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DaimlerChrysler AG (DCX)

Q3 2006 Earnings Call

October 25, 2006 8:00 am ET

Executives

Friedrich Lauer - Head of Investor Relations

Bodo Uebber - Board of Management, Finance and Controlling/ Financial Services

Tom LaSorda - Board of Management, Chrysler Group

Analysts

John Lawson - Citigroup

Max Warburton - UBS

Christian Breitsprecher - Deutsche Bank

Stefan Burgstaller - Goldman Sachs

Adam Jonas - Morgan Stanley

Unidentified Analyst

Harold Hendrikse - Credit Suisse

James Mackintosh - Financial Times

Arndt Ellinghorst - Dresdner Kleinwort

Stephen Reitman - Merrill Lynch

Carter Dougherty - International Herald Tribune

Stefan Gaechter - Zurcher Kantonalbank

Barbara Farrell - JP Morgan

Joseph Szczesny - Oakland Press

John Buckland - Daiwa Institute of Research

Mark Tonn - Warburg

David Garritty - Dresdner Kleinwort Benson

Presentation

Operator

Welcome to the global conference call of DaimlerChrysler. At our customer’s request, this conference will be recorded. You can listen to the replay by dialing the numbers you will find on your invitation. The replay of the conference call with indexation and synchronized presentation slides will also be available with audio webcast on demand in the investor relations section of the DaimlerChrysler website. The conference will be followed by a question-and-answer session.

(Operator Instructions)

I will now hand over to Mr. Friedrich Lauer, head of investor relations, DaimlerChrysler AG. Thank you very much.

Friedrich Lauer

Good morning. This is Friedrich Lauer from DaimlerChrysler investor relations. On behalf of DaimlerChrysler, I would like to welcome you to those on telephone and the Internet, to our third quarter results.

Today’s conference call is a joint investor relations [and corporate communications] and will therefore be attended by analysts, investors, as well as the media. We are happy to have with us today the member of the Board of Management responsible for financing and controlling and financial services, Bodo Uebber, and the head of Chrysler Group, Tom LaSorda.

Today we will begin the conference with a presentation from Bodo Uebber. Afterwards, you are welcome to ask your questions to Bodo Uebber and Tom LaSorda. I will explain the process for this later.

Before we start, I have a couple of administrative details.

Slides that accompany this conference call are available on our Internet site, and I would like to remind you that this telephone conference call is covered by the Safe Harbor wording that you found in our [inaudible]. Please take some time to study this wording and please note that our presentation contains 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 anticipate, assume, expect, intend, plan, and should. Such statements are subject to risks and uncertainties, examples of which are set out in the Safe Harbor area of our document, 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 Bodo Uebber.

Bodo Uebber

Ladies and gentlemen, good morning to those of you in North America. Good afternoon to those of you in Europe. Thank you for participating in this call. Let’s start with the key figures for the third quarter right away.

Slide 2 provides you with an overview of the group’s key financial figures. Third quarter unit sales decreased by 14% to 1 million vehicles, mainly resulting from lower shipments at Chrysler Group. Due to the lower unit sales and exchange rate effects, revenues decreased from EUR 38.2 billion to EUR 35.2 billion. Adjusted for exchange rate effects, there was a decrease of 5%.

The group’s operating profit of EUR 0.9 billion reflects the loss at the Chrysler Group, which more than offset improvements at the Mercedes Car Group, the Truck Group, and Financial Services.

In the third quarter, higher material costs, especially due to higher prices for certain precious metal caused additional pressure on earnings. However, increased material costs were offset by our proactive material cost management.

Net income decreased from EUR 0.9 billion to EUR 0.5 billion.

The free cash flow of the industrial business for the nine-month period was negative, at EUR 0.7 billion, mainly resulting from the negative business development at the Chrysler Group.

The net liquidity of our industrial business was EUR 3.3 billion compared to EUR 5.2 billion in the prior year period.

Now, let’s turn to the operational business. Let me start with the Mercedes Car Group on slide 3.

In the third quarter, distribution sold 307,000 vehicles worldwide, almost as many as one year ago. Unit sales by the Mercedes-Benz brand increased slightly to 283,000 vehicles. The lifecycle related decrease in C-Class sales and lower unit sales of the A-Class were more than offset by a sharp increase in the M/R/GL and G-Class sales of 67%.

In addition, the new generation of the E-Class started very successfully, and has regained global market leadership in its segment. What we are most proud of is the fact that with 20,500 vehicles, the S-Class sedan more than doubled its unit sales and has thus further strengthened its leading position in the luxury segment.

As expected, unit sales of Smart Cars decreased by 14% to 25,000 units, reflecting the upcoming model changeover of the Smart4two and the discontinuation of the Smart 4four. As a result of the improved model mix, revenues rose by 8% to EUR 13.5 billion.

The Mercedes Car Group made tremendous progress in profitability, more than doubling its operating profit to nearly EUR 1 billion. The Mercedes Car Group now, one-and-a-half years after we initiated the core program, is able to report its highest quarterly earnings ever.

This was due to the more favorable model mix and, most importantly, to the efficiency improvements from the core program. On the other hand, exchange rate effects had a negative impact on earnings.

By the end of September, approximately 9,300 employees signed severance agreements or left the company in connection with our headcount reduction program started one year ago. In the third quarter, we recorded further charges of EUR 47 million for these staff reductions.

Earnings also include a positive effect of EUR 40 million related to the Smart restructuring, because we had to adjust earlier assumptions following the most recent developments.

Slide 5 provides you with a brief update on the development of our core program. The implementation of core is fully on track. This applies for all working models. More than 19,000 measures have been implemented since ’05. We continue to work on our strategic levers. For example, the module strategy, in which we have defined more than 100 modules. These will be available for all vehicle series in the future.

Fixed cost reductions and net asset optimization are going on. One focus for the future here is on the implementation of shared service centers. As predicted earlier, we can see that the implementation of leaner processes also results in better quality, which is demonstrated in a positive trend of warranty and goodwill costs.

Last, but not least, we will have completed the integration of Smart into the Mercedes-Benz organization by the end of this year, and there is more to come in the future.

Slide 6 provides you with an overview of the ’06 product launches. The most recent launch was the new CL Luxury Coupe presented at the Paris Motor Show in September of this year. This masterpiece among luxury coupes combines pure driving enjoyment with outstanding design and pioneering innovations. Next year, major launches comprise the all-new C-Class and the Smart4two.

Let’s now turn to the Chrysler Group. Within the very difficult market environment, the Chrysler Group’s third quarter retail and fleet sales totaled 635,000 vehicles, 14% less than last year. Newly launched models like the Dodge Charger and Dodge Caliber were only partially able to offset lower sales of SUVs, minivans, and pick-ups. This resulted in a fall in U.S. market share of 11.2% from 12.8% in the prior year quarter.

Due to the high dealer inventory levels at the end of the second quarter, decreased demand from dealers, and a market shift to more fuel-efficient vehicles, the Chrysler Group reduced production levels and factory shipments during the third quarter. Accordingly, shipments decreased from 663,000 to 504,000 vehicles. However, shipments to markets outside the NAFTA region rose 30%.

The lower shipment level reduced dealer inventories in the United States from 580,000 to 534,000 vehicles. Third quarter revenues amounted to EUR 9.5 billion, compared to EUR 12.9 billion in the prior year quarter. Measured in U.S. dollars, revenues decreased by 23%.

Let me briefly explain the market environment which caused this significant reduction in sales. Due to higher fuel prices, industry demand is shifting away from pick-ups, SUVs and minivans towards more fuel efficient passenger vehicles. This has caused an increase in the portion of four-cylinder vehicle sales. Although the Chrysler Group share in sales of four-cylinder models increased during ’06 to 16%, it is still far below the industry average of around 37%. This is shown on slide 8.

On slide 9, we have summarized the changes in the Chrysler Group’s business plan for the third quarter of ’06. In mid-September, we announced a revised plan for the third quarter, with lower shipment and inventory targets. With an inventory level of approximately 530,000 units at the end of the third quarter, we reduced dealer inventory, carrying costs to allow room for Chrysler Group’s new products that I expect to be better matched with U.S. customers’ shifting demands.

As a result of lower shipments, the Chrysler Group’s operating profit, shown on slide 10, turned to a loss of EUR 1.2 billion. In addition to the lower shipments, the negative trend in earning was amplified by the less favorable model mix and negative net pricing. Higher material costs, especially due to higher prices for certain precious metals, caused additional pressure on earnings. This was only partially offset by our ongoing measures to cut cost and to increase efficiency.

Let’s turn to slide number 11. Our aim must be to improve the earnings situation at Chrysler Group as quickly, comprehensively, and sustainably as possible. In a rather short period of time, we have now designed a structure for an optimization program at the Chrysler Group. In this context, we also make use of the experiences gained with the successful implementation of other programs within DaimlerChrysler.

Designated teams are developing strategic initiatives that address basically all stages of the value chain. In addition, structural changes are being reviewed as well. The topics we are looking at comprise in particular efficiency and flexibility, the competitiveness of our cost position, fixed costs and net asset as well, revenues and margins.

As I said, the goal is to develop a strategy which ensures the sustainable profitability at Chrysler Group and DaimlerChrysler. The basis for such a strategy is a thorough analysis, which is not finally completed yet. Therefore, please understand that I cannot be more concrete at this point in time.

What I can say is that seven teams are working on the following areas: product strategy, portfolio management, capital management, fixed cost management, structural changes, manufacturing, material cost management, revenue management, and quality.

The seven teams are headed by Chrysler Group leaders, with colleagues from DaimlerChrysler involved to ensure sharing of best practices.

In addition to all these measures, we will continue with our product offensive, which should help us to improve our product offering moving forward. The new products and their launch dates are shown on slides 13 and 14.

During the third quarter, the Chrysler Group already launched the compact SUV, Jeep Compass, and the Jeep Wrangler Unlimited four-door. The Chrysler Aspen, the first SUV from the Chrysler brand, was also launched in the third quarter. By the end of the year, the Chrysler Group will launch three more vehicles featuring fuel efficient engines, which are the Chrysler Sebring, the Dodge Nitro, and the Jeep Patriot.

Of the products launched this year, the Dodge Caliber, the Jeep Compass, and the Jeep Patriot, and the new Chrysler Sebring will all be equipped with a brand new, fuel-efficient four-cylinder engine.

Now, let’s turn to slide 15, the Truck Group. With 142,000 vehicles, unit sales of the Truck Group were 2% above the level of ’05, reflecting increases in all business segments. Unit sales by Trucks Europe, Latin America were slightly higher than 38,000 vehicles. The ongoing weakness of the Brazilian market was more than offset by positive developments in Western Europe, especially in Germany.

The strong demand for vehicles with the new Bluetec technology continued in the third quarter.

Unit sales of 55,000 vehicles by Trucks NAFTA were 3% higher than in the prior year quarter, mainly due to the positive development of Class 8 trucks.

Trucks Asia sold 49,000 vehicles under the Mitsubishi Fuso brand, up 2% compared with last year, mainly reflecting the return of customer confidence in Japan, where we sold 26% more trucks than in the third quarter of '05.

The division’s revenue has increased by 3% to EUR 8 billion as a result of higher unit sales and an improved model mix.

The Truck Group increased its operating profit to EUR 556 million compared with EUR 354 million in the prior year quarter. If we exclude the non-recurring income resulting from the settlement with MMC on Mitsubishi Fuso in the first quarter of '05, these results mean an all-time high for the quarterly operating profit of the Truck Group.

The increase in earnings was caused by higher unit sales, combined with an improved model mix and, as a result of our Global Excellence program, a high level of capacity utilization and productivity gains.

Higher expenses for new vehicles and component projects to meet new emission standards were more than offset by the efficiency improvements resulting from measures initiated under the Global Excellence initiative.

We presented a lot of new concepts and technologies at The International Motor Show for commercial vehicles in Hanover. First example, the Truck Group presented the new Unimog model U20, and unveiled the Actros Space Max study, which is a cab useable as living space, bedroom, and office.

With Mercedes-Benz’s PowerShift, a new generation of automatic transmissions for the Actros line-up, and Bluetec, the division also demonstrated its innovations and the technology expertise for powertrain applications.

Let's now turn to Financial Services, shown on slide 18. The Financial Services division continued its positive business trend in the third quarter. At EUR 12.6 billion, new business was 6% higher than in the third quarter of '05. Contract volume of EUR 114 billion equaled the prior-year level. Adjusted for the effects of currency translation, the portfolio grew by 4%.

Contract volume of EUR 82 billion in the Americas region was at the same level as in the prior-year period. Adjusted for exchange rate effects, there was an increase of 4%, reflecting positive developments in all of the region’s markets.

In the region Europe, Africa, and Asia Pacific, contract volume increased by 4% to EUR 32 billion, mainly as a result of an increased contract volume of DaimlerChrysler Bank in Germany.

The Financial Services division’s operating profit for the third quarter increased from EUR 408 million to EUR 445 million. The increase resulted from higher new business and improved efficiencies. The positive results were partially offset by increased risk costs, which had been significantly low in the Q3 2005.

Let's turn to slide 20, showing our segment Van, Bus, Other. 59,000 Vans were sold in the third quarter. This was lower than the same period of last year, and reflects the launch of the new Sprinter and the associated production changeover in the Düsseldorf and Ludwigsfelde plants, which was not offset by the positive sales trend of Vito and Viano vans.

DaimlerChrysler Buses sold 8,600 buses and chassis worldwide, compared to 9,200 in the previous-year quarter. The large increase of 16% in Europe did not compensate for the 5% decrease in unit sales in Latin America. The segment's revenues decreased by 12% to EUR 3.2 billion.

The earnings of the Van, Bus, and Other segment decreased by EUR 64 million to EUR 350 million. While the sale of the real estate to a French investor resulted in a gain of EUR 86 million, the charges related to the implementation of the new management model impacted earnings by EUR 72 million. The latter largely resulted from severance agreements in the administrative areas.

The profit contributions from the van and bus business were positive in the third quarter. However, as a result of capacity constraints related to the model changeover of the Sprinter van, the operating profit of the van business was lower than in the third quarter of the prior year.

DaimlerChrysler Buses increased its operating profit as a result of a more favorable model mix and the achieved efficiency improvements.

EADS earnings contribution amounted to EUR 247 million. Although Airbus deliveries increased, profits were slightly below the prior year level of EUR 256 million due to U.S. dollar-related exchange rate effects.

The postponement of Airbus A380 deliveries did not impact the third quarter results because EADS results are included in DaimlerChrysler's financial statements with a time lag of three months.

Following a detailed review of the A380 program at the beginning of this month, EADS announced that the A380 delivery schedule has been revised for the period from '07 through '10. However, EADS has confirmed product specifications for the A380 and expect type certification for the A380 by the end of '06. Nevertheless, EADS expects a significant impact on earnings for the period from 2006 to 2010, reflecting postponed deliveries, higher costs, and late delivery payments. In addition, EADS has announced that it is initiating the “Power8” program to counter the financial impact.

Let me now come to the outlook shown on slide 23. For the full year, DaimlerChrysler anticipates unit sales to be slightly below the previous year's level of 4.8 million vehicles.

The Mercedes Car Group expects full-year unit sales at least as high as in '05. We assume that unit sales by Mercedes-Benz will exceed last year's figure, as a result of the success of the brand's new products. Unit sales by the Smart brands will be lower than in '05 due to the focus on the Smart4two.

The Chrysler Group assumes that shipments in '06 will be lower than in the prior year, reflecting the intense competition and the shift in demand towards smaller vehicles. Eight new models, many of which are in the growing segments of passenger cars and small SUVs, are now being launched or will be launched very soon.

With the full availability of these new products, the Chrysler Group should also be able to better match customer demands.

The Truck Group expects full year unit sales at least as high as in '05, reflecting pull-forward effects from upcoming stricter emission regulations in our core markets, which provided the basis for full order books. This will at least help us to maintain high production and sales volumes during the coming months, although incoming orders meanwhile shall show a downward trend.

While the Vans unit expects lower unit sales than in 2005, due to capacity constraints in connection with the Sprinter model changeover, unit sales of buses are likely to exceed the high level of the prior year.

With regard to operating profit, the Mercedes Car Group will continue to effectively implement the core efficiency improvement program. The division's positive earnings trend is expected to continue in the fourth quarter. The Mercedes Car Group’s performance in the third quarter makes us highly confident of meeting our target of 7% return on sales in 2007. However, due to seasonality and the model changeover of the C-Class, we expect a weaker first quarter in 2007, subsequently followed by stronger quarters.

The Chrysler Group will implement further cuts in production volumes during the fourth quarter, in order to reduce dealer inventories and clear the way for the current product offensive. We expect the Chrysler Group to post a loss of approximately EUR 1 billion in full year 2006.

The Truck Group will exceed the operating profit of the prior year as a result of the ongoing strong demand for its products and further improvements in productivity and efficiency.

The Financial Services division anticipated a continuation of its stable business development in the remaining months of the year 2006, despite the higher level of interest rates and lower growth in consumption in the United States. The division’s operating profit in full year '06 should be higher than in the prior year.

On September 15th, we announced that due to the Chrysler Group's unsatisfactory sales situation, the Chrysler Group's original earnings target for 2006 could not be maintained. For this reason, we reduced the group's operating profit target to an amount in the magnitude of EUR 5 billion.

We now have to assume that as a result of A380 delivery delays, the profit contribution from EADS will be EUR 0.2 billion lower than originally anticipated. However, due to the very positive business developments in the divisions Mercedes Car Group, Truck Group, and Financial Services, we are maintaining our target for the group's operating profit in full year '06.

This forecast also includes:

  • Charges of EUR 1 billion for the focus on the Smart4Two;
  • EUR 0.5 billion for the implementation of the new management model; and
  • EUR 0.4 billion for the staff reductions at the Mercedes Car Group.

In addition, the forecast includes:

  • A gain on the disposal of the off-highway business of EUR 0.2 billion;
  • A gain of EUR 0.1 billion from the sale of real estate no longer required for operating purposes; and
  • The release of provisions for retirement pension obligations in the amount of EUR 0.2 billion.

Continuing stable economic and political conditions are pre-conditions for achieving the Group's earnings target. DaimlerChrysler could face challenges in the fourth quarter as a result of continued high prices for oils and fuels, precious metal, and all oil-based materials, as well as suppliers’ financial difficulties, and a higher charge than currently planned from EADS.

Ladies and gentlemen, you will find some more charts, additional information on special reporting items, the balance sheet, our status of pension and healthcare obligation, as well as our free cash flow, in the PDF file of this presentation on the Internet.

Thank you very much for your attention. Now, Tom and I are happy to take your questions.

Question-and-Answer Session

Friedrich Lauer

Thank you very much. Ladies and gentlemen, [inaudible] -- your name, and the name of the organization that you are representing before asking your question. Two practical points -- firstly, please avoid using mobile phones, as this [inaudible] for everyone, and secondly, please ask your question in English.

Before we start the session, the operator will explain the procedure.

Operator

(Operator Instructions)

Friedrich Lauer

We will take the first question today from John Lawson.

John Lawson - Citigroup

Thank you. John Lawson of Citigroup. On Mercedes Car Group, you did say that it would not be a straight line in terms of delivery of core, but I think we have all found it quite remarkable that you have achieved such a high profit on what is a relatively minor sales increase in the third quarter. I wondered if you could share with us how much of the delta the improvement was cost-induced and how much of it came from mix. Would it be possible just to say a word on the contribution of Smart within this division’s earnings for the third quarter? Thank you.

Bodo Uebber

John, to your two questions, of course, two answers. As we also stated in the Mercedes Car Group divisional day, for the year-to-date numbers, and I do not want to make now a statement to one quarter, because you have to look at a somewhat longer period of time, so comparing year-to-date to year-to-date, roughly one-third is coming from the revenue and mix side, and two-thirds from the cost side, roughly. That was also our statement at the divisional day and that has not changed due to that quarter.

Your second question, of course it is right that the negative impact from the Smart operating profits should be less and less, due to the cost that we have to achieve, the break-even in ’07. This is fully in line with that, so per quarter, the impact of the Smart losses are lower and lower, and therefore we are clearly on track to achieve the break-even.

We have also taken into consideration here that we have a release of EUR 40 million in the provisions, which are related through better sales of the outgoing, the prices we achieved for the outgoing Smart four-seater.

Friedrich Lauer

Thank you. We will take the next question from Max Warburton, please.

Max Warburton - UBS

Hello, it is Max Warburton from UBS. Could I just ask two questions on Chrysler, please? The first one relates to the report in the media in the last few days about the inventory bank at Chrysler. We have heard Wards and some others talk about this. Could we just get the management view on this? Could you confirm how many units at Chrysler are in this inventory bank, the so-called sent units, and what the goal is for the year-end? Is it right that will be reduced to zero and will not be used at all in 2007? That is question one.

Question two, I know it is too early to talk in detail about what measures may be taken at Chrysler, but could you just explain any capacity adjustments, any plant closures, could they be achieved inside the current agreement with the union, or would we need to wait until September for any capacity adjustments to be agreed? Thanks.

Tom LaSorda

Relative to the inventory issue, part of the third quarter announcements that we made back in September was the whole issue of inventory. Obviously we have taken production down dramatically and reduced shipments, so you are right. We stated that between now and the end of the year, our intent is to get that back into the nominal levels, which is near zero, and try to stay there.

As far as the second question on plant closures, the terms of the labor agreement is that any closures need to be negotiated, at least discussed with the union, but we often make capacity changes and other issues of idling or whatever during the agreement.

Max Warburton - UBS

Could I just come back on this inventory question, just to be very specific? I think you talked in September, the company talked in September about a goal of about 500,000 units of dealer inventory for the year-end, and you are at about 530 at the end of Q3. Is the Wards number right, that there is about 50,000 that is not in that number, so we are talking about an 80,000 reduction in inventory for the year-end?

Tom LaSorda

The issue from where we are sitting right now, we are targeting in the low-500,000’s by the end of the year. Of course, it is hard to say what point in time where the inventory is sitting, from a standpoint of what is bank and what is not bank. That is why we did the third quarter -- I keep coming back, not trying to avoid the question. The issue is that we are going to reduce it between now and the end of the year and we have a plan to do that, and that is where we are headed.

Max Warburton - UBS

Thank you.

Friedrich Lauer

We will take the next question from Christian Breitsprecher, please.

Christian Breitsprecher - Deutsche Bank

I have a question relating again to Chrysler. You have given us some ideas what all the things are that you are looking at, and we understand that you cannot give us any details yet, but can you give us somehow a timetable when you are going to step forward with your plans, and whether you are going to give us certain -- a timetable of measures that you are taking that we can measure you against.

Bodo Uebber

Christian, at this point in time, we concentrate fully on the analysis side. Before we have made our final perspectives, it is even difficult to tell the timing, but to give you here, let’s say what we have in mind, I would not exclude if we would come out with the details of a plan or an optimization program in ’07.

Christian Breitsprecher - Deutsche Bank

Do you mean during ’07? So we are not going to hear anything over the next four months?

Bodo Uebber

Christian, we have to do first our analysis. We will do so in ’07, of course, as soon as possible.

Christian Breitsprecher - Deutsche Bank

Thank you.

Friedrich Lauer

We will take the next question from Stefan Burgstaller.

Stefan Burgstaller - Goldman Sachs

Hello, this is Stefan Burgstaller from Goldman Sachs. Two questions. First, I would like to get some more color on your elimination line, which shows a sharp increase in the third quarter, and if you could give a bit more detail on what has changed in the third quarter, specifically on the leasing business in Germany, and also on the floor plan, the financing of your European dealerships, which you point out.

Second question, for Tom LaSorda, in the last cycle of the Dodge Ram, we noted a sharp decline in the segment market share over the last two years of the run-out before the product was renewed. We are sort of hitting now the same period. Is there anything that makes you more comfortable that you are more successful of managing the market share of the Dodge Ram in the Truck segment over the next two years, particularly given where your incentives are sitting right now, relative to the market?

Bodo Uebber

Stefan, to your first question regarding the eliminations, first of all, you have to see that this impact in the eliminations is somewhat what you get back in the future, so it eliminates right away between the divisions effects or profit gains which are in the divisions are eliminated on the group level. Therefore, these kind of impacts will show up over the time again as positive impact in the future.

Two issues here, you have pointed them out, it is right. We have written it down in the interim report. It is a higher leasing business overall in the market environment, especially here in Germany. The second one is higher dealer inventories, which we have but which are financed by financial services, or by our own group. It is quite clear if we have in some quarters some increase in that dealer inventories, which is now not related to the U.S. but to the European business, it has an impact which we have to eliminate for, which comes back again, as I said, in the quarters to come.

Now, I will hand over to Tom.

Tom LaSorda

Stefan, relative to the Dodge Ram segment, first of all, as you probably know, the overall industry is down somewhere around 11% in the third quarter, and was about 14% in the second quarter. We have maintained the same kind of share basis there. We were down in the third quarter about 11%, so we are kind of riding with the industry there.

As far as what was new, on the Dodge Ram, we had the new frame, new interior, which is out in the marketplace. I know we are going to be competing against all new. We did launch the Mega-Cab. Soon, by the end of the year, as Bodo mentioned, a new chassis cab will be out there, heavy duty, and we have other chassis cabs for ’07 as well to start supplementing models into the particular fleet that we have never competed in. We are trying to use these other models to help us until our vehicle comes out in two years.

Fred Searby - J.P. Morgan

Next, we will hear from Adam Jonas, please.

Adam Jonas - Morgan Stanley

Just two questions, one on the Chrysler outlook and one on the Mercedes Q1 outlook that you alluded to. First, on Chrysler, you have made real painful production cuts to get the inventory down by what is here, but my understanding is that you are just getting it down to a normal level. I know that you have stated you are in no position to give guidance for the full-year 2007, but many in the market expect Chrysler to improve very, very significantly, as much as EUR 1 billion of profit from ’06 to ’07.

Tom, from where you stand now, given where you expect your inventories to be by the end of the year, with pretty good visibility, I think you said your pricing assumptions will be down next year, and that mix will be down. It seems like you are leaning on either production growth or cost-savings to get the profit to grow at all, or to even come close to a billion of improvement.

Do you think you can get -- while I am not asking for specific guidance, do you think confidently that Chrysler is in a position to improve the losses at all, even one Euro, given the production pricing mix outlook for next year? That is my first question.

The second is on Mercedes. You mentioned that Q1 would feel some constraints because of the C-Class changeover and net profits would be down. Bodo, were you referring to down sequentially from the 7%, 8% type of levels of margins we are seeing now? Or do you mean down year on year? Could you just give a bit more quantification of what you meant by down?

Tom LaSorda

Relative to the Chrysler Group, obviously I know you are trying, and so does everybody else, to try to get us to give you any guidance. I will not provide any guidance.

As it relates to the production cuts, you are right. As painful as they are, the level of inventory that we are talking, the low 500,000 level, is very low in what we will consider a good level for us. That is a level where I do not want it to be looked at -- in prior years, it has been up to 560, 580, so this is a switch for us. Bodo.

Bodo Uebber

Commenting to your question of Mercedes, as I have pointed out, we have to keep in mind two issues. One is the seasonality in the first quarter as, so to say, always also in the last years. On top of that, the C-Class launch. If I would exclude both of the issues performance wise, performance wise we would underline our 7% target, no doubt about that, and even you know that we have also communicated our potential upwards toward that figure. But again, we will see a weak quarter in the first quarter in ’07 due to these effects, and weak means, of course, it is not only slightly weak, it is weak.

Adam Jonas - Morgan Stanley

Are you referring to year on year? Last year is --

Bodo Uebber

I reflect to the 7%.

Friedrich Lauer

We will take the next question from [inaudible].

Unknown Analyst

Just one question on Chrysler. I wonder whether you could clarify one more time on the sales bank and, Mr. LaSorda, I wonder if you could maybe outline the strategy that is behind that. Why do you use a sales bank to this degree, and whether this number of 100,000 vehicles and why this has actually emerged, this problem?

Secondly, on that same note, what do we see on residual values going on at the market? Is that hurting you to an over-proportionate degree? Thank you very much.

Tom LaSorda

First of all, the number that you used of 100,000 is certainly way over-stated. The sales bank is obviously something that, when you look at it, based on the years of how we have done it, this is not anything new from a standpoint of what is going on in the marketplace.

I will give you some examples of where we use this. Perhaps it might be more, or add some clarity to it.

If you take a look at a vehicle that is actually building out for the all-new model, and you use some of that, you balance the situation with dealer inventory and what is going on at the production schedules.

Quite frankly, in the third quarter, our production schedules were higher than the market, and we adjusted. That is why I keep coming back to the fact that between now and the end of the year, our plan is to get back to the no bank, and that is what we have worked with with our dealers. The dealers had the whole issue of high interest rates and pushed back and said look, we do not want to carry the inventory, so now we are working with them to get it balanced by the end of the year.

On residual values, as far as -- it is pretty much at normal planning levels of where we are. We keep watching it based on what is going on between now and the end of the year, but overall, we do not see a major impact there.

Bodo Uebber

But of course, they are also looking at the month-by-month figures and you look at the overall market development there. You saw especially in the SUV and Truck segments, some deteriorating, which we have to take care of each model, so to say, what we do. There was not any significant stuff we had to do, but of course, they are by month by month depressed. We have to keep that on our watch list.

Tom LaSorda

Absolutely.

Friedrich Lauer

We will take the next question from Harold Hendrikse, please.

Harold Hendrikse - Credit Suisse

A couple of things, if you can. Great results on the Mercedes, but the volatility from quarter to quarter, particularly it was relatively weak Q1 this year, a much better Q2 and now, really, an amazing Q3. Can you give us some idea of the movements within that? I know you split it, one-third revenue and mix. The mix was very strong, about 8%. Is that a sustainable level of mix?

But also, in terms of the actual cost reductions, really what I am looking for is some sort of explanation of the people leaving on the voluntary redundancy program and the early retirement programs and how that is accounted for -- how these people actually left, how much impact that would have on the third quarter costs, and how much of that was cash relative to non-cash?

Secondly, if you could explain a little bit more on the free cash flow. The third quarter was not as strong as the profitability. Maybe you could give me some ideas on what is happening on the cash base.

Bodo Uebber

Harold, there were many questions, so I will do my best to answer it. As I said before, you asked again the composition of the earnings development, and please I would like to stay with a message there -- one-third was regarding margin revenue mix over a nine-month period, so to say, and the cost was two-thirds. If you ask me okay, that is mix.

Of course, the successful product will stay with us also in ’07, and we have the new product of C-Class, and of course, in the year to year development, you have then, if you compare ’07 to ’06, a lower impact compared to ’06 from mix. I do think also that we have addressed that in the Mercedes Car Group divisional day. When you go back to the breakdown of implementation levels, I do think there is a line where we address the composition in ’07. There you can clearly see that the mix and the revenue impact mix here would be a lower one, in percentage. If you go back to that slides, it would be helpful because I do not have the slides right now available.

You asked then for the development of the Mercedes Car Group staff reduction and how it is accounted for. It is accounted for in the way that we have this double voluntary from the employee and from the company, and as soon as the employee has signed the contract, it runs through, so to say, to the P&L. That means the P&L in fact, of the 9,300 people already included in the past quarters and also in the third quarter, there was a remaining element of 47 million which we had to account for. Cash flow wise, the number is for the total program, for this year ’06, EUR 780 million in terms of cash flow. You will find that also as a remark on page number three in the attachment of the interim report.

Harold Hendrikse - Credit Suisse

Okay, so the total cash out on this program from you is EUR 780 million, right?

Bodo Uebber

This year, ’06. I have now to go back into the ’05 numbers, which I most probably do not have available here, but if you would do me a favor to look it up in the ’05 numbers there, you will find another, I don’t know, 50 to 100, but please look it up and add it to the EUR 780 million. That is the right number.

Harold Hendrikse - Credit Suisse

If you look at sort of quarterly, or annual payback on that number, can you give us any idea what the sort of payback is that you are already expecting this year, relative to the full payback, which you should be able to get in ’07?

Bodo Uebber

The full year, full impact will be, of course, next year and this year, roughly two-thirds, 60% impact.

Harold Hendrikse - Credit Suisse

Sorry, could you just remind me of the total number? Could you remind we of the total number we are talking about?

Bodo Uebber

We have not released the total number of savings.

Harold Hendrikse - Credit Suisse

Okay, and just on the cash flow, free cash flow development, third quarter, was it --

Bodo Uebber

Sorry, that was the last one. The free cash flow development is more than 100% impacted by the Chrysler Group. Mainly, on top of this development, from the shipment point of view, you have to consider that by adjusting the production area, we stay with all the orders to the suppliers, so to say. That impacts, of course, our cash flow on top of the pure revenues related stuff.

This is an overall -- let’s say this is a higher impact than the pure sales impact, what we have here, which hurts us in the third quarter, which could somewhat offset by very good development, of course, from the Mercedes Car Group, related to the operating development there, and also the inventory measures we have taken in MCG, the good developments of Truck Group and the other divisions.

It was not able to offset this big number, so you could say also for the nine month comparison, it is totally based on the Chrysler Group affected, but also positive impacts here from the other divisions.

Harold Hendrikse - Credit Suisse

Do you see any of that Chrysler Group impact reversing in the fourth quarter and into 2007?

Bodo Uebber

In the fourth quarter, of course, we have to -- we have announced our total profit target for this year, but I do expect that production-related, supplier-related, straight payables related stuff to be let’s say revised in the fourth quarter. I expect that it would be a good guy in the fourth quarter, or -- now I have to, seeing the profit situation we do have, that would be a good guy, but I have also to consider the risks which are in the market, in the volatility, in the sales development in the North American market, and therefore, I stay somewhat cautious with any precise mentioning of numbers. Sorry.

Harold Hendrikse - Credit Suisse

Thank you. Do you have time for one more?

Friedrich Lauer

If we have more time at the end of the call, we would be happy to take you again, but please let us proceed. We will take the next question from James Mackintosh.

James Mackintosh - Financial Times

James Mackintosh at the Financial Times. I just had a quick, sort of long-term strategic question, which was looking at Chrysler having gone yet again deep into the red. Yet again you are drawing up a restructuring plan. Is there a fundamental problem here that could be fixed by a deep partnership, even a potential sale of the business? Is that something you can rule out, or something that you might consider?

Bodo Uebber

James, as we have stated before, I have announced, Tom has announced, we have announced a thorough optimization program. We look at all the details of the value chain. We do not exclude anything here to look at. We look at structural changes, if we have to do some. We have to get into touch and talk about that.

What we need to safeguard is a sustainable profitability for the Chrysler Group and for DaimlerChrysler. That is the main objective which we have to consider.

I would like to also tell you that we at first are doing the analysis, then we are talking about factors, then we draw our conclusions. As we have not finished our analysis yet, I stay with that. The conclusions will come, as I have pointed out, as soon as possible, as we are ready with the analysis.

James Mackintosh - Financial Times

You would not rule out the possibility of selling or a deep partnership of Chrysler?

Bodo Uebber

James, no, what I said before, now I have to repeat again, so no additional information to that what you asked for. First we do all our analysis. Second we talk about measures, then we draw our conclusions.

Friedrich Lauer

Next question from Arndt Ellinghorst, please.

Arndt Ellinghorst - Dresdner Kleinwort

Thank you. Coming back to Chrysler, I am a bit concerned looking at your leasing penetration at Chrysler. You increased leasing penetration each quarter since quite a while now, and you are doing that in a weak market with a somewhat weak model range. I do understand that your actual residual values are probably not a concern, because that is referring to cars coming off lease. Some years ago, when you went into leasing at a much lower penetration, but moving forward, don’t you run a significant risk that weak products in a weak market are coming back, hurting your residual values in ’07 or 2008?

Secondly, on Chrysler, isn’t the whole problem more a top-line problem than a cost problem? You cut costs for many, many years. I would believe that your cost base is a lot better than GM and Ford. Still, your revenues per unit are declining each quarter. What could you do to fix the revenue side of the business at Chrysler? Just talking about that a bit more structurally. Thank you.

Bodo Uebber

The answer to your first question regarding the leasing penetration rate, especially for Chrysler, if you look at the numbers, of course, during the quarters, it went down to 19%. Of course, the first quarter was 25%, second quarter 20%, third quarter 19%. But of course, we increased it, if you look to ’05 and ’04, where we stood at 12%, 13% roughly, leasing penetration into the upper -- that is an overall trend in the market. So as interest rates are rising, customer attitudes are shifting from finance to leaving business due to the fact of view of the higher interest rates. That is one explanation.

Let’s say you go to banks, you can go to other captures, the situation is more or less the same. Of course, you have to consider in the leasing business the residual value development, which of course is for the few cars you launch, a prediction and, based on the knowledge you have from the past, from AOG, from your own systems which you have in place and you incorporate that, also that risk which is applied to that. Also, in the amount of maturities you get back in three years into your leasing rates and let’s say doing your smart job, you have to provision that early on. So there is no way that you -- you have to consider in the actual accounting all of that risk. Of course, when the market deteriorates, we have to apply to that risk.

I would not say that we have here an extraordinary development because it is for every manufacturer, more or less, the same development what we have right here.

For the Mercedes-Benz brand, we have always high leasing penetration rate. There you also see the difference in the brands, of course, which is more or less the same in the U.S. as also in Germany.

Tom LaSorda

Relative to the comment on top-line revenue per unit, or revenue growth versus the cost, you are right. The cost structure, fixed costs year over year the last couple of years, we have maintained stability in some slight reductions there, which is good news.

The issue, however, is combined. We still need to continue to take costs out. That is why we are going through this detailed plan, as Bodo mentioned earlier, to look at all cost areas, as well as to your point, the top-line revenue. When you take the sales down like we have in cutting production, obviously it hurts our top-line growth. We are going to get big profitability focusing on top-line growth and looking at our cost structure, but I would agree. The revenue is the big focus.

Arndt Ellinghorst - Dresdner Kleinwort

What would you do there, please?

Tom LaSorda

For a couple of examples, we have announced a number of launches this year, eight in the second-half of the year. That is the first point. A lot of those, by the way, just coming to the market here in the [fourth quarter] on the retail side.

Next year, the annualized volume for the U.S. market, just for what we launched here in ’06, is somewhere in the neighborhood of over 600,000 all new units for next year, plus there are a number of new launches next year that we have not gone out to talk about the specific launches, but there is quite a number of new launches again next year that should help us in this area.

Friedrich Lauer

The next question is from Stephen Reitman.

Stephen Reitman - Merrill Lynch

A couple of questions on Chrysler again. You admitted that you were caught short by the rapid change in U.S. consumer behavior away from the gas guzzlers, the heavy fuel users to the smaller vehicles and the like. Fritz Henderson remarked today that GM was seeing some improvement in their mix towards trucks again. Obviously they have launched some new products. Could you comment on what Chrysler is seeing in the last few weeks or so, as gas has gone back to the $2.20 level?

Secondly, on the inventories, by the end of the year, your target of 500,000 units, do you think you are optimized at that stage? Do you think, in terms of having, you will have made sufficient cuts of the slow-selling and the older products that you needed to make by that stage, so that you are pretty clean going into 2007? Thank you.

Tom LaSorda

As far as the consumer behavior and the mix with regard to trucks, I think it is somewhat too early to tell, but there is a slight shift there. As I stated, the market was down 14% or so in the second quarter, third quarter. The truck market was off about 11%. I would not consider that to be a major shift at this stage of the game, and probably premature to determine where that might be until we see if fuel prices do stay at lower levels.

As far as the optimized level of inventory for ’06, obviously if we keep driving retail sales, our ability --

[Technical Difficulties]

Friedrich Lauer

We will take the next question from Carter Dougherty.

Carter Dougherty - International Herald Tribune

Carter Dougherty, with the International Herald Tribune. Two quick questions for you, very unprofessional finance guy. First of all, on the EADS issue, I just want to make sure I understand this. Because of the delay in incorporating EADS results into the DaimlerChrysler bottom line, this $200 million figure that you cite, that is in effect what incorporates what is coming, not what we already have, because what we already have from the third quarter is relatively stable. That is the first question.

The second question, as regards to the stake that Daimler continues to hold in this, as you are well aware, there are a lot of things hanging over this company. To take but one example, the extent to which the correct bet was made here regarding the E380, so as far as selling down the Daimler stake further in EADS, one thing I have never really been clear on is do you see an urgency to this? Is this something you would like to achieve in a relatively short timeframe? I realize it is not an easy matter, because there are some politics involved in here, but from a business standpoint, is that a priority of yours?

Bodo Uebber

Carter, I do not think that you are an unprofessional finance guy, so I do think that you are following the stuff pretty seriously, and your question is pretty related to that. If I got it right, I will try to answer your first question, regarding EADS and the profit we expect.

DaimlerChrysler views it this way. First of all, we have to see that we have a quarterly shift in earnings impact within our company, so whatever EADS posts in the third quarter will affect our fourth quarter. We have, based on the analysis we got from the EADS and their press release, the impact from the A380, which was announced by EUR 600 million for A380 related for their third quarter, they are off EUR 200 million on our stake, and this we do assume also for our fourth quarter impact, so our fourth quarter should be EUR 200 million lower in this regard.

I cannot exclude other stuff they are talking about, which they have not announced yet. The A350 effect, for example, the necessary effect of the Power8 program. They have announced what kind of savings they are shooting for, but not about the cost-side. These are issues which I cannot account for yet. First of all, I have to know them. On the other hand, they have to be booked in their quarterly books, which they do at the end of November.

That is the earnings side of this.

The second question you had regarding our stake, we have already announced that we would like to reduce our stake to 15%. We did that with our announcement when we sold the 7.5%. We clearly stated to do so. We have not put any timeframe on that, but we said we would do that and then we need --

[Technical Difficulties]

You will hear from that when we are doing that. We did it also with the 7.5% at the first step. We will always do that move in accordance with cooperation and with talks and discussions with the stakeholders, which also includes the German Government.

Today’s talks, the government has and we have, from my point of view, is a big discussion that I would like to avoid, because I do think that most important, from my point of view, is the success of EADS by themselves. They need to fix their problems and they have to implement the measures to be successful again, also in the long run. That is the most important stuff, the EADS management, and those are the factors they have to apply to.

The discussion about structure, as I said before, is something which will occur when we announce it.

Carter Dougherty - International Herald Tribune

Could I just confirm something, because the audio dropped out there for just a moment. As far as the further 7.5%, you will always do that in talks with the stakeholders, and that includes the German Government, that you have not put any timeframe on that, that the key point is the success of EADS?

Bodo Uebber

Yes, and as I said before, we had the discussion also with the German Government when we sold the first 7.5%, and we would do so, get into touch with them, in discussion with all the stakeholders when doing the second step.

Carter Doherty - International Herald Tribune

Thank you very much.

Friedrich Lauer

Next question from Meyer Shields.

Meyer Shields - Stifel Nicolaus

Thanks very much. My question has been answered already.

Friedrich Lauer

Then we can take the next question from Stefan Gaechter.

Stefan Gaechter - Zurcher Kantonalbank

Good afternoon. Two questions. One, on trucks. Volvo mentions that, or based on outlook for the first-half of 2007 and the slowdown they expect in the U.S., in class 8 sales, and they mentioned that they expect downturn up to 40%, and that it still would remain profitable at that sales level. Do you have any view on this, how your [breakdown] would perform in that environment?

The second question, a follow-up on cash flow. There was no special, noteworthy effects in Q3? You had a negative industrial free cash flow of 3.3 billion, so what you are saying, that was exclusively or mainly Mercedes payouts and, in essence, networking capital, or was there anything -- did you fund your pension scheme or anything of that sort, or toll collect? Could you maybe elaborate on that, please?

Bodo Uebber

To your first question, I could not attend the Volvo conference call, but thank you that you told me that the U.S. market, up to 40% down. As we stated before, we have three main markets.

The European market, where we do not expect a huge decrease in ’07. For the Japanese market, it will be related to the strong market right now in ’06, where you have to compare that to former times, so we expect a decrease there. In the U.S., you mentioned the 40%. The former downturn cycles were between 40% and 50%, somewhat like this in the past. We have not made up our mind right now where we do think the markets are.

Of course, we are in talks and our planning cycle did start and we will have also a divisional day within trucks. I do not know whether it is announced, but we have it at the end of November. We will have a divisional day regarding trucks, and I do think that we announce there also more precise ranges, where we think the markets will go.

But in tendency, the markets will be such in the range as it was in the past, and the Volvo number maybe is not a bad one.

Just wait until our divisional day, and then you will get concrete answers in every aspect, to everything within the truck group.

Then, your question regarding special items in the cash flow area, in smart related, for example, you see that on page four in the interim report. There was a negative cash impact due to the restructuring measures of roughly EUR 200 million in the third quarter, and -- just to look at some details here, if we go to the -- due to the property sale, we had more or less a good guy in the same range, so that is offsetting each other, and then you can say if you put now, let’s say EUR 100 million to EUR 200 million bad guy from the ongoing of costs, fixing the stuff due to the Fuso recall, and due to the new management model.

As a net position, EUR 100 million to EUR 200 million, bad guy.

Friedrich Lauer

We will take the next question from Barbara Farrell, please.

Barbara Farrell - JP Morgan

Yes, I wanted to ask a question to understand the difference in shipments versus cuts in production. You have the amount of shipments for the third quarter at 504,400, which would be a decline of about 23%. What is the actual decline in production in the third quarter, and then what will that be for the fourth quarter?

Tom LaSorda

The shipments and production are relatively close, as far as shipments and production. Shipments, just for clarity, is the things going to dealers and production is what we build, so it is relatively close, give or take a few thousand units.

As far as the fourth quarter, we do not talk about the production plans, but you have already seen some of the reductions we announced in September.

Friedrich Lauer

Next question from Joseph Szczesny, please.

Joseph Szczesny - Oakland Press

Yes, this is either for Tom or Mr. Uebber. Mr. Uebber seemed to put Chrysler up for sale here a minute ago when he kind of wavered or hedged when he was asked about the company’s future plans are for the Chrysler Group. Could you clarify that a little bit further for us?

Bodo Uebber

As I said before, I can only repeat myself. It was always as we did, again: first, analysis; second, measures; third is conclusion. That is what my statement is.

Joseph Szczesny - Oakland Press

That would seem to open the door towards some kind of a spin-off of the Chrysler Group then.

Bodo Uebber

Any speculation that you are doing, I do not do anything speculation, as I said before.

Joseph Szczesny - Oakland Press

Thank you.

Friedrich Lauer

Next question from John Buckland, please.

John Buckland - Daiwa Institute of Research

Good afternoon, thanks. Just going back to this inventory level for Chrysler, because it is quite importantly, obviously, to assess what could happen next year in terms of production and what measures you might need to take. You seem to be quite happy with 500,000, saying that is a reasonable level, but obviously it is only reasonable based on your assumptions about market share and growth, and market level next year.

If you were to assume a $16 million market and a 12% market share, that would still be over 90 days supply, which to my mind, is not a very comfortable level of inventory.

Tom LaSorda

You are right. If the market dropped by a 1.3 million units, and our share dropped, based on the scenario that you laid out, obviously that inventory would be too high and we would have to adjust it.

John Buckland - Daiwa Institute of Research

Isn’t the U.S. light vehicle market coming in something like 16.5 this year, isn’t it?

Tom LaSorda

It is still around 17 to 17.2, and next year, the economists that forecast, which not everyone has reported in yet, is still around 17, 17.1, so we do not see this million-unit drop, but we will see. I do not see it happening.

John Buckland - Daiwa Institute of Research

I thought that this high number that you referred to is the total market, rather than just the light truck market.

Tom LaSorda

The numbers I referenced were the industry. That is correct.

John Buckland - Daiwa Institute of Research

Anyway, at the moment, your planning is still on a market which would stay at this level. That is the crucial point. I mean, isn’t it, given the fact that you have been caught out before with regard to market shifts, segment shifts, everything else, when is the management going to bite the bullet and start planning on worst-case scenario, rather than trying to muddle through, hoping things are going to stay as they are?

Tom LaSorda

First of all, as Bodo stated, we are working aggressively on a detailed analysis of the company, top to bottom, and our approach is to look at that, not only best-case, but worst-case scenarios, and what do we have to do as an enterprise to be profitable and sustain that going forward?

I do not want anybody to believe that we are sitting here thinking and muddling, because I think the English term you used -- in the company, what we are doing is aggressively assessing the entire enterprise, looking at what is the worst-case, what is the future break-evens that we should be targeting for, in case the market goes down, and we will come back with a detailed plan when we are ready.

I am not sitting here thinking that we are going to be optimistic on everything.

John Buckland - Daiwa Institute of Research

Thank you.

Friedrich Lauer

The next question from Mark Tonn, please.

Mark Tonn - Warburg

Good afternoon. Just one question regarding the financial services business, which obviously has done pretty well during the third quarter, and we saw when looking at Ford’s results, or the results of Ford, this company experienced a negative trend in earnings in the financial services business, due to higher depreciation, higher interest costs. I wonder whether you might tell us why [inaudible] is doing so much better, and what might be the risks in the future and what we might have to expect for the next years to come.

Bodo Uebber

Mark, the profit development is, I am pretty satisfied with the levels we have achieved, also compared to the past years. We have done a lot of process improvements, risk management introduction, for example, [inaudible], that has to be applied for, so that the worldwide rollout in that aspect, which makes us stronger in the risk assessment area.

We are heading in two directions to optimize further. We are looking at the European business to get use of scale effect there, where we are very decentralized, for example, in the Americas. We are further heading -- we call that being number one in terms of many aspects, whether that is quality or dealer and customer satisfaction, and operating profit, operating ratios, levels.

The main aspect why we are doing well, we have, as I said before, we had some portfolio increase year over year, a couple of percentages, which gets to the bottom line effect on the one hand. On the other hand, due to our optimization processes, as I stated before. Also, e-contracting, for example, and getting to a paperless flow of applications helps us to cope with the other stuff.

Therefore, the development right now was also positive and, of course, there are minor issues which add on to 10 to 50 million which, if you improve by 40 million, I can go now into details of 1 million and 2 million to add them together. For example, [inaudible] was also related to that stuff, but this is very, very minor, but okay, a few minor stuff gets to 10 million.

For the future to come, two aspects we have to take into account -- the further interest rates developments. They got somewhat on hold, I would say, in the U.S. right now, but I cannot exclude a further rise in this aspect. Also in Europe.

The second issue that we have to watch, of course, the risk costs development, because they are on a very low level. If they cannot really be reduced again in the future, so there is something which we have to watch and look at, due to the economic development in the U.S. and in all the countries we are, in Germany, that we have to look at the watch list and of course, as I stated before, as residuals, for example, in the U.S. are somewhat deteriorating, we have to put that also on the watch list and to consider also for the year ’07.

Friedrich Lauer

David Garritty, would you please ask the next question?

David Garritty - Dresdner Kleinwort Benson

Tom, I was wondering if you could tell us what you expect your capacity utilization to be in the fourth quarter, and whether the outlook would be that that would go up next year, without some sort of permanent action.

Tom LaSorda

I think we had some technical difficulties on the question. David, I think it was capacity utilization in the fourth quarter, and then -- go ahead, again.

David Garritty - Dresdner Kleinwort Benson

Directionally, do you expect that to go up in 2007, without some sort of permanent action?

Tom LaSorda

From the production plans, I do not have the utilization percentage here with me, but from the production of the third quarter to the fourth quarter, obviously production will be up in the fourth quarter, mainly due to all the new product launches, and of course, we have a number of new launches next year as well, including the new minivan. It will go up.

The way the definition of capacity’s utilization is, is using the harbor report on two shifts, 235 days per year. This year, up to the third quarter, we were in pretty good shape, but in third quarter, we dropped quite a bit.

Friedrich Lauer

Ladies and gentlemen, as we do not have further questions, I would like to thank you for your questions and for [inaudible] Internet, corporate communications [inaudible].

Operator

Ladies and gentlemen, thank you for your participation. This concludes today’s conference. You may now disconnect your lines. Thank you.

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Source: DaimlerChrysler Q3 2006 Earnings Call Transcript
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