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Executives

Dieter Buhl - Head of Investor Relations

Bodo Uebber - Chief Financial Officer

Dr. Dieter Zetsche - Chairman of Management and Head of Mercedes Benz Cars

Andreas Renschler - Head of Daimler Trucks

Analysts

Jochen Gehrke - Deutsche Bank Frankfurt

John Lawson - Citigroup, London

Daniel Schwartz - Commerce Bank, Frankfurt

Aleksej Wunrau - BHF Bank, Frankfurt

Christian Breitsprecher - Oppenheim Research

Horst Schneider - HSBC, Dusseldorf

Philippe Houchois - UBS London

John Buckland

Max Warburton - Sanford Bernstein, London

Thierry Huon - Exane Paris

Adam Jonas - Morgan Stanley London

Georges Dieng - Natixis Securities

Ranjit Unnithan - J.P. Morgan London

Arndt Ellinghorst - Credit Suisse London

DaimlerChrysler (DAI) Q4 2008 Earnings Call Transcript February 17, 2009 9:00 AM ET

Dieter Buhl

Good afternoon from Stuttgart. This is Dieter Buhl from Daimler Investor Relations. On behalf of Daimler, I would like to welcome you on both the telephone and the internet to our full year results conference call.

We are happy to have with us today the Chairman of the Board of Management of Daimler and Head of Mercedes Benz cars, Dr. Dieter Zetsche, the Head of Daimler Trucks, Andreas Renschler and CFO, Bodo Uebber. In order to give you maximum time for questions, Dr. Zetsche will begin the conference with a short introduction which will be directly followed by a Q&A session. The webcast and the respective charts of the press conference held this morning are available on our website.

Before we start, I have a couple of administrative details. I would like to remind you that this telephone conference 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. These forward-looking statements can be identified by expressions such as assume, anticipate, believe, estimate, expect, intend, may, plan, project, and should. Such statements are subject to many risks and uncertainties, examples of which are set out in the Safe Harbor wording in our documents and are also described in our most recent Form 20-F under the heading, Risk Factors. If the assumptions underlying any of these statements prove incorrect, then actual results may be materially different from those expressed or implied by such statements. Forward-looking statements speak only to the date on which they are made.

Now I would like to hand over the conference to Dr. Zetsche. Dr. Zetsche, please.

Dr. Dieter Zetsche

Thank you. Ladies and gentlemen, Daimler’s business performance in 2008 told two completely different stories. We had an extremely successful first half year followed by an abrupt downturn of markets in the second half. With this background, I begin by pointing our three basic facts.

First, Daimler is in a relatively strong position to face this crisis. During the first half of 2008, we proved how well we perform under normal conditions. Second, we have adapted to the extreme conditions that have prevailed since the end of the third quarter and our measures are proving to be effective. Third, both of those facts give us the opportunity to emerge strengthened from this exceptional situation and we will seize this opportunity.

Now, let us turn to last year’s figures beginning with the fourth quarter. Dramatically worsened market conditions had a substantial impact on our Q4 earnings. Mercedes Benz cars posted a loss. Daimler Trucks’ earnings were reduced mainly by expenditures related to the repositioning of our truck business in North America. Mercedes Benz Vans remained at the previous year’s good level while slightly increasing margin. Q4 earnings at Daimler Buses were somewhat below the fourth quarter of 2007 which had been exceptionally strong. At Daimler financial services, there was an increase in earnings compared with the previous year’s fourth quarter which had been impacted by expenditures following our separation from Chrysler Financial Services.

In addition to these developments in our division, the fourth quarter of 2008 was substantially burdened by charges of 2 billion euros connected with Chrysler. Excluding the impact from Chrysler and other special effect, fourth quarter EBIT amounted to 272 million euros profit.

Let us now take a look at our results for the full year 2008 starting with cash flow. In 2007, our industrial business delivered a positive free cash flow of 7.6 billion euros compared with a negative 3.9 billion euros in 2008. The figure for 2007 included cash inflows of nearly 5 billion euros from the transfer of EADS shares and from the sale of real estate in Japan.

In 2008, cash inflows from the sale of Potsdamer Platz in Berlin and the transfer of EADS shares partly offset the cash outflows for the acquisition of Tognum shares and the payment of the subordinate loan to Chrysler.

The negative cash flow of 3.9 billion euros primarily resulted from an increase in working capital of 3.8 billion euros. This is largely due to the sharp drop in unit sales of Mercedes-Benz Cars in the fourth quarter. Other factors include new vehicle launches and the build out of the new E-Class predecessor. These proportionately high payments to our suppliers at the end of the year, the temporary increase in investment expenditure associated with the launch of the new E-Class, investments in technologies for reducing CO2 emissions, as well as our acquisition of strategic interest in the Russian truck manufacturer Kamaz.

So, what have we done in the second half of 2008 and since to strengthen our position in this modern turbulent market environment? First of all, we are preparing to cope with all contingencies and are therefore planning for several different scenarios. However, in each of these scenarios, a key role is played by three levers. Consistent and aggressive crisis management, further sustainable efficiency improvements and future oriented long term investments in new products, technologies and markets.

One of the crucial levers for improving our cash flow is the reduction of our vehicle inventory. In the summer of 2008, we therefore began to adjust our production program. Since December, we have been producing fewer vehicles than we sell. As a result, we have reduced our vehicle inventory by 40,000 units by the end of January compared to last year’s peak figure. We plan to reduce our vehicle inventory to normal levels by this summer, thus further reducing our working capital.

We have also introduced the strict system of cash management. We have subjected all budgets to a rigid review process, and we are also fundamentally reevaluating the necessity of all investment projects that are not directly related to vehicles, such as for example in the areas of IT and real estate. As a result, we are postponing all expenditures with no direct relevance to our competitiveness. Of course, that includes our new office building Stuttgart-Untertürkheim.

The shorter work times that have become necessary as part of our program adjustments, are leading to savings in labor costs and other contribution to improving our cash flow. At Mercedes-Benz Cars and in our van business unit, we have introduced short time work almost everywhere. Approximately 50,000 employees are affected in total.

In addition, at our headquarters and in our divisions, we will institute collective work breaks that are covered by vacation and flexi days. We have almost fully utilized the instrument of flexible work time accounts. These actions are being supplemented by a series of further measures, including waiving salary increases for senior executives, reducing the number of temporary workers, suspending our employee shares program, and strictly limiting participation and external training programs and the use of external consultants.

Now, group wide administrative functions, we expect to be able to save about 23% this year compared to 2004. Thanks to our new management model. That means that we have fully achieved our goals connected with a new management model. The full effect of these measures will first be realized this year. In absolute numbers, we are counting on more than one billion euros in annual savings.

All in all when we add our short term crisis measures and our continuing efficiency enhancements, we anticipated overall savings in all of our divisions in 2009 over 2008 of several billion euros this year. With 8 billion euros, we have a good level of gross liquidity for continuing operations. The unusually high liquidity at the end of 2007 was related to the sale of majority interest in Chrysler. As a result of the decrease, we have achieved a level of liquidity appropriates to the Daimler group.

The net liquidity of the industrial business decreased to 3.1 billion euros due partially to the cash flow development but also to the share buyback. Various bond issues in the fourth quarter of 2008 and in January 2009 have shown that we have good access to the capital market although currently at higher refinancing cost.

In 2009, we have bonds due for refinancing in an amount of 8 billion euros and similar amounts in 2010 and 2011. This means that we acquire a long term refinancing for approximately 2 billion euros in each of the coming quarters. We see no problem in placing this volume in the market.

Our credit relations with our partner banks worldwide are stable. In addition, we augmented our non-utilized credit lines in the autumn of 2008. At the same time, we remain focused on key long term objectives. That is why we will not cut our investment in new products, green technologies, or important growth markets.

Our rule of thumb is that the best remedy in hard times is innovative automobiles and that is exactly what we have got. This year will be the year of the E-Class, as a sedan, a coupe and a station wagon. Customer response to date has been very positive. We have already received more than 35,000 orders for the sedan since the order book was opened in Western Europe on January 12. That order rate is even better that the already good rate we had for the new C-Class when it came to the market two years ago.

The official E-Class market launch is scheduled for March. In the second quarter, we will launch the new generation S-Class, which will be followed in the third quarter by the new generation GL-Class. So, we will continually update our extensive product range by introducing attractive new models for 2009.

Our commercial vehicle business will focus among other things on the new Actros which will be available in all model variants in 2009. In general, clean and economical vehicles will play a key role in the market’s accessible products. That is why despite the economic crisis, we will remain firmly committed to our strategy for sustainable mobility, and we are making excellent progress both with regard to the optimization of combustion engines and with hybridization as well as with fully electric cars powered by batteries of fuel cells.

We will make further advances in each of these areas throughout 2009 and beyond, and in giving you just some of the background, let me first turn to the drive technology that will determine the most significant reduction of road traffic emissions in the short and medium term, the combustion engine. Our new four-cylinder diesel engine offers an excellent example of just how green and dynamic innovative combustion engine can be these days. No other four-cylinder engine provides as much torque and at the same it consumes only 5.3 liters of diesel per 100 kilometers in our new E-Class. That corresponds to only 139 grams of CO2 emissions per kilometer. Year 2009 also marks the launch of Daimler’s hybrid offensive [11.24] car segment which will kick off with the S400 BlueHYBRID.

This vehicle is not only the first German series produced hybrid but also and more importantly, the first hybrid model worldwide that comes with innovative lithium-ion technology. We will also produce a small volume of Mercedes-Benz B-Class models equipped with a fuel cell drive this year.

Towards the end of the year, we launched a second generation electric smart within the framework of major pilot project. And next year, we will stop production of a limited series Mercedes model with a battery electric driver as well.

The speed at which we can move ahead in the area of electric mobility heavily depends on available battery technology and lithium-ion batteries play a crucial role there. We have therefore secured direct access to this important technology through our participation in li-Tec [GmbH], a global leader in the production of lithium-ion cells. All of these costs money but it is money well spent. In total, Daimler invested more than 10 billion euros in research and development in 2009 and 2010. This investment is important because it will ultimately determine which companies will emerge strongest from the crisis.

Another area where we continue to move ahead is the expansion of our presence in the major growth markets of Russia, India and China. It is true. The emerging markets are also being impacted by the global economic crisis. However, our industry’s long term growth will be concentrated in these regions where the potential is still enormous.

Now, with regards to the outlook for this year, we cannot give you any specific guidance at this time. Based on developments that we consider probable for today’s perspective, global demand for cars in 2009 could decline by at least an additional 10% compared with 2008. At the same time, the market could bottom out in the second half of the year. However, in terms of our cost targets, we are also preparing for the worst development.

The outlook for major commercial vehicle markets is not good. In total therefore, Daimler is prepared for significantly lower business volumes in 2009. Unit sales will continue to fall and we also anticipate further substantial pressure on earnings, both at coupe level and at individual divisions.

The first quarter will be significantly negative. Due to the full availability of the new E-Class and the effects of our efficiency measures, we anticipate a gradual improvement as the year progresses. This is also based on the assumption that there will be somewhat economic recovery in the second half of the year.

We will provide more precise statements on earnings later in the year when it becomes easier to predict where the world economy and the markets are headed.

Ladies and gentlemen, thank you for your attention. We are now happy to answer your questions.

Dieter Buhl

Thank you very much, Dr. Zetsche. Ladies and gentlemen, you may ask your questions now. I will identify the questioner by name but please also introduce yourself with your name and the name of your organization that you are representing before asking your question.

Two practical points; firstly, please avoid using a mobile phone as this distorts the quality of the call for everyone and secondly, please ask your question in English. Before we start the session, the operator will explain the procedure.

Question-and-Answer Session

Operator

(Operator Instructions)

Dieter Buhl

Your first question comes from the line of Jochen Gehrke at Deutsche Bank, Frankfurt.

Jochen Gehrke - Deutsche Bank, Frankfurt

Good afternoon. I do have two questions for Dr. Zetsche. Number one, working capital; could you maybe just give us a bit of a feeling how working capital should progress over the year 2009 now that you have moved to a shortened workweek. Should we see already an improvement in the first quarter and how long do you need to bring working capital back down to a normalized level?

Secondly, on cost reductions, I understand that in the press conference you mentioned several billions in cross targets for the current year. Could you just clarify at least in terms of buckets where you think those shall be coming from should we anticipate a further restructuring measure throughout the year 2009 and is this all incremental or do you count already announced cost savings such as a modular strategy etc? Thank you.

Dr. Dieter Zetsche

The question, working capital obviously the ultimate outcome is depends on sales and production. I mean that is very basic and what we can plan for exactly is production. On our assumption for sales, we assume that we will have significant progress in reducing the working capital in the first quarter, and I will make to the second statement a remark right afterwards and basically be done in Q2. Now, the remark is that we plan to do a summer break in end of July or August and if we would go with minimal inventory levels in two days break, obviously we could not serve the market during and after this break anymore. Therefore, we have to prepare a little bit for this break and then right after be rather below than at our levels we are planning for.

The cost cutting program, you know when we in the past have announced a specific program with numbers and categories and all of that. We are very much committed to deliver exactly on those numbers. While we have a clear understanding about the scope, we want to achieve while we have already a high degree of definition how to accomplish this scope and while we are already in execution of course as we want to see the effect within 2009. We have not this precise level for the total program to be measured against and that is the reason why I have not been very more specific in my statement I made before, but what this program means is that it is cost saving over the level and above the level of 2008 being effective in 2009 and of course we are using tools we have on hand, like for instance, the modular system but this will not provide for significant improvement in 2009 specifically and especially the effect of the new E-Class where this cost structure is not counted as part of this program.

Jochen Gehrke - Deutsche Bank, Frankfurt

So, should we expect at a later stage like as you said initially with your guidance that we also get further clarity on where we stand on your cost positions and how much you think you could take out of the structure, later in the year, I mean?

Dr. Dieter Zetsche

What would be interesting to you in this regard in the first place would be an amount of restructuring charge. At that point of time, we do not have plans in this regard and therefore, I think it is not necessary or does not provide too much added value to go into too much detail with this program.

Dieter Buhl

Your next question comes from the line of John Lawson - Citigroup, London.

John Lawson - Citigroup, London

Thank you very much and good afternoon. First question if I may, I think you said this morning Dr. Zetsche that R&D would remain quite close to the 10 billion cumulative over the next 2 years which had been targeted a year ago. So, how much can you take out of the other element of spending the PPE CapEx which I believe was funded around for 4 billion per annum, just how much is it realistic for us to expect you to cut there?

And second point, I just wanted to ask how big were the customer deposits at Mercedes-Benz Bank at the end of the year and how big is that relative to the asset base of that entity? I am obviously wondering whether you have made any progress in regrouping the worldwide business into Mercedes-Benz Bank with a view to opting for government guarantees for your financial services refinancing. Thank you.

Dr. Dieter Zetsche

Thank you for your questions. I do not think we have given you specific planning figures for 2009, 2010 as far as our R&D or CapEx is concerned. We gave more rough combined numbers for the next three years or something like that. So, in comparison to our original plan, we have reduced the R&D total spending by some hundreds of millions, while protecting the contents to the maximum extent.

We have just to give you one idea for instance defined on the production site a scope of about 800 million euros reduction in CapEx for 2009 at that point of time. So, that is the status of our efforts by then. This number was now specifically and exclusively for Mercedes cars. So, I do not give you the full scope but some idea in what steps we are moving forward and with that I would like to move on to Bodo to give you more information about our Mercedes Bank.

Bodo Uebber

In the end of the year, we had 6 billion in terms of deposits in the Mercedes-Benz Bank and they have increased our rates during the course of January and currently we are not finished with the order backlog, so to say, we are at 8 billion and our portfolio is roughly 16 billion. In this regard, we plan also to just as information of course the question where do we use this kind of liquidity. You know that we are having Spain as a branch of the Mercedes-Benz Bank. So, it means, we have all Spanish portfolio within the bank and we plan to do so also for example for UK. So, that means also we are optimizing our European portfolio there to use as kind of liquidity.

John Lawson - Citigroup, London

At this stage, you have not applied for anything, I guess.

Bodo Uebber

Applied, also your second question of course as we always said, we are watching the situation there and I said before we have right now enough liquidity in the Mercedes-Benz Bank, but if we do get to competitive disadvantages to our competitors, we will have the option to do so but that we will decide at a later stage.

Dieter Buhl

Your next question comes from the line of Daniel Schwartz - Commerce Bank, Frankfurt.

Daniel Schwartz - Commerce Bank, Frankfurt

One question on cash flow, in the first quarter, you expect a negative income for the group but with a planned reduction working capital, do they expect a positive free cash flow in the first half, or in other words, have we already been at a low point with regards to net liquidity? The second question is regarding trucks. You significantly increased your market share in trucks. In the fourth quarter, as well as the third quarter especially in Germany, is that due to the rollout of the Actros and can we expect a similar development

in other markets going forward?

Bodo Uebber

Daniel regarding your first question, we have addressed it also in the press conference. We like to stay with our guidance as we said first quarter P&L was remarked negative, substantial negative and what Dieter Zetsche said to reduce our working capital in the first two quarters with the statement Dieter made to the end of the second quarter where we have this downtime plan in July. So there, we will address in the first and second quarter this cash with a working capital and more we do not want to say right now.

Daniel Schwartz - Commerce Bank, Frankfurt

Okay.

Dr. Dieter Zetsche

I think the slightly increase we had in Germany in the fourth quarter was based on the new Actros. We launched this as the new truck of the year at 2008, and this was one of the impacts. The second for us that we had a little bit challenge, if you remember in the first quarter, was delivery but it was spread through the year and that is the reason we ended up at just slightly higher market share.

Depending on the other region you asked, if we can see there the same effects or the first effect will be not there any longer. We have no shortage. We try to stabilize and if there are possibilities to increase the market share but we have very good positioned market share around the world or will be a very good position or it will be very tough.

Dieter Buhl

Your next question comes from the line of Aleksej Wunrau - BHF Bank, Frankfurt.

Aleksej Wunrau - BHF Bank, Frankfurt

Good afternoon, Aleksej Wunrau. Three questions if I may please. You have fully written down your receivables with Chrysler but you continue or you resume component deliveries to that company, so whether we have to brace for some future one-offs in this regard? Secondly, the funding status of your pension plans will reveal some gap, so my question is whether there are going to be any annual contributions to that plan and if this is going to weigh down on cash flows? Thirdly, on page 19 of your presentation Dr. Zetsche, you mentioned cost savings of this 1.2 billion from the new management program. What portion of this can we particularly expect to become effective in 2009?

Dr. Dieter Zetsche

Aleksej, to your first question, the Chrysler components, of course, these are deliveries as we have them also to other customers so to say, and we apply here the respective accounting methods which we have to apply. So there is nothing special here and it is also not included in the mentioned 3.2 billion. So we have there normal course of business, so to say, and also the volume is of the 200 million to 300 million basket. So it is not a huge one, so to say.

Aleksej Wunrau - BHF Bank, Frankfurt

The deliveries to Chrysler.

Dr. Dieter Zetsche

Yes right. The funded status of course there we suffered for some of our equities of course in the returns. We do not plan for any cash flow contributions, just to mention, but the one of course we are legally obliged of course we will do so and these are maybe, I do not know, 100 million to 200 million through the whole world, less than this 100 million.

Aleksej Wunrau - BHF Bank, Frankfurt

You talked that you may cut social benefits to your employees. So, is there any chance of just cutting the benefit obligations and so to say lowering that gap?

Dr. Dieter Zetsche

No. Of course we have lowering the gap of last year. The German plan shifted over in a kind of defined contribution plan, but we will further analyze the situation and if necessary we will do further actions.

Aleksej Wunrau - BHF Bank, Frankfurt

What about this 1.2 billion?

Dr. Dieter Zetsche

The 1.2 billion, 250 million to 300 million of that will be effective in 2009 compared with 2008.

Aleksej Wunrau - BHF Bank, Frankfurt

A 250 million to 300 million?

Dr. Dieter Zetsche

Yes.

Dieter Buhl

Your next question comes from the line of Christian Breitsprecher - Oppenheim Research.

Christian Breitsprecher - Oppenheim Research

Yes, good afternoon. It is Christian Breitsprecher from Oppenheim. I have two questions. One, on your credit lines outstanding, could you tell us just the amount of unused credit lines that you still have and secondly, with regards to the whole state of your value chain. I mean is there any risk that you may have to take equity stakes in suppliers, or that you will have to extend loans to suppliers because they just do not get any funding from banks? How stable is the situation? Do you think that the worst is behind us or is Q1 or Q2 really the point in time when the whole value chain might get under such significant pressure that you may have to use extraordinary measures?

Dr. Dieter Zetsche

I will start with your second question and then Bodo will talk about the credit lines supply network. We have relatively good transparency today compared to like two or three years ago with early warning system about the status quo of our suppliers. That is the good news. The bad news is that what we see is not very pleasant, and these are of course individual cases which we deal with on an individual basis typically ask an industry because almost all of these suppliers deliver to all or most of the OEMs in Germany and this is kind of a routine where we then sit together and decide in every specific case what to do, if to do something, what to do.

I do not foresee a situation where we would come up with equity in anyone of those cases. I do not exclude this possibility but I do not foresee it at this state. There are numbers of different ways to react between doing nothing to giving loans and talking about prices of whatever. There much depends on what is the reason for the trouble the supplier is in on the one hand and on the other hand, how dependent we are on these specific deliveries.

We have seen definitely significant increase in cases we have to deal with. We have not seen major crashes to some extent because we have better preemptive actions and transparency to some extent but of course it can happen tomorrow morning, so I definitely kind of exclude that. I do not think that we have seen the worst. The number of suppliers who are thinly stretched is still growing and is significant, and that is an industry problem we have to deal with together as an industry and hopefully as far as the problem is just the lack of financing for an otherwise stable and promising supplier, we of course try to encourage the banks to play their role.

Bodo Uebber

Even in this regard, we had three days ago, a supplier where we could convince the bank to step in so of course it is not excluded that we could convince with all the treasury guys, the banks to stay in this Company. So, we do all the things that we can also of course to avoid what we have liquidity outflow out of Daimler.

To your second question, the credit lines, we have two credit lines. One is a US$5 billion credit line, which is committed and unused until the end of 2011, and just last year, we did a 3 billion credit line as a commercial paper backup, and also for corporate purposes, 3 billion euros 364 days means October 2009.

Dieter Buhl

Your next question comes from the line of Horst Schneider - HSBC, Dusseldorf.

Horst Schneider - HSBC, Dusseldorf

Good afternoon, Schneider from HSBC. Quickly, two questions. The first one is on your market guidance for global automobile demand. It strikes me that you guide only here for decline of 10% in 2009 but when I listen to statements of your PS like for example Volkswagen which is guiding for demand decline of 20% even this year. I ask myself how conservative that guidance is or that market guidance is, so could you please breakup your market expectations by regions and in particular would be interested in your expectations for the Western European and the North American market, and also I would be interested to know if you expect premium car demand to decline more since the global demand for automobile in general, and last question is on a possible cooperation with BMW. I do not know if you have mentioned that already in your presentation. Sorry, therefore if I ask again that. But could you give any more details if and then you could announce more details on a possible cooperation with BMW. Thank you.

Dr. Dieter Zetsche

Thank you. As for your first question is concerned, we kind of address our divisions, if you want, in a split way. On the cost side, we made much more conservative assumptions, conservative means more negative assumptions as far as the market development is concerned, and to the revenue sale side of the house, we said that we would expect the development in the range as you were mentioning as we said at least 10% minus. In this regard, we assume that the current status which is clearly further down will continue for at least the first half that we will see some recovery in the second half. But once again, we are prepared in our plan for a more negative development which basically then would not see any recovery in the second half of the year because [inaudible] in the scenarios.

Horst Schneider - HSBC, Dusseldorf

Okay. Sorry, can you give a bit more details what is your worst case assumptions and your planning.

Dr. Dieter Zetsche

No.

Schneider - HSBC

Okay, and the split by a market, what do you expect by region?

Dr. Dieter Zetsche

I can just give you an example for instance, when you take North America. Obviously, we are having there a range of about 13 million to 11 million between the scenarios I was just talking about.

Horst Schneider - HSBC, Dusseldorf

Alright, thank you.

Dr. Dieter Zetsche

Well, I will leave it there. BMW, Daimler, there are no news which would come from the participants in these discussions. There are many so called news from the media. The fact is that we inform quite some time ago that between the two companies we are evaluating potential opportunities of work together in some fields like we do in hybrid and until today we have nothing to inform about, but obviously the topic is so exciting that we see other sources to give information which are none.

Dieter Buhl

Your next question comes from the line of Philippe Houchois - UBS London.

Philippe Houchois - UBS London

Two questions please. The first one is I am looking at your operating leverage at Mercedes in the fourth quarter, it looks quite high. If I summed it right, you have lost about 1.8 billion of operating earnings on a 3 billion drop in revenue. That seems much worst than what we have seen elsewhere in the sector so far. Is there anything unusual in, I know you do not supply profit bridge, but if you can provide some clarity on why we had such drop, and the other question I have is more for Bodo. The cash position that you reported at the end of the year of 3.1 billion, how much of that cash is actually tied up in the financial services business and are you still in a position where you feel like this cash can be brought back to the industrial side and are you refinanced for the market or should we consider that cash is permanently gone to the [finco]?

Dr. Dieter Zetsche

Perhaps what I could mention there with regards to the fourth quarter and your question, is that a significant amount coming from the difference of the E-Class in the fourth quarter of 2007 versus the fourth quarter 2008 were obviously we are in the last phase of the runouts with volume and a very much depressed in a segment which is a key contributor to our overall profits.

Philippe Houchois - UBS London

That is makes sense. Mix effect, okay.

Dr. Dieter Zetsche

That is certainly one important element. We have exchange rates there, which a significant chunk is exchange rate as well. We have some one-timers as which are not reported one-timers but nonrecurring issues included. Overall, our base levers like the productivity in our plant like raw material develops pretty positive so there were even raw material for the full year with 1.5% reduction in spite of significant raw material increases but it is basically revenues and thereby as I said a major impact from the E-Class and from exchange rates.

Philippe Houchois - UBS London

Yes. Okay.

Dr. Dieter Zetsche

You are welcome.

Bodo Uebber

To your second question, it is pure industry.

Philippe Houchois - UBS London

Okay. So there is no internal planned lending from parent to finco?

Bodo Uebber

Right, in the 3.1 billion.

Dieter Buhl

Your next question comes from the line of John Buckland.

John Buckland

As we have not got any profit and loss or balance sheet numbers with these results. I just wondered if you can give me two numbers if there are. What is the inventory at the year end, it was 17.3 billion at the end of September for industrial business, and also what the trade payroll number was at the end of December, it was 8.3 at the end of September, if those numbers are available?

On the truck business, I wonder if you could give us how the ordering take has developed in January and in February. It is obviously very pretty awful in the fourth quarter, and given your restructuring the US operations for a cyclical downturn and perhaps not the recovery you expect in North America, I just wonder whether you are thinking about doing a similar thing for the European truck operation, given the outlook for that market is equally dire, and just on the issues of cost cutting restructuring, under what circumstances will these temporary lay offs will the short term working have to become a more permanent feature and therefore you have to have restructuring and perhaps suggest your cost base in a more permanent base to lower volume lower mix environment. Where are we? How close are we to that much tougher decision?

Dr. Dieter Zetsche

While Bodo is looking for our year end inventories, Andreas can start to talk about trucks in North America.

John Buckland

It was a European question, I see.

Andreas Renschler

If I got your question right, this was a question of the order intake in January and February. I think more or less they follow the line you saw in the first quarter of last year, and as overall the regions comparable. The second question if I got it right was a market forecast for Europe, for trucks. So, it is tough to say of course, and like Dieter Zetsche said, we are focusing on different scenarios. If you ask me, I think a decrease of 30% is more realistic in Europe.

In the United States, it looks like it is slightly above. There is also a decrease compared to 2008, a slightly decrease in the United States. The Japanese market, it looks like that it has reached the bottom line, the Japanese market. If you look at the rest of the world, that means Far East also Middle East, there is also a decrease foreseen. But again the best thing what we can do is focus on a different scenarios and find ways through if production if all the measurements we can take that we still can fulfill all targets.

Dr. Dieter Zetsche

You are satisfied with the truck answer?

John Buckland

Well, I was wondering whether given the European market peaked to trough variations slightly to be similar to that of the US, and we could have an extended downturn given the level of order intake, when you have restructured the US operations. I mean you are not needing to do the same for Europe, and also I wonder whether the same question applies to the vans where you actually increase capacity recently, did not you, yet we were facing a similar outlook for those products.

Andreas Renschler

If you look to trucks Europe first, I think what we have done so far is through our programs try to prepare ourselves for this kind of situations. So, in normal terms of a downturn we are prepared to come through a level of 30% decrease in the market in our plans without further measures because we have worked with temporary. We have a very high degree in temporary workforce. They are all gone by the end of the year and we have also worked with time accounts. So, at the end of the year, we have an average now in truck lines and positive time account of 260 hours.

So, first of all, we try to fix this with this kind of measures. If there are more measures necessary we can go, for example, to the reduced working hours per week and such measures. Somehow, I guess this is a situation in Europe and we will see how long this is going into different scenarios. First of all, we have to use what we have prepared ourselves and the second thing is then further measures.

Dr. Dieter Zetsche

Then of course of the truck site in Europe different from US, we do not have four, five smaller plans for consideration, but we have basically one big plan not counting the small one in Turkey and that is a very different production footprint between the two countries. The same more or less applies to Benz as well. The plans I mean are very concentrated productions in 1.2 big ships. The plans we had for expansion, we have stopped in time and not invested in this direction so that is not going to the wrong direction and not talking about the Chinese production which would start middle of this year, but that is obviously for this market which you cannot access in a different way. But the plan for Dusseldorf and Ludwigsfelde has been stopped, and you asked the other question about the workforce.

We have no plan of layoffs at that time and I do not want to speculate about potential activities in potential scenarios as well as this area is concerned.

Bodo Uebber

So, a lot of time to look up the numbers, of course, you find these numbers at the 27th of February will be disclosed along in your annual report in 28th and of course I would ask you also to look in these numbers so that preliminary numbers right now for the inventories are 16.8 billion and for the trade payables are 6.5 billion. If you compare this to the third quarter you see a big movement in the trade payables, which was also commented today in the press conference.

John Buckland

But it has come down, which is…

Bodo Uebber

Of course, yes, as we said we adjusted production towards sales but of course we thought we could do better, even in first quarter, but it came down from Q3 to Q4.

Dieter Buhl

Your next question comes from the line of Max Warburton - Sanford Bernstein, London.

Max Warburton - Sanford Bernstein, London

Good afternoon. Max Warburton from Sanford Bernstein. I have got some questions on mix, but just wondering if I can come back to Philippe Houchois’ question on the intercompany loan, a question for Mr. Uebber.

Page 21 of your presentation has the components of the gross liquidity and the net liquidity. Could you just help us to understand what the positive is in short term financing liabilities and the industrial business? There is a number of 6057 which seems to be a positive liability. What is that, if that is not a loan to the financial services company? That is the first question. And then, can I come back on the mix questions? Could we just get to the bottom of this liquidity question please?

Dr. Dieter Zetsche

We are flipping through a whole lot of pages, but we got there, okay.

Perhaps we ask the second half of your question then we can start answering this one.

Max Warburton - Sanford Bernstein, London

Yes, sure. Okay, thank you. Dr. Zetsche, a more strategic question for you, just on mix, it has got three smaller parts. I mean the first question is, are you seeing any positive signs on mix, just in terms of orders coming into Mercedes in last month or so? I mean maybe there are no orders, but from what you are saying, I mean you said something about E-Class orders. Is there any sign that moderating fuel prices is giving us a bit of a positive boost to engine mix within the model ranges? That is the first part.

Secondly, I mean obviously thinking about a small car strategy, are you still determined to go ahead and build the second small car plant, I think in Hungary, there was some stuff in the local press there saying that you had broken ground, and were going to start building a new A-B-Class plants. And then thirdly, just strategically, I mean I imagine the wise thing to do is wait a little while and see what mix looks like and try to figure out how is cyclical and temporary and how much might be more structural, but if the problem is structural, could you just give us your thoughts on how Mercedes repositions itself to be effectively more a smaller car company. How does Mercedes not to get pricing and pricing power in small cars and what sort of things would do differently to last time with smart and A-Class? Thanks.

Dr. Dieter Zetsche

Well, that is an easy one. First of all, as far as mix is concerned, and currently we have seen as I have mentioned before to quite some extent driven by the lifecycle of the E-Class significant overall proportion decline in that segment and as I mentioned this morning, we have seen in the first four weeks, 35,000 orders coming from Europe for the Europe E-Class, which is the higher absolute number than in the same four weeks after start of sales for the C-Class two years ago in a very positive economic environment.

So, I consider that is a pretty good news for the E-Class and for our mix altogether. When you then look to US market, you can see that the share between cars, trucks, SUVs, and minivans, beginning of 2007 was X and August 2007, the share of cars grew significantly on sacrificing the share of SUVs, Pickups to some extent and minivans.

When you go to December 2008 or January 2009, you will see that you have basically the exact same share of cars compared to beginning of 2007 and SUVs and minivans and Pickups. So there, the change was almost entirely in correlation with gasoline prices, and not with any other discussion, of course, oil is very much down but mix is less adjusted. Within the car segment there was a move towards more four-cylinder engines and more smaller cars, but the overall mix was we adjusted.

Now, looking more forward, first of all, Hungary if you ask, as we have said before we planned on four different models in the segment of the A and B Class compared to the two models we have in today, and we are very confident based on these very different models which we think are very appealing and we will have significant volume increases in that segment which we cannot supply for out of the capacity of Rastatt. That was the reason for the new plant in Hungary and nothing has change in this regard.

Looking further forward, I do not have any indications that our typical clientele would prefer to drive in smaller cars, less safe, less comfortable cars than they do today. What they do either for their own sake or for the pressure of the neighbors, want to see is lower CO2 emission and less fuel consumption and that is why we are working diligently towards reducing the CO2 level off of lead, not by selling Smarts instead of S-classes but by reducing the respective CO2 emission levels significantly in all segment and when you talk about an e-class with 500 new meters and 5.3 little fuel consumption, I think you can see where we are going with pretty big steps.

I do not see the need or any justification but I do not see either a way to turn Mercedes into a small car company. Once again in an illustrative way, selling Smarts instead of s-classes. We have with this Smarts certainly given the size of the vehicle and the segment pricing power. This is not an entry level vehicle pricing which we can charge with Smarts and even in the current situation, we have very low discounts on Smarts, I would say lower than in any other of our segments.

So, yes we have some pricing power there but I do not think that I would see a libel business case for Mercedes to become a Peugeot or Fiat with a star on the hood, as a company but once again that is not that I am saying it is because we do not know how to get there but because I see no reason to expect that customers would be reduced the numbers who want to have comfortable, safe spacious vehicles with some status which are very fuel efficient.

Max Warburton - Sanford Bernstein, London

Okay, thanks a lot. Do you want me to repeat the question on liquidity or is that something easy to answer now?

Bodo Uebber

That is easier now because I have more time to look it up. So the group is longer funded in the debt market but you can clearly see in the second column where we have the long term financing liabilities ended money to 6 billion here, a sort of money we are giving to the financial services side. So we are more conservatively funded which means if you look also at the consolidated numbers, you see of course it is not anymore there because you add industrial business and financial services. What means, at the end of the day, the 3.1 billion is net liquidity industrial.

Max Warburton - Sanford Bernstein, London

Just to clarify, you said before that did not include any allowance to financial services but that full six is, all of that six is in financial services at the present time.

Bodo Uebber

Right but we could restrict it easily and we could use the 3.1 billion for the industrial only. So that means we need to be a more conservatively funded which I do think a good message.

Dieter Buhl

Next question is from Thierry Huon - Exane Paris.

Thierry Huon - Exane Paris

I got a question on the residual value because I heard this morning you say that you are seeing some improvement on that side when BMW said exactly the opposite last week. So I would like to drove more detail on that and if this improvement is also for the luxury segment.

And then another question on your short time scheme that you may implement going forward, could you explain how it works and what is the compensation that Mercedes would have to pay to its worker if this scheme is implemented? Thank you.

Dr. Dieter Zetsche

First residual values; to some extent, first to clarify what I had said does not mean that we would be by now at better residual value levels that we were in the fourth quarter 2008. We had within the fourth quarter a further decline and then a turning point and an improvement in the last month which continues in the first month of this year.

Secondly to some extent, we are talking about Mercedes specific effect. For instance in Germany, this is very much influenced by our young use cars, one year old, half year old which is basically rental and employee car business in the first place. As we saw inventories building, we very much reduce supply in this regard plus a better use car market led to the fact that our inventory there came down sharply and prices recover. That is not totally opposite to the industry trend right now but we certainly have more momentum in this regard with Mercedes in Germany.

In the US, we have two effects which are different directions. One effect is that we have a growing number of lease cars coming back as the industry does at this time so this goes back through years where these percentages were very interesting. These cars are coming back. At the same time, we have a growing percentage of the cars being sold through our retail network which is the consequence of an initiative we took a year ago and which is very effective and of course the big auctions are putting much more pressure on retail values than the retail used car business.

So, altogether in US, we have seen this turning point as well let us say within the last two months and an increased activity on the used car side. So once again, if that is a trend, I cannot tell you but I can say that the development in the last two months on that front was encouraging.

Thierry Huon - Exane Paris

Okay that is helpful, thank you. About the compensation for short time?

Dr. Dieter Zetsche

We have regulations which apply per state in Germany. They are different from state to state and for instance in Baden-Watemberg, we have a very strange situation where the net income of the worker decline with the working hours declining and then when it goes towards zero, the net income goes up to 100% again.

So it is pretty strange with this legislation but that is what it is, very different from for instance Bremen where for another major plant of ours where we voluntarily added some to what we have legally to pay for short term altogether, I think it is fair to say that while we have reduced from 35 to 25 hours in our plan, we have about which is what 10 out of, that is about 30% something. We have, if you want residual cost of about 5% each points. So it is relatively good deal to award for residual cost when you are taking labor down. When you talk about a period up to 18 months, it is the most cost-effective way of adjusting production to lower sales volume.

Dieter Buhl

We will take the next question from Adam Jonas - Morgan Stanley London.

Adam Jonas - Morgan Stanley London

Just a follow up on the work structure in Germany, can you confirm that you have halted the early retirement program I think in all your plans but substantially in Germany as you kind of shifting more towards short time and can you say that this is going to be, as long as you have the short time at your disposal that your early retirement program will remain shut, not working?

The next question is on the e-class. You mentioned in this call and on the press call that you have been very pleased with the order intake, 35,000 orders you mentioned that higher than the e-class which is typically sells more volume. I think you referred to it in Europe where the orders were very strong. Maybe I am not the only one here that is scratching my head thinking who is buying an e-class in this environment? Where these orders coming from? Which countries are they coming in in a strong level? Or is it just literary taxi fleets or some other technically you would like to let us all be aware of?

And then finally on the dealers; you mentioned the distress on the supply side which I think we can all understand. What about downstream at the dealer level? Are you seeing any dealers going in solvent and if so or if not yet, but if this were to happen, what happens to the receivables from the dealer? Do you write them off completely against EBITDA? Can you just from accounting perspective tell us how you treat that? Thank you.

Dr. Dieter Zetsche

Well, first part, we have no ongoing early retirement program. We did very, very small number of early retirements but that is like a two-digit number around the end of last year, beginning of this year. This is a relatively or very costly way of reducing work force which at that point of time we do not think being prudent will be applied.

E-class; first of all in general terms, my assessment is that reduction in volume care sales are at least to some and perhaps a higher degree related to a shortfall in purchasing power of the respective clients whereas reductions in premium car sales is to my understanding primarily related to psychology. When you just lost some of your assets at the stock market or you have difficult restructuring in the company you own or things like that, you are not necessarily in the mood to buy a new BMW, Mercedes, you name it. This for me is the reason why I think we have a chance for faster recovery because obviously the mood can change faster than purchasing power and secondly, we have a huge clientele of former e-class owners or current e-class owners. This is the classic Mercedes, the e-class and many of these customers are certainly financially able to buy a new car and are curious about the successor and hear all these wonderful stories about very low fuel consumption, extremely high level of safety equipment and so on.

And therefore, first of all, this is not any technicality or anything but it is just orders. Admittedly, a portion of it coming from dealers as well, so these are not all customer orders but to me just like it works with the c-class at the same time so those numbers are totally comparable and the fact that it is just this absolute number is higher for the same period of time then it works for the c-class which once again, I think is a good indication.

Dealers downstream distressed we informed for instance last year that in Germany, we did some general support program which was related to some different distribution of risk on receivable values as well in the magnitude of I think $60 million or something in this range and there are some, have been some local program of this kind in other market as well that funneled to that magnitude. So we, of course, looking at the profitability on capitalization of our dealer body in their respective market. In some cases, we see the necessity of doing something in general term or we see the necessity to do something on an individual basis but we do not see this necessity.

So, to some extent, this will lead to some restructuring as well, not necessarily there where we would like to be but we will not stop all of that from happening and return. Probably, Bodo can give you a better information about the fact that we are floor planning to very high extent to our dealers and therefore we basically own the inventory and have less risk of receivables in this regard.

Bodo Uebber

Dieter was right. As to the extent of the process, we have implemented in the Company like on the supplier side, we have a weekly meeting between treasury, sales and financial services to exchange all the information, of course, we have from the dealer and we do let us say an assessment what we do in the specific case and what we do so to say for each and every country.

And Dieter is right, from a risk point of view of course the staff is floor planned so as we bake at the end of the day, normally our risk costs are from an average percentage of course lower than from a pure retail point of view.

Dieter Buhl

We will take the next question from Georges Dieng - Natixis Securities.

Georges Dieng - Natixis Securities

I have two questions. First of all on the residual value risk, if I understand correctly what you said, should we assume that you rollout having to book for the provisions for residual value risk be in the US or in Europe?

Second question on Chrysler; I was wondering what is today your assessment of the residual risk on Chrysler both in terms of viability and in terms of P&L. Am I right in thinking that now that your participation is worth zero that you will not have to book any further antiquity losses in the coming quarters?

And sorry I have a final question on the clarification on the outlook, when you say that you will be losing money in Q1 at group level, are you talking operating or net profit? Thank you.

Dr. Dieter Zetsche

That one was related to EBIT. The first one, we cannot rollout. What we told you is that within the last two months, we see a positive development and now, we always when we talk about the future, we start to speculate, is that a trend? Is that a stabilization or will we see another turning point and things will deteriorate again, which of course very much depends on the overall development of the economy and other indicators? So, we cannot rollout. We just can tell you that the information we got from the last two months was encouraging. That is all we can say at that point in time. And Bodo, you can talk about Chrysler.

Dieter Buhl

So George, you were right. The book value is zero and the loans are written off 20. So you are right with this. The further risk we do have is the pension guarantee we have in place that is US$1 billion pension guarantee which we have guaranteed to the pension benefit guarantee cooperation in the US regarding to Chrysler and as I said also in the conference call that we have of course some asset right now which are transfer to Chrysler. These are the wholesale companies which we had from Chrysler. This is the ongoing business we have despite the uncertainty that could kind of exclude a risk there but of course they cannot calculate it there.

Georges Dieng - Natixis Securities

Just to make it very clear, in Q1 for instance, if Chrysler reports losses, will you have to book losses at the equity in your P&L?

Bodo Uebber

No impact on the equity accounting because the book value is zero. So we do not have any impact anymore in the P&L there from the equity accounting.

Dieter Buhl

The next question we take from Ranjit Unnithan - J.P. Morgan London.

Ranjit Unnithan - J.P. Morgan London

A question on the financial services. Could you comment on the cost of risk? I know it increase, maybe if you could put some numbers around that either as the percentage of your loan book or in terms of millions of euros that will be great and if you could comment on the delinquency trend in your loan book through the Q4 quarter and compare it to Q3 that will also be helpful.

Lastly, can you comment on the sustainability of your loan book? So, right now it stood at $63 billion. You issued about $30 billion of new business retail loans in last year. How do think about managing that in 2009 given where the credit markets are? Does it, it sort of kind of imply the penetration rates have to go off for your book. If you could comment on all those points, that will be great.

Bodo Uebber

So regarding your question of cost of risks, we had at the year 2008, we had 73 basis points in terms of cost of risks to 0.73% compared to 2007 of 0.43%. Of course, the 0.73% is more than the net credit losses we had in 2008. Delinquency trend of course is going up and we also the repossessions going up more or less all over the world but maybe also in the US. So the delinquency trends of course are let us say I think higher that means also for the year 2009, we do expect higher cost of risks than in the year 2008 but I do think that it is common knowledge more or less for each and every, let us say for the automotive industry I would say.

From the portfolio point of view, I do expect the portfolio of course going down as we see our sales going down. We tried to keep our support that means our penetration which we had the last years on the level we had. In some markets, maybe even we have to go into the markets as we some banks going back from this business so might support it even a bit more but it depends a little bit on the liquidity situation and balancing the business there.

Ranjit Unnithan - J.P. Morgan London

One follow up, so based on what you see on delinquency rates, do you have an estimate for what cost of risk could end up in 2009?

Bodo Uebber

No, as long as we do not get, say we have decided to stay with our EBIT guidance as we have said, so it will go up but we will show you each quarter where.

Dieter Buhl

The final caller of today we take from Arndt Ellinghorst - Credit Suisse London.

Arndt Ellinghorst - Credit Suisse London

Just to more strategic question to conclude this call, do not we see a very drastically changing environment for the car industry? I mean firstly, we are probably under the decayed of a technology revolution for car makers moving to the electrical drive training opposing a huge change to how cars are being sold and about individual mobility at overall.

Secondly on financial services. This is probably a business unit which has been highly supportive for the last 10 to 15 years and companies might save higher cost of capital limiting support in thus growth for the overall company from financial services. And then in the maturing road, demand is probably not coming back toward years ago and if so, probably it will change significantly to smaller cars. So, if you look at your company on the longer horizon, I mean do not you need to find bigger answers than everything that we are currently discussing on this call?

And then leading us to potential changes and you say you talked to BMW but to us it sounds like you are sending over a couple of engineers vice versa and you are not hearing anything back. I mean does not management have to take more active role in making this company more bullet proof for the future? Thank you.

Dr. Dieter Zetsche

Thank you for that easy question to conclude. First of all, even though all car manufacturers are making a high percentage of their communication about alternative drive train, electric vehicles, we will see a long time to come where the combustion engine is the drive train of the market.

So, if we would see in 10 years 5% electric cars, this would be a very high share. So the core business continues to be around combustion engine but of course, even there as we have commented various times, we have to make major investment to further significantly improve the technology as we are doing. I was mentioning the new diesel e-class for instance and we have to prepare those alternative trains as well which requires significant on the end and cap efforts. That is an incremental burden, no doubt.

As far as financing is concerned, I would assume that world altogether will see somewhat higher cost of capital in dependant of the current record low set rates but what is happening now can only be address to long run with less leverage of equity in the banks and so on with higher cost of capital which to my understanding means that altogether, the world will see a lower level of growth than it had seen in the last 10 years. That applies to everything the industry is talking about including automotives.

So, either we go to a different planet or we accept that change of environment which applies to us as well. That is true. And we discussed that before. I do not have any indication from and little discussions from statistics, from customer behaviors that the basic interest for a safe comfortable spacious car as a percentage of total car sales have changed. We have seen an increase of this percentage over the last decade and in spite of their current situation which we discussed before, I do not see a long-term trend independent of total volume that the mix would go from two small cars from larger cars especially where the clientele which has a better living standard.

You are certainly right but that again applies to all industry that growth rate in triad markets will be limited in general terms and that it will take some time till we come back to the levels we had last year and the year before whereas we all expect that probably at least some of the emerging market specially China will comeback to form a growth rate or close faster than the triad markets will recover at least that is my expectation.

So I confirm a part of what you are saying but not as specific for the car industry but for a change which happen to the world altogether and certain that we have to adjust our company, our business system to these changes in environment and we are working on that but I do not think that the answer is to, I am repeating myself, sells more cars. It is better instead of large cars or to sell electric cars instead of combustion engine cars.

But clearly we have to look into our overall strategy and look for adjustments, not change of direction by the adjustment given the changes in the environment.

Arndt Ellinghorst - Credit Suisse London

My question regarding south Germany was more, I mean does not Germany really need to join forces in premium car manufacturing in order to continue being the world leading premium car manufacturing ground?

Dr. Dieter Zetsche

Well, I mean it is not what you are really asking but first of all, I think that is not a Germany question but of the two companies but that is what you mean, of course. Secondly, I agree with you that that is not the question for any technicians or whoever traveling south or north. That is not the way that will work but it is not the question of the media either and therefore, whatever the time is, the two companies should give any kind of answer to this question whatever it is and this is then the base for further discussion, not a speculation which is going on outside which I accept and understand, but it is not based on the actions taking place.

Arndt Ellinghorst - Credit Suisse London

Okay, thanks. At least I tried.

Dr. Dieter Zetsche

Okay, nice try.

Dieter Buhl

There are no further questions on our list. Ladies and gentlemen, I would like to thank for your questions and for being with us today on the phone or in the internet. Investor Relations remains at your disposal to answer any further questions you may have. We hope to see you soon. Thank you and good bye.

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