization rate. That is mostly due to the fact that both parameters are changing all the time, the existing capacity and the production.
But of course, at some point of time, we have to even discuss if we would have to look at another location, an additional location. There is certainly some specialty in our case that our partner, the main shareholder of our partner, is the Municipality of Beijing, which so far is certainly not to our disadvantage. We have a very, very positive collaboration with our partner and with our partner on the shareholder side. Having said that, we have to see to which extent we can further leverage that location, or if we have to, wherever look for other locations as well. But this is not something which we would be deciding right now.
Yes, we are obviously very successful with our SUV. We have altogether a strategy of global production networks, where every car line, and, yes you are right, GLE is an exception from that, typically is produced at different places in the world and we exchange. We cannot produce 40 cars at every place in every market where we are selling them, but we are exchanging, of course, throughout this link network, which is very flexible in itself. We develop our plans what to do where all the time. As far as the GLE is concerned, we are adding capacity all the time, and this affects, of course, our plant in Tuscaloosa in a positive way.
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Harald Hendrikse, Morgan Stanley - Analyst [45]
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(inaudible - microphone inaccessible)
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Dieter Zetsche, Daimler AG - Chairman of the Board of Management/Head of Mercedes-Benz Cars [46]
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That's what we are paid for. As far as your first part of your question is concerned, we are introducing a new generation of engines, which we internally call [Fame], and they are famous about their flexibility. So we finally are reaching a stage, which would have been nice if we had had it earlier, where manufacturing-wise we have almost total flexibility between four cylinders, six cylinders, between gasoline and diesel engines.
These are [ourselves] where all of these things are produced and not huge transfer lines. And we can almost, almost without limit, shift back and forth, whatever the need be. At the same time, we are seeing, so far since September 2015, no significant change in the take rates of diesel in Europe. It's a European issue what we're talking about, and yes, we have sold very, very low volumes of diesel engines.
We are talking about 200, 300 basis points in change in the take rate, at almost 50% levels or over 50%. So this is marginal, especially when you know that typically, when you have low fuel prices, the ratio of diesel take rates goes down, because it's an economical consideration at the end of the day. And while we had low fuel prices, we still saw an almost flat development of diesel. So the customer so far, doesn't care about the discussion which is going on.
Is that true tomorrow, or the day after tomorrow? I don't know. If my colleagues continue to tell the public all the time that tomorrow they might not do diesels any more, we might end up in a self-fulfilling prophecy. I don't understand that. But we see nothing of that. At the same time, I think third parties have confirmed that our new diesel engine OM 654 is an extremely clean engine. As far as NOx is concerned as well, and whatever kind of definition for measurements you want to take. And it continues to be true that a diesel engine has a 15% to 20% advantage in CO2. And even though today the entire world talks about NOx, CO2 I think stays being relevant.
That is what we're talking about, climate change. Climate change is what COP21 in Paris is all about. And we try to contribute in this regard, not just as a Company, but I think as an economy, and as a society, it would be stupid to waste the benefits diesel can provide, because of things which went wrong in one area, which we are fixing altogether, as an industry. But ultimately, it will not be decided just by us. I can just say we base our future on the diesel engine in Europe as well and we do not see a different reaction from our customer base, so far.
As far as electric vehicles are concerned, it is our objective to put a vehicle, like this one sitting here, aside of our combustion engine vehicles, and making it a very hard choice for our customers, ideally making them want to buy this vehicle, no matter what, because we do believe that is ultimately the direction we want to go in, and we have to go. And we do not want to go there because people mandate it, and don't allow us to sell gasoline or diesel engines, but we want customers to prefer these vehicles. That's what all the EUR10 billion we are talking about are going towards.
How this will play out is very difficult to forecast, and that's why we're talking about ranges, and that's why we're trying to put flexibility in our manufacturing facilities, as I mentioned before. But our objective is to accelerate the ramp up of these vehicles as a percentage of the total sales. As we told you, our current internal planning is something between 15% and 25% by 2025, but it's not just dependent on us, if that is the right range we're talking about.
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Stefan Burgstaller, Goldman Sachs & Co. - Analyst [47]
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Stefan Burgstaller, Goldman Sachs. Dr. Zetsche, you talk about strategic margin target of 10%; most of us have come to learn that this product age of your product portfolio, and the mix, the margin has a certain cyclicality. Can you just share your thoughts how you think, everything else equal, in a steady market environment, let's assume that the regulatory headwinds can be compensated for cost measures, how do you think about the margin spread as you walk through your aging process of the product portfolio?
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Dieter Zetsche, Daimler AG - Chairman of the Board of Management/Head of Mercedes-Benz Cars [48]
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Of course, we were aware some time ago that relevant part of our growth would be driven by the compact segment, and that's what was happening. And therefore, on the one hand, with our current generation, we have very attractive, especially family members, which commands pretty attractive margins. That's not true for all of them. And we have put very, very strong emphasis on the development of the next generation, where our objective was to improve the overall profitability of that family, significantly over the current one.
And we are still more than 12 months before the launch of the first product, but all we can see today is very encouraging. This does not mean that the new generation of compact vehicles will be on the upper side of our strategic margin, but the downside will be significantly reduced, compared with our current family.
So this is all about that. We try to understand how a mix will develop, and with this impact on the mix, how we can safeguard the 10% as our strategic target, and that's not an easy one. That's why we're working every day and where so far we have made good progress.
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Bjorn Scheib, Daimler AG - Head of IR [49]
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So we take then the last question from Stuart --
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Dieter Zetsche, Daimler AG - Chairman of the Board of Management/Head of Mercedes-Benz Cars [50]
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Just one element. While the compact are growing, not just for us, it's true as well that on a global basis, the share of SUVs is growing. And that is, generally speaking, something which is not a burden on our margins.
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Stuart Pearson, Exane BNP Paribas - Analyst [51]
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Stuart Pearson, Exane BNP. So two questions. One just following on maybe from the mix point, and I wonder how you would see that developing if and when we finally get to a rising interest rate world. Because if we look at the financial services balance sheet, whether it's yourselves, the whole industry, it seems there's never been a time when the industrial business has been more dependent on financial services than it is today. So I just wonder what happens when interest rates start to happen. Do we see consumers start to down trade a little bit in terms of mix? So wonder how you think about that, on the financial services side.
And then totally separately, for the second question, just on electric vehicles, there's a question here about where you see you being in the value chain. And I think you said before you don't plan to be in cell manufacturing, for instance. But I wonder what your strategy is in terms of securing the battery supply that you and your peers will really need, in five and 10 years' time, because clearly somebody has to put a lot of capital at risk here, for some very uncertain volume forecasts for EVs in five or 10 years.
So I'm wondering what the strategy is there. Do you have to commit to some take or pay agreements for certain volumes, in five or 10 years, to convince the battery players to invest?
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Dieter Zetsche, Daimler AG - Chairman of the Board of Management/Head of Mercedes-Benz Cars [52]
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As for the first question, when we exclude for a moment, the Chinese market, which used to be a market where you felt ashamed when you didn't pay for your new car in cash and it's developing in more normal pattern, relatively rapidly, over time, if you exclude that effect for a second, my best understanding, and Bodo can correct me immediately, is that our penetration is more or less flat over the time, as it was in high interest rates phases as it is now. Of course, the financing is very attractive today, for good reasons, but somewhere else people get as attractive rates as well.
I do not necessarily see a mix impact on high interest rates, which certainly would be for the total system, and additional costs no doubt, which might have a total volume impact. But it's the rate of financing, especially leasing, is more regionally different than from the car lines, to some extent as well, but not so pronounced. And [perhaps] you're more in depth in our financial services business, Bodo, but I don't think that this would change our business system significantly.
As far as our electric -- where were we there, electric car was the other point you made --
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Stuart Pearson, Exane BNP Paribas - Analyst [53]
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On the battery supply sourcing, and what capital at risk that you might have to put, or commitments to.
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Dieter Zetsche, Daimler AG - Chairman of the Board of Management/Head of Mercedes-Benz Cars [54]
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Sorry. We are confronted with a situation where, in spite of the starting growth in this field, we see excess capacity. And we see an ever growing number of suppliers coming to us, and a significant, or an interesting, reduction of cost per kilowatt hour in that area. Many new competitors are adding now, coming to the game in China, and some of them being very capable already, by today. So at that point of time, we have no visibility of a shortfall in supply, as far as the cells are concerned.
We ourselves, as you know, are investing in the batteries, which is not the cell, but the entire assembly of the batteries, including all the other parts, beyond the cell. That's our part. But once again, eight years ago this was the discussion and we set up our own cell production, because everybody said you will be strangled by the Koreans, or whomever, who will not give you cells when you need them.
The opposite is true. It was just a lot of money in that field, and it only prevented us from picking the best supplier technologically, and especially economically, and we are in this game today in a very favorable way. And this development is encouraging.
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Bodo Uebber, Daimler AG - Finance & Controlling/Daimler Financial Services [55]
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So I don't have to correct Dieter, because he was right what you said there, by definition, but usually of course, he's very knowledgeable in many things. But just to add a little bit when you go back 10 years or 15 years, we had interest rate development up and down. It was normal course of business for a couple of years. And normally what happens is that you pass over it to the customers after a certain period of time; you lose three to six months in financial services, to adapt to the situation. When we now, from my point of view, assimilate rising interest rates, I do things that the GDP development will go in line with this, and somewhat inflation also. So keep in mind the whole system might be different, and then, of course, in this, Dieter is right, the penetration rates are more or less kind of the same.
So for this I don't see a huge impact. On the other hand, I do think we are a well run Company. You know our rating is a very positive one, and that helps also to do a very good financing for our customers, and you will get even good news during the day. There will be another announcement from another rating agency which moves us in a little bit off better position, which I like, and that we will use to do a better support for the divisions.
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Bjorn Scheib, Daimler AG - Head of IR [56]
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So ladies and gentlemen, thank you very much for your questions, and being with us today. For the ones of you who are listening via the Internet, thank you very much for joining in. Also big thank you to the management team for comprehensively answering all your questions.
As a friendly reminder, you're being informed that we're going to host our Capital Markets Day on financial services mid February in London. For the ones of you who haven't signed up yet, make use of the opportunity you've seen today. There seems to be some interest on this business. And with this, have a lovely day, a safe travel back to your homes. As always, IR stays at your disposal. Have a lovely day. Bye-bye.
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