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Executives

Björn Scheib - Director and Head of Investor Relations

Bodo K. Uebber - Head of Finance & Controlling - Daimler Financial Services and Member of the Management Board

Analysts

Jochen Gehrke - Deutsche Bank AG, Research Division

Jose M. Asumendi - JP Morgan Chase & Co, Research Division

Stuart Pearson - Exane BNP Paribas, Research Division

Arndt Alexander Ellinghorst - ISI Group Inc., Research Division

Horst Schneider - HSBC, Research Division

Adam Hull - Berenberg, Research Division

Philippe Houchois - UBS Investment Bank, Research Division

Philip Watkins - Citigroup Inc, Research Division

Fraser Hill - BofA Merrill Lynch, Research Division

Charles Winston - Redburn Partners LLP, Research Division

Frank Biller - Landesbank Baden-Wurttemberg, Research Division

Stephen Reitman - Societe Generale Cross Asset Research

Laura I. Lembke - Morgan Stanley, Research Division

Daimler AG (OTCPK:DDAIF) Q1 2014 Earnings Call April 30, 2014 7:30 AM ET

Operator

Welcome to the global conference call of Daimler. At our customer's request, this conference will be recorded. The replay of the conference call will also be available as an on-demand audio webcast in the Investor Relations section of the Daimler website. The short introduction will be directly followed by a Q&A session. [Operator Instructions]

I would like to remind you that this teleconference is governed by the Safe Harbor wording that you find in our published results 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 disclosure documents and are also described in our risk report in the Daimler annual report and in the most recent venture interim report.

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.

May now I hand you over to Björn Scheib, Head of Daimler Investor Relations? Thank you very much.

Björn Scheib

Thank you so much. Good afternoon. This is Björn Scheib speaking. On behalf of the Daimler AG, I would like to welcome you on both the telephone as well as the Internet.

Today, we will discuss our 2014 Q1 results. In order to give you maximum time for your questions, our CFO, Bodo Uebber, will begin with a short introduction, which will be directly followed by Q&A.

With this, I would now like to hand over to Bodo. Thank you.

Bodo K. Uebber

Thank you, Björn, and good afternoon from my side as well. We published our first quarter figures this morning, which proved again that our past investments are paying off and that the company is well on track. Our product -- strong product lineup and the success of recent product launches were the main drivers of the improving sales dynamic.

Highlights in the first quarter were the very successful launches of the new C-Class and the GLA in Europe, as well as the world premiere of the S-Class Coupé, the B-Class and the B-Class Electric Drive. At Daimler Trucks, we presented the new Mercedes-Benz SLT, heavy-haulage vehicle and the announcement to sell our 50% equity interest in Rolls-Royce Power Systems Holding for EUR 2.43 billion.

In the first quarter of 2014, the Daimler Group sold 566,000 passenger cars and commercial vehicles worldwide, surpassing the prior year total by 13%. Mercedes-Benz was again the fastest-growing premium brand in the first 3 months and boosted sales by 14%. The great success of our newly launched models and the increasing benefits of the initiatives in China were the main drivers.

Daimler Trucks unit sales were 7% above previous year's level. The main drivers were the strong NAFTA region with 13% and Asia with 15%, while unit sales in Western Europe were slightly below the prior year level. Sales in Latin America decreased significantly by 22%, but at least, we could slightly gain some market share in Brazil.

Let's have a closer look at the key financials in the first quarter. Group revenues increased 13% and reached EUR 29.5 billion. Adjusted for foreign exchange effects, revenues even grew by 18%.

Group EBIT from ongoing business came in at EUR 2.1 billion. That more than doubled compared to previous year's Q1. Our strong earnings improvement was mainly the result of the positive unit sales and revenues development, good product mix at MBC, including benefits of the implemented efficiency programs. Against these factors, foreign currency had a negative impact on earnings of EUR 200 million.

Group EBIT was reduced by expenses of around EUR 300 million in connection with hedging Daimler's equity interest in Tesla and the exercise of the put option on the Rolls-Royce Power Systems.

I will continue -- I will outline the related positive effects within the 2014 outlook section later on.

Group net profit reached EUR 1.1 billion, which translates in an EPS of EUR 0.96. Industrial free cash flow rose to EUR 700 million in the first quarter and was mainly positively impacted by the profit contributions from the industrial business. Cash flow burdens rose from the slight increase in working capital by EUR 200 million, mainly due to inventory buildup in connection with the production schedule during the year and the introduction of new models. As a result, net liquidity position of the industrial business reached EUR 14.5 billion at the end of the first quarter.

With this very solid level, we are well positioned in light of the volatilities and risks in the automotive and financial markets.

After a good start into the year, what is driving the improvement of our financial performance in the coming quarters? The key drivers will be the positive impact of our new products and the increasing benefits from our efficiency programs. On the other side, we see risks in several of the emerging markets, which we closely monitor.

Let's start with Mercedes-Benz Cars. We continue to anticipate a full year global growth of the passenger car market between 4% and 5%. But today, we rather see the market at the lower end of this range. It is mainly the result of the uncertainties in key emerging markets.

With our new products, we are well positioned to exploit the global market growth. Two of this year's highlights, the new C-Class and the GLA, were very successfully launched in Europe in the first quarter and will be globally rolled out over the course of 2014.

Further exciting models will be launched this year, like the station wagon and the long-wheelbase version of the new C-Class, the new S-Class Coupé and the new smart family.

Our efficiency program, Fit for Leadership, reached 45% of the targeted savings and the benefits will accelerate, for example, with the ramp-up of the new C-Class.

At Daimler Trucks, from today's perspective, global truck demand this year can only be expected at around the level of 2013. With the exception of the North American market, no significant dynamism is to be expected in most of the core markets. On the contrary, downward risks exist in some emerging markets.

We updated the market guidance for North America to about 10% market growth, thanks to the increasing economic momentum and lowered the market guidance for Brazil where we now expect demand to decrease by approximately 10%.

We are very well positioned in this market environment with this strong product lineup and expect to significantly benefit from the market growth in the NAFTA region.

In North America, our new Cascadia Evolution is a benchmark for our total cost of ownership, with even 7% less fuel than the already best-in-class predecessor truck.

In Europe, it is our new Actros in Euro VI configuration, up to 5% more fuel-efficient than its predecessor. In combination with predictive powertrain control, we achieved even double-digit fuel economy improvements.

The extensive measures, which we are taking in Brazil to optimize our production, product and sales, for which we will invest approximately EUR 300 billion by the end of 2015, should further strengthen our market position.

The book build for Daimler Trucks as a whole in the first quarter at 123% is encouraging, but the overall market environment remains fragile. At the same time, our efficiency program, Daimler Trucks #1, is increasingly bearing fruit and supporting the EBIT development in 2014.

Let me give you an example. The Euro VI introduction in Europe results in a significant step-up in the production of our global Heavy-Duty Engine Platform, generating significant scale benefits on the material cost side over time.

We continue optimization programs in Germany and Brazil, which will result in onetime cost of up to EUR 150 million. At Mercedes-Benz Vans and Daimler Buses, we are also continuing the renewal of our product portfolio. Mercedes-Benz Vans expect significant growth in unit sales of midsized and large vans in Europe, as the new Sprinter, the new B2 and the B-Class will stimulate simulate additional demand.

The profitability is burdened this year by the launch cost of the new V-Class and the feedback on the new product is excellent.

At Daimler Buses, the Western European business is running very well and anticipates significant expansion this year. Due to the currently difficult economic situation in Argentina and growing market uncertainty in Brazil, weaker unit sales of bus chassis are anticipated in Latin America. Therefore reduce the sales outlook for 2014 and only expect a slight increase for sales this year.

At Daimler Financial Services, our key growth drivers are the sales growth in the automotive divisions, effective marketing directed at younger targeted groups, the expansion of business in Asia, the further development of our online sales channels and the expansion of innovative mobility services. The division enjoyed EUR 45 million benefit from the sale of noncore assets in the U.S. in the first quarter. This effect will not repeat in the coming quarters.

Putting all together, Daimler Group expects a significant increase of sales in 2014. On the basis of our current assumptions, we also expect to significantly increase our Daimler Group revenues, as well as the EBIT from ongoing business in 2014.

For the divisions, we expect EBIT from ongoing business. At Mercedes-Benz Cars, significantly above the prior year; same for Daimler Trucks; Mercedes-Benz Vans at prior year's level; Daimler Buses, slightly above the prior year; for Financial Services, also slightly above the prior year. We slightly increased the Daimler Financial Services guidance due to the positive onetime effect in the first quarter.

As a result of the strong euro and the developments in the emerging market currencies, we expect, based on current rates and expectations, EBIT headwinds of up to EUR 1 billion for the group this year. Therefore, 3 quarters are resulting from -- thereof, 3 quarters are resulting from transaction and 1 for the steams from translation risks.

Due to better results and rising depreciation and amortization in connection with the new products, as well as disciplined supply chain management, we target an industrial free cash flow from ongoing industrial business to cover this year's dividend payment.

The sale of the shares in Rolls-Royce Power Systems Holding and the changeover from the equity method measurement of the shares in Tesla to first-time fair value measurement, the stake worth EUR 736 million in value at the end of March, will lead from today's perspective to a significant contribution to earnings of approximately EUR 1.7 billion.

From the transfer of our shares in Rolls-Royce Power Systems Holding GmbH, we expect a cash flow of EUR 2.4 billion, which we intend to invest into our core business.

In 2013, Daimler Trucks benefited from a EUR 60 million contribution from the stake in Rolls Royce Power Systems, which will cease in the future.

In closing, let's take a brief look beyond 2014. We will continue with our product offensive in all our divisions at Mercedes-Benz Cars. We'll be able to benefit in 2015 from the global availability of the new C-Class and from a younger model lineup than today. We will further strengthen our product portfolio with additional models, such as higher-end derivatives of the S-Class, the Coupé version of the M-Class, a very exciting new sports car and the fifth version of our compact class family.

Our business model in China will be further optimized to fully exploit our potential.

For Daimler Trucks, the full availability of the product portfolio, the new Asia business model, as well as the turnaround initiatives and product upgrades at the Brazilian business, will drive the performance. The divisional efficiency programs will show their full impact starting 2015.

A lean organization and efficient structures will then enable us to leverage the benefits of our continuing product offensive, as well as the growth potential of new markets in the coming years.

At the same time, we continue our high spending for new products, capacity expansion and innovation. Investment budgets for CapEx and R&D will therefore remain on high levels. At Mercedes, we continued to spend about half of our R&D budgets on green technologies.

In 2015 and the subsequent years, we expect EBIT improvements to all automotive divisions and the group as a whole. The key drivers are product offensive with a strong product cadence in our regions worldwide, further improving the flexibility of operations, increased presence in growing markets and the full impact of our efficiency programs, as well as continued financial discipline.

Thank you for your attention. And now I'm happy to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from Mr. Jochen Gehrke from Deutsche Bank.

Jochen Gehrke - Deutsche Bank AG, Research Division

Yes. Three questions, if I may. First of all, with regards to working capital and just the thought process on the cash flow outlook for the current year, if I remember correctly, at the fourth quarter, you expected more than EUR 1 billion of swing-back in cash. Is that still the case given the onetime payments that you had towards the end of the year? And if so, is that reflected in the modern dividend outlook for the cash basis? And then secondly, on Mercedes, when we look at the margin, obviously 7% on an all-time high record revenue basis, are you still -- how should we be thinking about the rest of the year? Should we still see the same seasonal pattern of Q1 as the weakest of the -- quarter of the year with more [indiscernible] located in lower volumes and, therefore, rising margins throughout the rest of the year? How should we be looking at it, in particular with a view on ForEx towards the rest of the year? And then and just briefly on Brazil, with trucks, where are you there with your footprint? How much of cost restructuring are we set to still digest throughout the rest of the year? And when are you finally FINAME-ready? If you could walk us through your thoughts there.

Bodo K. Uebber

Thank you, Jochen, for your questions. With regard to cash flow, first of all, I'm happy to report that EUR 700 million cash flow positive in the first quarter was a good achievement, mainly driven by operating -- higher operating earnings, including, of course, higher depreciation, which, of course, boosts, of course, cash flow on top. The reversal which we have seen in the beginning of the year has not come true as big as we have seen it. There will be some couple of hundred millions left, of course, where we have also investments, which will -- might lead to higher investments in the second or third quarters, for example, in the van business. Certainly, we have, of course, also in the first quarter, some reporting date topics. So when you get to payables or receivables, of course, there are still always something which fluctuates around the quarters to come. But anyway, I'm happy with the EUR 700 million. We have a higher probability, I would say, from today's point of view, to achieve the target of covering the dividend compared to the February announcement. That is, I do think, the main aspect. The target will still be the same, but the probability to achieve, I would currently say, it's higher. Secondly, the margin development, we are not giving margin development targets over the quarters. I do think the pattern, which you have seen last year, that second half in earnings is better than the first half, will also be true this year. That should guide you a bit through the year. Of course, we have also announced that we have substantial higher volumes. And you see our pattern last year in volumes development, our seasonal development from last year. And also, you see our product launches of this year where the C-Class is mainly coming in the third quarter into the market, so that should also drive our sales development for this year. Brazil, we currently -- we can use the FINAME program when -- if that was your question, by 80% due to the fact that our localization is 40%. We invest, of course, currently into higher localization. By the end of the year, we think to achieve the 100% FINAME compliance, so to say, which is in line with the 50% localization in Brazil and that we are working on and that we are putting our investment in.

Jochen Gehrke - Deutsche Bank AG, Research Division

Just coming back to the cash swing backs, do you feel more confident now that you will not see the entire amount swinging back?

Bodo K. Uebber

That's right, yes. Answer is yes.

Operator

The next question comes from Mr. Jose Asumendi from JPMorgan.

Jose M. Asumendi - JP Morgan Chase & Co, Research Division

Couple of items. The first one on pricing environment in Europe, if you could please comment on how you're seeing the pricing momentum, I would be interested to hear if you're seeing competitors also increasing incentives as you launch new cars. Maybe you could also please talk about how much pricing power you lost over the cycle and have we started to see some type of pricing power being regained in Q1. The second element, I would like to know, please, if you booked any cost savings on the -- from your Fit for Leadership plan on the autos business in Q1. And then finally, I'm just wondering, if we look at the EBIT progression for both divisions, autos and trucks, is it fair to assume that the first quarter will mark the lowest EBIT point for the year?

Bodo K. Uebber

Thank you for your questions. First of all, on your Europe question, the situation currently in Europe and in trucks and in cars is a competitive one, a high competitive one. And I don't expect that also to be really better. We had also last year the situation in trucks. On top, of course, we have the advantage of the best truck in the market, I would say, seeing also the fuel efficiency gain we have. And some other competitors, I do think they are not in a so good position and therefore, they might spend some more money. Of course, we try and -- we will not join them, but of course, the competitor -- the market stays competitive. Your second question was pricing power, have we lost something? So when you see our comments on Q1, it's extraordinary positive contribution in the first quarter. We have a younger and younger product portfolio. We have a strong S-Class. We commented on the S-Class, of course and other products which are strong in the market. So it was positive contribution from the price positioning in cars but also slightly in trucks, slightly, of course, not as big as in cars. Secondly, our cost savings, we have pointed out. We have given you the number of 45% within cars. That reflects the -- compared to a 40% which we have achieved in 2013. So the difference is the Q1 effect. And in trucks, it was last year 30%. We are now at 40%, so that difference is 10% of the total program of EUR 1.6 billion. We see at -- you see that at trucks that with the cost position is even decreasing nicely. And you know in cars, we are investing a lot, so we could offset some of the burdens through -- which we have through depreciation and in other topics. You asked whether EBIT is the low point this year. Of course, I made already the announcement that second half is better than first half and the first quarter should be the lowest quarter in cars and trucks.

Operator

The next question comes from Mr. Stuart Pearson from Exane.

Stuart Pearson - Exane BNP Paribas, Research Division

Just roughly just 2 or 3 questions from me. Just going back to that 7% Mercedes margin, obviously, you had huge volume, a huge SAP in the quarter and the, say, pricing at least flat. So just understanding where some of the margin's gone to. And maybe if you could just update us on the impact of the new C-Class and GLA in Q1 and then the swing into Q2. Presumably, C and GLA were a cost item in Q1 but not much revenue in Q2. That should flip around. So maybe just help us understand the swing from those products there from Q1 into Q2. And then secondly, just on the vertical integration side, more generally, it's been a lot of in press, I guess, recently. And this is a topic, I guess, that's come up on and off over the last, well, years. Maybe you can just give us an update on what you see is the options in the sales network, particularly that's been a focus in the press and what financial impact that might have. And then following on from that, what other options you might see within the organization to improve the cost structure as we hear, I guess, you've almost fully delivered on the Fit for Leadership now. So basically, what's next?

Bodo K. Uebber

Stuart, so to your first question of the 7% margin, of course, the explanation, of course, you find in -- so to say, in the backup when we give you some more information of the EBIT bridge from Q1 last year to this year. And there, you can see that we had a higher impact, of course, due to volume and structure. Of course, that is based, on the one hand, volume, but also a better mix and structure. The main impact from that, both topics, we had a higher -- a better net pricing. And of course, when you see at the -- what was negative, it was clearly the currency, with EUR 144 million mainly coming from the U.S. dollar and the yen, which will burn the Q1 results. And of course, as we already talked in February about it, we have cost investments into plant capacities technologies, of course, which we are offsetting partially with our Fit for Leadership program, which led to cost changes of EUR 340 million negative. And that of course, is the explanation that we are at 7% in the first quarter. Main impact on the cost side, you know that we have already addressed that, are more than EUR 500 million higher depreciation over the total year, which is somewhat also reflecting the C-Class launch with all the plans. When we ramp up the C-Class over the -- over time, that was also one major burden in the first quarter. So the GLA, of course, the impact is not to -- of course, we had not too many sales on the one hand and of course, we have now done a lot of launches, A-Class after the B-Class, the CLA and now the GLA. So the impact we would see over time now in sales more than we had impact here on the cost side. So then you had a question about our sales alignment here in Germany. You know that we have an historical grown network here in Germany, which is -- which we need to improve on the profitability side. We will target on the structure and on efficient processes in this regard. And to make it more efficient, we will talk internally now with our unions about the further proceedings and get into alignment with them and then we'll get further details. So I can't and don't want to further comment on that. But it is one topic where we, of course, target some structural change, of course. And we will do so in the future for everything, what we see, what we need to adjust in our company for the sake of a long-term business -- sustainable business model which we have in mind to achieve. And then certainly, there are other areas where we are looking into, but let us talk about when we come there to some decisions then. I do think that were your questions. Thank you.

Operator

The next question comes from Mr. Arndt Ellinghorst from ISI Group.

Arndt Alexander Ellinghorst - ISI Group Inc., Research Division

Yes, it's Arndt Ellinghorst from ISI. When I think -- one of the confusions today is really coming back to this 20% revenue increase in Mercedes and why this hasn't driven a better profitability. So, Bodo, I don't know whether you want to do that, but could you give us more details on the volume mix pricing side and how much pricing exactly was so that we could get our head around the leverage at Mercedes? That would be very helpful. And the other one just very briefly is on warranty provisions. We've now seen over the quarters an ongoing decline over the last few years of warranty provisions. Again, current warranty provisions, I think, declined more than EUR 300 million in the first quarter alone. Understand there are a couple of currency effects in there as well, but could you talk about the trend of provisions? Do you see them going down further from here? Or shouldn't the industry really stop thinking about increasing these provisions, given the increasing number of big-scale recalls that we're seeing?

Bodo K. Uebber

Arndt, thank you for questions. One -- we have, of course, a certain mix in Q1, which is better, of course, compared to the former quarter. We have a higher share of S-Classes, but on top, we have also a higher share of compact class substantially. But in total, a better mix. On the other -- and that leads to a high volume impact but also mix impact. And on top, we had a very good pricing environment, which is also driven by the S-Class, of course. It's very young in the market. So therefore, the effect here was also a quite high one in that area. But it gets burdened by -- and I can only repeat that, by currency and by the cost development which we have, although we have our efficiency measures and that led to the 7% margin. So that is the explanation for this impact. If warranty provisions, again, to -- one thing is the provision as such, I do think it was also the question by the provisions as such are going down. You have to keep in mind that we are using provisions. So if you have a guarantee provision, you are using it for the customer service when they come into the maintenance, so we are using it. That is no EBIT impact because it's neutral because you have built it up the provisions before. So the -- for warranty provisions, the situation is currently that over the years, we had better and better quality, so we don't have to build our provisions, as we had before, per unit, even the lower rate over time. So that is naturally now and that is, quite honestly, a part of the success that you are -- that you don't have to build up the provisions by higher unit sales because the rate is lower. And we are controlling it very nicely. And you see us also doing less, I do think, actions on the recall side than others compared to the other companies. And therefore, we are going in the right directions. So it's true also for trucks. So that is a topic which we created years ago to focus on quality more and more and more. On the other hand, you have a currency impact because you are translating some provisions from outside euro countries into euro, so you have the currency impact. That means the provision is somewhat lowered by currency, but it's a minor item. So I hope I could convince you that everything is in order and not -- not an EBIT impact. It is -- it's good news and it will lead to further developments in the future. It helps us to get to our benchmark levels.

Arndt Alexander Ellinghorst - ISI Group Inc., Research Division

Okay. No, that's clear. And maybe just briefly following on from Stuart's questions on your certain distribution network. Can you tell us by when you might share some more details regarding the whole project? How much it could, well, save you, but also cost you? What's the timing on that?

Bodo K. Uebber

Let us internally talk about it, Arndt. I do think these are -- all topics you know that, which we have first to talk about with our unions internally and I don't want to give any information outside. Let us talk internally about the topics. Let that come to an agreement and I'm sure that we give more information over time.

Operator

The next question comes from Mr. Horst Schneider from HSBC.

Horst Schneider - HSBC, Research Division

So I would be interested in knowing -- or I still have got problem, let me put it that way. I have got problems to work with this bracket on the cost changes. And when I look, for example, that at Mercedes cars, you show the minus EUR 343 million burden for Q1. At the same time, you talked for the full year about these EUR 800 million savings in Fit for Leadership. So what shall we expect going forward then in 2014 from this item, other cost changes for Mercedes? So it was Q1 exceptionally high. And should we expect then this cost burden to come down in the next few quarters? And with that already be in Q2 or will that be more back-end loaded towards H2? And then also another question that I had was on pricing. I mean, it's obvious you showed in the walk-down that year-on-year the pricing has improved, but I think last year, it was also exceptionally low, the price level for you. So I will be more interested how the pricing has developed sequentially for cars and for trucks, especially for cars also in Europe. And then the last issue is more housekeeping issue. What should we expect this year now for the tax rate? I think you have some volatility here quarter-on-quarter and the tax rate.

Bodo K. Uebber

So Schneider, thank you for questions. Of course, we have already addressed last year, but also this year, that we have high investment into capacities, expansions and technology. And also, into product attractiveness that we have also addressed. That is a high cost topic, which we are trying to offset with our efficiency measures. One of that is the net viewer approach and material cost. This is running very well. We were already, the last quarter in 2013, very successful in this quarter. Again, means offsetting all the burden in material costs with our efficiency measures. But net, of course, it leaves us with some costs because when you expand your business and you're showing up with a double-digit growth rates in sales, you can't do that without any cost increase because you wouldn't get there if you do not any investment into fixed costs. And that is what you see here currently, of course, by far higher depreciation number than we had before. We targeted for the year EUR 500 million to EUR 600 million in higher depreciation. That is what you can see now in the other cost bridge. On top of that, we have announced for the total year that we invest into marketing costs, for example, because some of our products are not for younger targeted groups. For example, but also when you see the Smart where we have done a lot -- less marketing in the last years. We have to do something to introduce the cars, so you will these cost burdens, but they are more or less related to the gross number you see on the volume side. So don't be scared about higher costs because you need them to get the volume up. So therefore, please keep that in mind. So we have a good quarter. We are in line with our targets for the year on the cost side, but also on the efficiency side. You had a...

Horst Schneider - HSBC, Research Division

It's getting less than in Q2?

Bodo K. Uebber

And we have already announced in the beginning of the year that the costs, what you see here of EUR 340 million, is roughly something what you could expect over the quarters to come. Let's wait and see. We will disclose that at the time when we have the numbers. And yes, let's wait a bit. So your other question was pricing versus Q4. It's slightly better than in the fourth quarter in cars. And then you had ...

Horst Schneider - HSBC, Research Division

Globally?

Bodo K. Uebber

The tax rate question, sorry, the tax rate question. Approximately 30%, but without the impact of Rolls-Royce Power Systems and Tesla and so on. So the one-time effects, please remove them, so the tax rate is roughly at 30%.

Horst Schneider - HSBC, Research Division

Okay. And sorry, coming back to the price improvements sequentially, that was in globally or it was particularly in Europe?

Bodo K. Uebber

Leave it there, as I said. It is even good information, so -- against last quarter, so slightly and that's it.

Operator

The next question comes from Mr. Adam Hull from Berenberg.

Adam Hull - Berenberg, Research Division

I have 3 questions. Firstly, on the European truck orders, I think down 17% in Q1. I don't know if you could give us a bit of a sequential figures for sort of January, February, March, is that getting much better as we get into March and into April? And also maybe a bit on pricing on European trucks on Euro VI, are you really getting at a high price holding? And then secondly on the FX side. You're guiding towards EUR 1 billion headwind on the FX side. Just remind us a little bit of what your FX hedging situation is? And to some degree, how much benefit are you getting from hedging? Is there -- would it be a clean headwind of EUR 1.5 billion or more just to give us a better feel on that? And then finally, on the cash R&D and actually, the impact on the P&L. I note the cash R&D was flattish year-on-year in Q1 and actually your accounting of it had a hit to the P&L as your amortization was higher. Maybe give us some idea on the guidance, the cash R&D full year and whether we should expecting kind of neutral effect on the P&L for the year R&D accounting.

Bodo K. Uebber

Okay. Thank you for your questions. To answer your last question, of course in the beginning of the year, January, it was -- the order intakes were very slow. So that did better in February and March and came up to a level where we need some more growth in order intake to make our full year numbers, but they are doing a bit better and better. So that was the reason why we kept our market guidance slightly below last year, that we saw some progress. But of course, there's also some volatility in that what I'm saying currently. So we need another few weeks and months to see whether we will make up the total year guidance. Pricing, from our product and from our point of view, it's good, so we can stick to our pricing. That's true what I commented before was a bit pricing from other competitors. Then you asked the question about the EUR 1 billion headwind we see for the total year, which is roughly 50%. The major currencies like dollar, yen, pound and so on and so forth, or Canadian dollar and the other 50% is emerging markets, more or less. They are off a lot of burden from ruble, on the Russian ruble, from South Africa, from Turkey and so on and so forth, so a bag of currencies. We have to remind ourselves that a quarter is translation effect. So in trucks, we have a big balance sheet in the U.S. and in Brazil where we have translation effects not transaction effects. We have currently hedged 2/3, 2/3 -- more than 2/3 of the major currencies, of the dollar even somewhat more. So that's to the currency side.

Adam Hull - Berenberg, Research Division

Just a guidance on the sort of cash R&D and whether the P&L...

Bodo K. Uebber

Repeat your last question, please.

Adam Hull - Berenberg, Research Division

Yes. Just, I mean, in Q1, I think your cash R&D was down 1% in cash terms, but if I look at your capitalizing was actually lower than your amortizing. So interesting you had a negative hit of R&D in terms of the way you're accounting for that. So I was wondering what were the cash R&D be for the full year, just a bit of a guidance on that? And two, on how it counts through in the P&L?

Bodo K. Uebber

Okay. Cash R&D on the full year side is slightly up to last year. So the total R&D cost, without taking into account what is depreciation or amortization, it's slightly up this year. Now for the total company, Daimler.

Adam Hull - Berenberg, Research Division

And just on the FX, I mean, you said you were hedged -- I mean, just to be clear, so the hedging is still significant -- there's a significant benefit there if you didn't have hedging, just to get a feel...

Bodo K. Uebber

Of course, if we wouldn't have hedged, of course, EUR 1 billion would be a lot of higher -- a lot higher, of course.

Adam Hull - Berenberg, Research Division

And can you give us a feel for that clean number might be?

Bodo K. Uebber

No. But our hedging volume in the dollar, for example, is $17 billion to $18 billion. So you can make up your mind on the dollar side. And we have a lot of exposure in the yen and so on and so forth. Of course, this would be a huge number, but it would not lead into a right direction, I don't think. I don't know where you're heading to.

Operator

The next question comes from Mr. Philippe Houchois from UBS.

Philippe Houchois - UBS Investment Bank, Research Division

Two questions for me, please. The first one is on your -- the nature of your currency exposure. If you look at -- if I look at BMW's disclosure, the past several years, there's a big increase in exposure, the renminbi, which is now 2.5x their exposure to dollar in terms of transaction risk. Should we be looking at a similar situation where your transaction risk has fundamentally changed and much more to a point where renminbi now or within a couple of years will account for pretty much half of your total currency risk? That was my first question. The other one is, on the dividend policy. Am I clear on understanding, when you guide to a 30% to -- 35% to 40% payout ratio, this is on a declared net income? In other words, shareholders who will benefit from the disposals that you're doing, such as the Rolls-Royce Power System, in other words, there will be a payout on the gain as well, which means the payout may not be just limited by your operating cash. Is that a fair understanding?

Bodo K. Uebber

First of all, the renminbi is included in our EUR 1 billion -- up to EUR 1 billion number, first of all. And secondly, I do think 40% of our total U.S. dollar and renminbi exposure, 40% is renminbi related roughly. So but it's included in our management of exposure management, so -- and included in the up to EUR 1 billion burden of this year. Secondly, the dividend policy, of course, is understandable. We have 40% long-term policy to payout ratio. And of course, it's finally excluded the one-time effects because, long-term, I don't expect always a one-time effect, honestly. And we have a clear, sustainable dividend policy. So for long-term targets, of course, we are targeting 40% clean EBIT or clean net income. So it means without these big impacts. Last year, you have seen the ideas where we used to some of that to make up our dividend, that's true. But normally, we exclude it and we will strengthen our business, core business, with the proceedings. Sorry.

Operator

The next question comes from Mr. Philip Watkins from Citi.

Philip Watkins - Citigroup Inc, Research Division

It's Philip Watkins from Citi. Just on the balance sheet, I mean, the cash flow was pretty good in the quarter. You've got the proceeds in from Rolls-Royce as well. I was just -- the balance sheet looks quite strong to me. I was wondering if you could just update us with your thinking on the uses of cash here outside of dividends. And secondly, I don't think everybody heard the answer to the last question. On the capitalization rates of R&D, they're relatively low compared to peers, so that improves the quality of your earnings. Is it likely to stay around this level for the next couple of years?

Bodo K. Uebber

To your first question, first of all, the Rolls-Royce Power System stake selling is not included in the first quarter. Of course, it will come up based on the closing of antitrust proceedings and so on and so forth. Regulations, we do have to get during this year, most probably. But finally, we have to ask the authorities when we get the final go here. Then we will get the EUR 2.4 billion we target further in the cash flow, as I said before, with ongoing cash flow without this M&A transactions and pensions and other stuff to be over and above the dividend. We will invest this money into our core business, which comes from Rolls-Royce. You have heard in the former questions, we are staying on a high-level of funding, of total funding, R&D, CapEx, invest in intangible assets. We will keep high to invest into our product and get the best return from this strategy. Capitalization rates in the first quarter 2014 was 20% overall in Daimler. This number is lower than in the past because the main reason is trucks and buses because there, our capitalization rates was higher when we invested a lot into the Euro VI product portfolio, for example, and that is now going down. And for the next couple of years, it will be so low, so to say. So on the Daimler level, it might be a flat development of this 20%. Of course, it jumps up sometimes in the quarters. It is higher, of course, within that number in cars, because there, what we are doing a lot of product investments. Our policy, I do think is, I do think even a bit more, you can say so, conservative, so less capitalization, more spending, so to say, which I do think is the right approach.

Operator

The next question comes from Mr. Fraser Hill from Bank of America.

Fraser Hill - BofA Merrill Lynch, Research Division

It's Fraser Hill from Bank of America. Just 3 questions, 2 clarification. On the first question on trucks. I was wondering if you could give us a flavor as to how your confidence on achieving your truck guidance has changed during the quarter. Obviously, you're looking for significant growth and it's been a tough year for the industry, particularly in Latin America and we've got the expected hangover in Europe. So you have the declines in Latin America for your orders and I guess the high level of inventory and possibly, tough pricing effects in that market, been more than offset by the positives in North America, or is that weight something that's become an incremental downside surprise, let's say, to your expectation about hedging that truck guidance for 2014? The second question is a clarification on Jochen's question on the EUR 1.5 billion of cash reversals which you had guided for 2014. I think you said that those would certainly be less this year now. Can you maybe be a bit more specific on that? Are we talking half that level, EUR 750 million? What would be a fair number to assume? And then final question. Again, just to clarify, back to the other costs within cars, the EUR 343 million for the quarter, just to confirm, so you're saying now that we should expect a similar, let's say, EUR 300 million or so other cost effect in cars for the remaining quarters for this year per quarter? Is that the way I understood your comments?

Bodo K. Uebber

Fraser, to your first question in trucks. First of all, the first quarter, we could offset with the very positive NAFTA development and Asian development. Together, the weak development in Brazil. And we updated the guidance -- market guidance for this year, so we increased some of the NAFTA market guidance and we reduced the Brazilian ones. And of course, there are some risk, of course, in the European guidance if you might say so. And that is what we currently see. Other than this, I can't tell you. These are the risks. The positives and the negatives so to say from the market. But we clearly stick to our guidance, but we have to watch out, to control, to monitor these emerging markets, which have certainly a higher share in trucks than it has in cars. And therefore, we are monitoring it very constantly to see how the market is developing. The EUR 1.5 billion of cash reversals, as I said, I would roughly assume 2/3 of that is -- I expect just the EUR 500 million of that EUR 1.5 billion in the upcoming quarters as a reversal compared to the February situation. All in all, as I said before, the probability to get to our target of covering the dividend, I would say, is from today's point of view, higher than it was in February. So it's a good development. To your questions on the other cost changes, take the number of the first quarter, roughly for the year, times 4, that is quite a number we have in our plan for other cost changes. As I said before, which includes major costs for higher depreciation due to the investments, some marketing spending and so on and so forth and that is included there.

Fraser Hill - BofA Merrill Lynch, Research Division

Okay. And other cost change line is, obviously, net of your cost savings as well?

Bodo K. Uebber

Of course, yes, of course. They would be higher, of course, if we would not do our efforts in the efficiency programs, yes. And I said before, you have to see these costs related also to the volume increase piece. So that is -- you can't do volume increase without more capacity in the plants. And therefore, you see that also with other manufacturers. So don't be worried. That is good investments and you see us growing.

Operator

The next question comes from Mr. Charles Winston from Redburn Partners.

Charles Winston - Redburn Partners LLP, Research Division

I'm just down to 1 question actually. And it's trying to revisit this area of the 20%, 21% revenue growth in Mercedes in the period, which I guess must be getting on for something like 24% if we look at it excluding FX. Your sales volumes were 13%, 14% or so as reported. But clearly, that can be impacted by the pace of exports to China, to the businesses there. And it could also be impacted by any parts and components that you export out to China. So I was wondering, what the volume impact within the 24-ish or 20-plus percent clean of FX, would volume actually be quite materially above the 13% to 14% that we would imagine just looking at your unit sales growth? Could volume growth have been sort of towards the 20% mark if we included both exports to China and also parts components exports as well? I'm just trying to get my head around this very, very high underlying figure, which just -- it seems quite a little still hard to rationalize.

Bodo K. Uebber

Well, I don't know whether I understand your question right. But the first answer is, everything is included here, so also volume wise. So therefore, the revenues also include -- including China, so therefore, the numbers are included. If you have more detailed questions, please go to Investor Relations because there might be other questions you have in this regard. But yes, everything included.

Charles Winston - Redburn Partners LLP, Research Division

Okay. So just could -- to follow up then. I understand everything is included, but was there a significant increase in parts and components to China which would have been captured in the revenue number? Is that, that...

Bodo K. Uebber

Nothing special, I have to tell you.

Operator

The next question comes from Mr. Frank Biller from LBBW.

Frank Biller - Landesbank Baden-Wurttemberg, Research Division

Frank Biller from LBBW. It's just 2 questions on my sheet here. The one question is on the Daimler Buses business which performed pretty good in the first quarter. And you are speaking to your guidance of a slightly increase in operating profit, which should be the EUR 163 million from last year. So what are your you expecting in the quarters to come as a negative, because you have seen a shift of more than EUR 70 million in the first quarter? So what negative, if you're missing, or is it just the conservative guidance for the buses? And the other thing was on the one-timers. So EUR 1.7 billion are going to be purchased here or coming in the next quarters from the Tesla stake, as well as Rolls-Royce stake. So what is the figure after taxes here? And the other thing is on Tesla. So am I right, you had a color here and now you're making mark-to-market accounting for the Tesla stake? Are you going to sell the Tesla stake with this color or strategy, or are you sticking to the stake and what is the situation in your accounts? Is it fluctuating from quarter-to-quarter driven by the share price?

Bodo K. Uebber

So to your first question of buses. Of course, we are very happy with the performance in bus because the 6% is a very good achievement. We have gained market share, a strong market share. If you see the fact sheet in Western Europe and in Brazil, in Germany due to a strong product. We have -- but we have also some effect that we couldn't deliver all the trucks in the first quarter last year to some restrictions on production we had, so some of that is -- came from the first quarter sales, so that moved into the first quarter. But as the other effect, but on the other hand, we see also the cost, the efficiency measures which we have done with our globe program are bearing fruit. For the next quarters to come, don't expect the 6% in all the quarters because we have decreasing market expectation for Argentina and Brazil. So that was a good contribution in the first quarter, but that will certainly go down. Please keep in mind, The World Championship, I don't know, starts in June also. So after that, of course, we expect also the deliveries of buses and so on going down anyway. So therefore, there's a market impact certainly. And as I said before, a swing from first quarter and first quarter. So keep our guidance, please. We are pretty pleased with our guidance and they are right. We'll see that in the upcoming quarters. But the good performance is benchmark. I don't think you will see any truck manufacturer who has a bus business is doing these kind of numbers, so we were happy -- very happy with that business currently. The EUR 1.7 billion, I -- is divided up into EUR 1 billion on Rolls-Royce, as I said before, which depends on the closing of the transaction, yes? And the EUR 700 million is related to the -- our stake in Tesla. That is -- the EUR 700 million which we will be -- where we do a fair market valuation in the second quarter is just related to an accounting topic, so to say, because we will not anymore be in the board of Tesla, so we will lose our equity accounting and it will be treated as financial investments. So with -- our auditors will force us, if you might say so, to move it into financial assets and therefore, you make an evaluation of that stake, which we think from today's point of view, seeing the current share price from Tesla at EUR 700 million roughly. And that will happen in second quarter noncash. And is not related to our -- of the term of the color, which is 3 years. We started in December with the term and it will end then 3 years later. And at this point of time, it's in 2.5 years from now, we will see what we do with the color and the stake. So the cash impact you will see only in 2, 2.5 years roughly.

Operator

The next question comes from Mr. Stephen Reitman from Societe Generale.

Stephen Reitman - Societe Generale Cross Asset Research

I apologize if my question has been asked already. I was late on the call. I wanted to look at China and look at price realizations there. What has been your experience in the quarter with the E-Class? And how are you thinking about C-Class production coming later this year in China?

Bodo K. Uebber

So with regard to E-Class, the situation has not changed compared to the first quarter last year. The E-Class is doing well. Price positioning has improved over the last 6 months and that is currently stable, which is good news. And the C-Class production, of course, we will be third quarter in China, our global ramp up. Everything is in line so technical-wise we had a good ramp up here Europe, so I expect also China and the other plants doing well. And of course, certainly, we will see some volume effect in the second half and also next year with the derivatives of the C-Class. So everything is okay with regard to that product. And of course, the customer feedback what we had here in Europe was extraordinary towards -- together with the GLA. So it was an extraordinary, all-time high what we saw here in traffic in dealerships, which is promising for the start.

Stephen Reitman - Societe Generale Cross Asset Research

And on the C-Class in Europe, do you have any date yet on the average transaction on the C-Class in terms of option take-up in average prices of cars?

Bodo K. Uebber

I can't tell you right now something, but it seems to go -- yes, not so much, so therefore, please ask the -- or in July in the conference call, maybe we will have more information to that question, Stephen.

Operator

The next question comes from Mr. Laura Lembke from Morgan Stanley.

Laura I. Lembke - Morgan Stanley, Research Division

And I have 3 questions left. The first one would be on your China joint venture profitability. I mean, obviously, that has improved a little bit compared to last year. But I think on a full year-run rate, you're at about running at like EUR 120 million or so. I'm just wondering what is really holding back the profitability here? And also if I'm correct, I think your capacity utilization in the JV is right now only at 50%, so if you could give us a little bit of a sense as to when and how this really ramp-up and what your expectations are really for the profitability development here going forward? Second question is on Mercedes. If you could give us a bit of a better sense on how actually 2015, on how we should think about that year, because basically in that year you're going to get the full effect, I guess, of the C-Class launch, S-Class launch and that A-Class derivatives. But then on the other hand, your key model, the E-Class, is just ahead of the changeover. So how do you think the margins will develop throughout 2015? Or put a little bit differently, when do you think you will achieve your peak margin for Mercedes? And then the last question is on North America trucks. I think we've now seen about a few years where basically we've been going through very strong order momentum in the beginning of the year. The industry then consequently ramps up production and capacity to only find out during the summer that actually that ramp-up was too much and everybody has to cut their capacity or the production again. So I'm just wondering if you see any risk of that happening again? And if so, what your flexibility is in your North American production setup?

Bodo K. Uebber

Laura, thank you for your questions. With regard to the China joint venture production, joint venture what we do have, of course, is currently, you might say so, somewhat burdened by the capacity expansion we are doing on the one hand, but we have also, you know that, opened up an engine manufacturing within the joint venture. We are producing engines there. Of course, the lower number, that goes up, we have our ramp up, our changeover to the C-Class, all of it of course somewhat burdens the joint venture. Profitability, I expected in the years to come also to go up. Yes, after these investments are taking and the new products are up and running. The 2015, of course, we have commented it in my introduction speech, that we see earnings improvements for -- based on the current market assumptions, I have always to tell you and some other assumptions we do, we see increasing earnings. And we have also said that holds true for trucks and then cars, that we see a gradually improvement, step-by-step-wise, increase in profitability and also margin development. So that you can also expect for the years to come. I don't see this discussion about peaks. I cannot -- I don't see that peak development because we are constantly pushing new products into market, good products, well received from customers, so I don't see this discussion about peaks of product cycles and so on and so forth. There might be peak through markets, but I can't tell you anything about '16 and '17 market developments. In North America, of course, we have built up a strong business. The product complexities, we have reduced, we have introduced, of course, our engine, our world engine, so to say, the HDAC in all these market, but especially here in North America. It's strong. We have a combination in Mexico and the U.S. production network, which is highly efficient. And we have demonstrated already that we can -- we have the flexibility in North America that we can go down and up with the market as we see it. So we are monitoring it. Certainly, you are right. Of course, sometimes, the U.S. market were demonstrating strong business and then it went down. We had that 1.5, 2 years ago, that situation. But anyway, currently, it's moving up. Our order intake is significantly and that should lead to numbers which will lead us not only to the second quarter, I can tell you currently. With that order book, we are already going more in the third quarter. So therefore, the year is quite defined. But of course, there are some flexibility to the upside maybe, but we have to see how we are developing. Biggest -- good information, flexibility is a very high one we have in the NAFTA.

So with this, we come to the end of this call. Thank you so much for everybody on this call and also on the Internet. If there's anything left open or you still have questions to be raised, Investor Relations is definitely at your disposal. So have a nice afternoon, early morning or late afternoon and talk to you soon. Bye-bye.

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