Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  
TRANSCRIPT SPONSOR
Better Than AdSense

DaimlerChrysler AG (DCX)

Q4 2006 Earnings Call

February 14, 2007 12:30 pm ET

Executives:

Friedrich Lauer - Vice President, Head of Investor Relations

Dr. Dieter Zetsche – Chairman of the Board of Management DaimlerChrysler/Head of Mercedes Car Group

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

Thomas W. LaSorda - Board of Management, Chrysler Group

Andreas Renschler – Head of Truck Group

Analysts:

Adam Jonas - Morgan Stanley

Max Warburton – UBS

Stefan Burgstaller - Goldman Sachs

Ronald Tadross - Banc Of America Securities

John Lawson – Citigroup

Phillip – Analyst

Christian Breitsprecher - BHF Bank

Jon Backland - Man Securities

Kieran Mann – Ode

Daniel Shwartz – Commense Bank

Phillip Ayaye – Unidentified Firm

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 number you will find on your invitation. The replay of the conference call will also be available as audio webcast on demand in the investor-relations section of the DaimlerChrysler website. The conference will be followed by a question and answer session. If you want to ask a question, please press one on your telephone keypad. To remove the question, please press hash on your telephone keypad. Again, for a question, please press one your telephone keypad, and hash to withdraw. May I now hand over to Mr. Friedrich Lauer, Head of Investor Relations on DaimlerChrysler. Thank you very much.

TRANSCRIPT SPONSOR

Better Than AdSense

What if there was a way to promote your company to a perfectly targeted group of potential customers, partners, acquirers and investors? What if you could tailor your pitch to them at the moment of maximum interest? And what if you could do this for a no-brainer price?

This is exactly what Seeking Alpha is offering with transcript sponsorships.

Seven types of companies are sponsoring earnings transcripts on Seeking Alpha:

1. Company sponsors its own earnings call transcript (example).

2. Company sponsors partner's transcript (example).

3. Company sponsors competitor's transcript (example).

4. Issuer-sponsored research firm sponsors client's transcript (example).

5. Investment newsletter sponsors transcripts of successful stock picks (example).

6. IR firm sponsors transcript of micro-cap company (example).

7. Consulting company sponsors company's transcript in sector of interest (example).

Your company's name and promotion could have been on this transcript! Learn more, or email Zack Miller for details.

Friedrich Lauer

Good afternoon from Morgan Hills, this if Friedrich Lauer from DaimlerChrysler investor relations. On behalf of DaimlerChrysler, I would like to welcome you on both the telephone and the internet for our full year results presentation. We are happy to have with us today, the Chairman of the Board of Management of DaimlerChrysler and Head of the Mercedes Car Group, Dr. Dieter Zetsche, the CFO, Bodo Uebber, the head of the Chrysler Group Thomas LaSorda, and the head of the Truck Group, Andreas Renschler.

In order to give you more time for your questions, Dr. Zetsche will just make a short introduction. Tom LaSorda will then summarize for you the elements of the Chrysler group recovery and transformation plan. After that, Dr. Zetsche will shortly elaborate on the outlook. Afterwards, as usual, you're going to come to us to ask your questions. I will explain this process later.

Before we start, I have just a couple of administrative details. All the slides showed at the press conference this morning, are available on our internet site as well as the replay. Please understand that we do not discuss the charts in detail at this conference call.

I would like to remind you that this teleconference is governed by the Safe Harbor Wording that you'll find in our published results document. Please take some time to study this wording.

Please note that our presentations contain forward looking statements that reflect management's current views. These forward looking statements can be identified by expressions such as: "anticipate", "assume", "believe", "estimate", "expect", "intend", "may", "plan", and similar expressions.

And such statements are subject to risk and uncertainties, examples of which are set out in the Safe Harbor Wording in our document. And I will also describe in our most recent publication, on the heading respective. 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. And forward looking statements speak only to the date of which they are made.

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

Dr. Dieter Zetsche

Thank you Friedrich. We just announced our full year 2006 results and the recovery and transformation plan for the Chrysler Group at their annual press conference. I guess it's in our all best interest as Friedrich just mentioned, that I very briefly summarize just the key issues in order to give you maximum time for your questions.

Unit sales from 2006 and Group levels were down by 3% to 4.7 million vehicles, but revenues were up by 1% to EUR 152 billion. Operating profit was up by 6% to EUR 5.5 billion. And net-income was up by 13% at EUR 3.2 billion. Board of Management will propose to the supervisor boards that we establish a dividend of EUR 1.5 per share.

In 2006, our overall results were very much shaped by a strong year. We had a strong year at three of our divisions but a difficult and disappointing one at the Chrysler group. The profitability met, or in most cases, surpassed our target at the Mercedes Car Group, the Truck Group, and Financial Services.

The Mercedes Car Group, the profitability was significantly up due to co-efficiency improvement and a strong world wide market performance of our new models. No doubt in our mind that we will reach at least the 7% return on sales this year.

On the Truck Group, the profits increased to an all time high. We had record unit sales, improved model makes, and further efficiency improvement which all together allowed for this very good result.

Financial Services showed their fifth consecutive year of profit growth and they achieved record results again based on improved efficiency and a higher volume of new business. The Chrysler Group, on the other side recorded substantial EUR 1.1 billion loss. SDS market environment in the high volume, high margin segment dramatically changed.

To get Chrysler back on track to sustainable profitability, the Chrysler Group developed a comprehensive recovery and transformation plan. And Tom will outline the key elements of this plan right now for you. Thank you.

Thomas W. LaSorda

Thank you Dieter. I'd like to give you a brief overview of the Chrysler Group's Recovery and Transformation Plan and it will be an overview. It's a three year plan geared to quickly return us to profitability by 2008. We'll also change in the way we do business in the long run in order to sustain that profitability.

There are two integrated parts to this plan: its recovery and transformation. The three key measures of the recovery plan are first, revenue management, second, reductions in material and fixed cost, and third, changes in capacity and productivity.

A key to revenue management is the continuation of our great product offensive. With the launch of these all new vehicles and five refreshed products for 2007. Between 2007 and '09 we'll launch more than 20 all new products and 13 refreshed vehicles. We'll also invest $3 billion or EUR 2.3 billion and new engines, transmissions, and axles, in order to move toward a portfolio that is more fuel efficient for the future.

On the cost side, our goal is to reduce material cost spending, back to EUR 1.15 billion or $1.5 billion by 2009. We'll also reduce our capacity in our assembly plant to 2000 vehicles.

We’ll be eliminating assembly plant shifts at our St. Louis minivan plants and our Newark, Delaware large SUV plant and our Warren Truck plant here in Michigan. We’ll also idle New York Assembly plants in the end of 2009. And of course, we’ll also idle one of the parts distribution centers as well. Powertrain stamping and the component operations will also be adjusted to reflect this reduced assembly capacity.

As a result of these actions, we’ll reduce the number of employees by 13,000 people. 11,000 hourly and 2,000 salary over the next three years. The salary will be 1,000 this year and 1,000 in 2008.

We will have reached significant financial savings over the next three years. A target of $4.5 billion, of which we project revenue management to contribute about 25% of this savings program and 80% for material manufacturing, fixed, and variable costs reductions.

The stretch goal of $4.5 billion includes assumptions for unexpected headwinds to overachieve, but we want a 2.5% return on sales by 2009. The financial impact of the recovery measures will begin in 2007 with the restructuring charge of up to EUR 1 billion or $1.3 billion. The net cash impact will be around EUR 800 million or $1 billion in 2007 with the balance in the succeeding years.

The transformation part of the plan recognizes that we need to go beyond recovery. Our business model must change in order to achieve long-term sustainability and profitability. For product leadership more customer and brand focus. Putting the shift in car-truck mix will grow in truck, increasing cars.

For example, we’ll add a $3 billion investment in new engines, transmissions and axles, which will lead us towards this refreshing product.

We’ll also target $5 billion in additional global purchasing from low cost countries. And finally in this area, continued reliance on internal resources, but leverage more alliances and partnerships globally.

Such as some of the initiatives that we have going on in Powertrain where we’ll have joint venture with Katreg on new technology for dual clutch transmission for fuel efficiency.

So to sum it all up, for our recovery and transformation plans for 2009, here are the following key highlights:

We’ll be reducing the assembly plant capacity by 400,000 units through shift reductions, idling of the plant and other corresponding actions and Powertrain and component facilities.

The Chrysler Group’s total workforce will become smaller by 13,000 people. We will aggressively pursue global market opportunities along with low cost sourcing. We will invest $3 billion and will leverage partners to launch the biggest Powertrain offensive that will give us a portfolio for more fuel efficient vehicles and much more global diversity.

We’ll work to reduce and optimize our retail dealer network here in the United States to help make dealers more profitable and more competitive, with strong brands to support them.

As I stated, we have set a target of $4.5 billion or EUR 3.5 billion and financial improvements including $1.5 billion in material savings in order to achieve a 2.5% return on sales in 2009.

We believe that this represents a solid plan to return the Chrysler Group to profitability and lay the groundwork for a solid future.

Dieter, back to you.

Dr. Dieter Zetsche

Thank you, Tom. Ladies and gentlemen, you have seen that the class of team worked out a comprehensive recovery and transformation plan using all resources available.

In the course of last year, we reviewed our strategies, including comprehensive benchmark approaches. For Mercedes, we implemented the CORE program that would lay the base for operational excellence, focused on new products with top-notch quality and strength of brand and developed a growth strategy. This will bring Mercedes-Benz back to the top beyond the 7% return on sales.

For the Truck Group, we initiated the Global Excellence Program that drives productivity and integration around the globe, with maximum flexibility. It will allow us to ride the cycles more successfully and run the business with return on sales of at least 7% over the

cycle while still earning our cost of capital in the down cycle.

Financial Services, will become an operational benchmark in efficiency with a strong customer focus. We will achieve both optimal support for the long term positions and a return on equity above 14%.

Now, for the Chrysler Group, the tough competition and the adverse market conditions made it necessary to accelerate and expand operational improvement implemented in the last years.

The Recovery and Transformation plan is designed to improve both the cost position and the revenue side of the business and we are therefore convinced that it will lead the Chrysler Group back to profitability.

In addition to that and in order to optimize and accelerate the presented plan, we are looking into further strategic options with partners beyond the business cooperation partners mentioned by Tom.

In this regard, we do not exclude any options, in order to find the best solutions for both, the Chrysler Group and DaimlerChrysler. Please understand that we cannot provide you with any more details at this point in time.

As far as the outlook for the year 2007 is concerned, the DaimlerChrysler Group earnings will be impacted by charges related to the Chrysler Group recovery and transformation.

As the shift this year from year’s gap to IFRS and earnings outlook for the year will be provided in connection with our first quarter announcement. Thank you.

Question-and-Answer Session

Operator

Ladies and Gentlemen, if you do have question at this time, please press the number one to register the question and the hash to cancel.

Analyst

Thanks for taking my question. I have actually three. First of all, on health care, I think you stated in the press conference that you need cooperation from the UAW towards bringing Chrysler to a sustainable level. I wonder if you can comment broadly whether you are open to good-year type of solution to fund healthcare in order to bring this liability down?

Secondly, question to Tom on the cost cuts, could he provide us with any time line in terms of how we should spread these EUR 3.5 billion and is there any relief from healthcare already included in there?

And lastly, On Mercedes post this fourth quarter, do you see any reason to change your outlook for the first quarter where you initially said that you were going to fall below the target 7%? Do you feel we’re generally in the pocket, do you feel a little bit more comfortable? Thank you very much.

Thomas W. LaSorba

Relative to the UAW cooperation and the question on the healthcare, would you consider the good-year as the potential solution? The answer to that would be absolutely yes. It is something that we would consider and are considering and we’ve done a lot of analysis there as we continue with our discussions with the UAW.

As far as the cost cuts as we launch this program that will be as I would say a three-year program. We talked about a material cost of $1.5 billion over a three-year period and you’ll see more in year two and a little more in year three, but we need to make big savings here as well in 2007.

As far as the relief from health care, we’ll wait to see how UAW negotiations go on that and once we get further savings beyond what’s considered a base plan that will be in addition to what our base plan is.

Dr. Dieter Zetsche

Thank you, Tom. I will add to the first part of the question. I did not feel uncomfortable about the first quarter before either, but we were just aware that seasonally, the first quarter is below average and because of the launch of the incremental burden in the first quarter. For that reason we are still expecting a first quarter below the average of the year and below the 7% we are shooting for. But clearly, we have a lot of momentum and January went very well. So, we are looking optimistically forward including the first quarter.

Thank you.

Operator

We take the next question from Adam Jurewicz please and also please introduce your name of your organization. Thanks.

Adam Jurewicz - Morgan Stanley

Sure, thanks its Adam Jurewicz from Morgan Stanley. A couple questions for Tom.

First, on the health care again to follow up, how important is it for you to get the harmonization on the healthcare side with GM and Ford before entering into the pre-collective bargaining pattern in presumably July? And if it did, if you ran into enough labor conflict that you had to go to a strike situation, if it did come down to that unfortunately, would you be willing to do this now to get the deal that you wanted, if you saw that was the best thing for Chrysler? And if it did go to that point, how long could you last if you are able to tell us…would you be able to withstand this and how long?

My question for Dieter is on the truck business side. You’ve seen some of the evaluations and the relating of the truck industry. Clearly the entire business model seems to have evolved for the industry in a very favorable way and from a cost and demand side and valuations reflected back. You’ve got some of your truck competitors at 15, 16, 17, times earnings. It doesn’t take a mathematical genius to see that if you apply that to your business vans, buses, and trucks, you get value of around EUR 30 billion. It doesn’t appear to be reflected in your share price.

Can you tell us why you wouldn’t consider selling the truck business, spinning it off to shareholders? Is it able to be on a stand alone basis now that is entering in a new era of health? Can you give us some reasons why you wouldn’t consider doing that? Thanks.

Thomas W. LaSorda

Adam, this is Tom. Relative to health care and reaching an agreement with the UAW, someone in the GM and Ford, obviously, that continues to be our intent and when you asked me that in the third quarter, I said we hope that we get it very, very soon and then a quarter before that you asked me and now this at the end of the year, here we are.

Bottom line is we are working aggressively. We’ve provided all the financial information to our Ron Gettlefinger and team to make sure that they have a very close look at our financial situation.

We are going to do everything possible to try to reach an agreement before bargaining this fall. Of course, like you said it will begin probably as early as this summer. I can’t make any more comments about negotiating health care in the press or on the analysts call. But we need to make sure that we get clarity with GM and Ford and we’re prepared to work on that aggressively.

As far as a strike and a conflict, and how long would you go out, and how much cash do you have? Quite frankly our game plan is to reach an agreement that’s aggressive from the standpoint of taking costs down not up and working with the UAW and not through the press or through communications like this.

Dr. Dieter Zetsche

I guess it’s my turn even though it’s a track related questions probably unanswered or doesn’t opt to answer it. Adam, I would like to get a recommendation from your side under what circumstances we could stay with any business when it’s unprofitable? So, I’m afraid there won’t be much left if we follow this recommendation.

I mean seriously, we of course appreciate that not only our truck business has improved a lot and actually came closer to the benchmark. But that the industry has altogether become more profitable and there added steps, the multiples have become much more pleasant.

Of course, it is our objective to ultimately come see the value of the part of our business be reflected in the overall value of the group and we do believe we have contractual strategies how to accomplish that.

In the first place, we want to bring our truck business to benchmark level, to maximize the value of this entity and then as I said, transfer that into higher value of the group.

Operator

We take next question now from next Max Warburton, please.

Max Warburton - UBS

Yeah, hi, it’s Max Warburton from UBS. Does that show, obviously note that you are unable to discuss any details of the idea of strategic partners, etc… I think we all saw that on the press call so I am not going to ask about that.

But looking at another potential option for Chrysler that might just be a conventional exit, the long talked about spin-off or my best teacher, could you just help us understand, as a company I imagined that you looked at this option and you looked at the legal ramifications. Can you just help us understand? Is it legally possible in your mind for Daimler to deconsolidate Chrysler? Are there legal, financial, union obstacles to a spin-off? Forget partnership, just a self help measure of the best in Chrysler. Is that technically possible? Thank you.

Dr. Dieter Zetsche

Thank you for this question, I see a little conflict between your first statement and your question because I would consider this being part of the options we are not in a position to talk about in more detail at that point of time. I am sorry for that.

Max Warburton - UBS

If that’s the case, I guess it’s difficult for us in the equity market to understand some of the options here. But I guess that if you are not ruling it out, you’re saying that it technically remains one of the options that is still on the table?

I could ask another way. Can you confirm that it is not impossible to pursue such a course of action?

Dr. Dieter Zetsche

We said and I said that we do not exclude any options. And of course I should add any legally part of options that goes without saying. But with that we don’t want to exclude any options.

Max Warburton - UBS

Okay, thank you.

Operator

Okay we take next question from Stefan Burgstaller please.

Stefan Burgstaller - Goldman Sachs

Hello, Stefan Burgstaller from Goldman Sachs. Just along the same line of thought here.

In terms of legally separating Chrysler, just a question on the debt side…Daimler Chrysler North America has some $55 billion of debt which I understand is irrevocably guaranteed by Daimler Chrysler HEE. So if you could just talk us through the technicality here, is it possible to under this context separate Chrysler from the group. Would you not burden the rump with a lot of debts here and how would you have to compensate bondholders? That’s my first question.

And the second question is on the Chrysler target of 2.5% in 2009. But clearly in 2009, you should have a lot of help from the product side. You’ve got still a young minivan lineup. Do you see any potential for Chrysler to ever go back to recent high markets of 3.5% particularly given, I think you said on the press call, you researched a mix to shift a 6% cost in 2011? Obviously, there is a significant amount of profit substitution to be compensated.

And finally if I may on the UAW, you said you would look at the similar dealer Good-year. But how feasible really is it that the UAW would accept to take on the combined health care liabilities of the big three as similar to the dealer Good-year. Isn’t the big difference in the Good-year case, the health inflation was capped, when I think under your agreement it isn’t? Thanks.

Dr. Dieter Zetsche

Stefan, for your first question, you just said that you already said that we do not rule out any option. Please, we ask for your understanding that we do not want to comment further in this regard also your questions with adding bonds and other stuff. I ask for your understanding. Thank you.

Thomas W. LaSorda

Stefan, it’s Tom with regards to the 2.5%, it was about 40% on the car side in small SUV’s like a Patriot or whatever. I think that you have made a comment and I think it maybe a mistake with about 60% being cars. It would still be 60% if in the truck, SUV and minivan category in that range that we are talking about and obviously we want to grow and not cut back in those statements which have a good margin as we continue to go forward.

2.5% is the target for 2009 at the end of that year and obviously we want to continue.

As far as your comment on the UAW and how reasonable it is... I mean, this would take a day of debate with experts from all walks of life, including the union, with regards to how reasonable it is. You’re right that in a good-year case, the health-care add a cap for future inflation and things. But all I can say is we’ve studied it, I know others have studied it in town, and it’s just something...it’s an option we would not discount at this stage.

Stefan Burgstaller - Goldman Sachs

Thank you.

Operator

Okay. Next question from Ronald Tadross, please.

Ronald Tadross - Banc Of America Securities

Thanks. Ron Tadross of Banc of America Securities.

Just two questions. First for Doctor Zetsche. Dr. Zetsche, in the process of evaluating Lexus as a competitor for Mercedes. I’m wondering if you think that the 8 million units of Toyota volume, the Toyota brand volume, is a significant competitive advantage for Lexus. And then I just have one question for Tom after that.

Dr. Dieter Zetsche

There’s no question that economy of scale is relevant. There’s certainly limitations which might be a little less tight for Toyota, for whatever reason, than for other competitors. In using parts and components between luxury brands and volume brands. But independent of that, cost size for a premium manufacturer is very important, the revenue size is more important. Of course you go for both sizes. But we have a significant advantage of doing our business with the best brand in this industry, on the Mercedes side, and this makes things much easier for us. And we just have to make sure that we maintain and further develop the strength of the brand and work accordingly.

And on that basis the advantage of that brand versus Lexus looked at versus the potential disadvantage of less access to economy of scale is certainly greater... the advantage is greater than the potential disadvantage of the other side. So I think we are very competitive.

Ronald Tadross - Banc Of America Securities

Okay. I appreciate that. Just one question for Tom. Tom, the $700 million from revenue management in the cost-reduction, can you just elaborate on what that is?

Thomas W. LaSorda

5%, Ron. What we’ve done is obviously, we’re going to drive the revenue. And when I mentioned the revenue portion, we’re looking not only at what are we doing at incentive improvement, what are we doing on the margin improvement from the other cost areas, but also on the volume side going forward with this product.

And any of the gains above that we put into what I’ll consider to be a stretch contingency fund, that will offset any of the headwinds that we may see in some of the...including revenues, but in the cost areas, to help offset any of that...what I’ll call future bad news.

So it’s a pre-plan to overdo above 80% on the cost side, to work aggressively to take that down, and then instead of putting all our eggs on the revenue basket, for our future profitability gain, we put it more in the cost basket, something that we have certainly much more control, especially on the volume side.

Ronald Tadross - Banc Of America Securities

I’m sorry, you got cut off a little bit in the beginning, but...in the media call I think you said that you should be able to reduce your incentives a little bit as you cut capacity and reduce inventory. Is that what that is, the revenue management?

Thomas W. LaSorda

When we look at revenue management, it’s really the net margin on the contribution margin we’ve made on selling vehicles in the market place.

Ronald Tadross - Banc Of America Securities

So it’s the incremental margin?

Thomas W. LaSorda

Correct.

Ronald Tadross - Banc Of America Securities

Okay, so you’re not saying that there’s a... even though you’re…maybe a long-term trend as the pricing comes down, there’s not a short-term opportunity to raise prices?

Thomas W. LaSorda

Well, in our plan we still see a negative net pricing in the market place. Having said that, I also outlined this morning that we’ll be taking our daily rentals place down by 70-75 thousand units this year as well.

Ronald Tadross - Banc Of America Securities

Okay. But you are saying that you’re going to grow your units down to get the revenue management piece?

Thomas W. LaSorda

We took capacity down, that’s true. Of 400,000, that doesn’t mean we’re not going to grow the business on the volume base.

Ronald Tadross - Banc Of America Securities

Okay. Thanks a lot.

Dr. Dieter Zetsche

Okay, we take the next question off from John Lawson, please.

John Lawson - Citigroup

John Lawson from Citigroup. Thank you and good evening.

First, if program spending going up again with this Powertrain investment and... since you comment on name plate tuning, does this actually indicate that we’ve reached the end of the top hat strategy? Is that what’s gone wrong or have I misunderstood?

And then perhaps one question if I could for Bodo Uebber. I guess that the balance sheet is one of the better stories of this release, certainly pension funding situation improved quite dramatically. Did you actually put cash in there, during the fourth quarter? Thanks.

Thomas W. LaSorda

Hey John, Tom. With regards to program spending, it will be down slightly over the next five year period. Even with this capital spending with regards to power trains. We were on the cliff of roughly $6 billion a year and that will drop by about $200 to $250 million per year over the five year period.

As far as the name plate tuning, I just want to make sure that there are specific name plates with very low volumes that we would look at tuning. But when we’re talking major brands with high volumes, name plate brands, obviously, we’d want to continue those. So we’ll tune in the right time in the right specific name plate versus widespread tuning, if you know what I mean.

And top hat is here to stay. This is a fundamental strategy for the future. It’s a great architectural platform strategy for us.

And as we put more top hats, like we announced with the Dodge Challenger, going on the LX platform, and there’s others. So we’ll continue to build top hats off the current architectures.

John Lawson - Citigroup

Okay.

Dr. Dieter Zetsche

Drawing you to your question of balance sheet, I do think you’re right. When we look at the structure of the balance sheet, it’s improved.

Coming to your question regarding engine, right, the under-funded status went down from $7.2-2.3 billion. Most of that is related to the good returns of the capital markets and the exit returns we had. Your question regarding the contribution we had in ’06, $1.2 billion in terms of cash contribution into the pension plans. In the fourth quarter, it was only minor mandatory contributions, since most of the stuff was done in the first three quarters.

John Lawson - Citigroup

Okay. Thank you.

Dr. Dieter Zetsche

Okay. We take next question from Phillip (inaudible).

Analyst (Phillip)

Yes. Good afternoon. My question is to Tom LaSorda. You know, you’re presenting some cost measures which are pretty standard and there’s no doubt you will achieve those cost target. The interesting bit more is on the revenue side.

Can you come on this stage...to me I look at...your plan is going in the right direction in the sense of having more fuel-efficient cars or fuel-efficient SUV’s, more in line of what the market is demanding. At the same time, those products have very often barred new entries from Chrysler and maybe products that maybe your dealers are less familiar or less used to selling.

Could you comment on the market reception on those vehicles, and whether it is proving a challenge for Chrysler to introduce new segments, even though they are the right segments to pursue at this stage, to stabilize the top line?

Thomas W. LaSorda

On the revenue side, if you take a look at 2007, for example, if you take a look at the total new volume, if you take 2006, where we launched ten all new, and then eight all new products here in 2007, the combined...I’ll call it new product volume for this calendar year will exceed 900 000.

And we are entering into segments, like you said, primarily into small segments, where the caliber of that plant is on six days a week on three shifts, so we’re working on as much overtime as we can.

We’re just launching the Patriot as we speak, which we think will be a good entry. And of course our midsize Sedan, the Sebring and the Dodge Avengers. Avenger is just being launched and then the new Sebring convertible in a few more months.

So those are the segments where quite frankly, in the midsize Sebring and the old Stratus, as you note, have been more fleet-related, and now we’re pushing more retail.

So far this year we’re ahead of plan for the Sebring and retail with the Wrangler we launched last year 4-door, we cannot make enough.

We’re on max overtime and it’s a nice problem to have. Nitro’s doing nicely for us as well, so we’ve got some great entries in the marketplace in both the mid-size and small SUVs as well.

Analyst (Phillip)

And you’re happy with the performance of your dealers in pushing those vehicles, new segments?

Thomas W. LaSorda

Well, first of all we had a relationship issue with our dealers in 2006. I’ve been working not only my regular job, my second job, as the head of sales and marketing to build better relationships. I’ve been spending a lot of time in the field. We’ll rebuild that.

Our inventories are down to 480,000 with the dealers now, they see our plan, they see our product and I think we’ve got them back in the game with us. And I just pretty much said we’re going to balance production with the marketplace.

Analyst (Phillip)

Would you agree with us that all major obligations of the German legal entity DaimlerChrysler AG has to be mentioned in the journal annual filing, the so-called Ein Elinghoff?

Dr. Dieter Zetsche

You’re coming closer to a yes or no. Yes.

Analyst (Phillip)

If I look at your targets for Chrysler, you talk about a $3.5 billion operating profit improvement, coming from a negative $1.1 billion. That’s, if I calculate that correctly, that should lead us to about $2.4 billion in gross profit. And now your 2.5% margin on roughly flat earnings of $50 billion at Chrysler would imply $1.2 billion in operating profit in ’09.

Does this delta of about $1.2, $1.3 billion give us an understanding about your conservatism regarding external headwinds?

Dr. Dieter Zetsche

Again, yes or no answer. Yes.

Analyst (Phillip)

Could you then speak about these external headwinds that you see coming up in 2009?

Thomas W. LaSorba

I can’t give you a yes or no on that. I’ll give you a couple of examples. The headwinds would be in the material area, in the event of commodity prices worldwide. We think they’re going to stabilize, but in the event that they do not. In fact, some of them should be coming down. And of course what might happen in the U.S. retail marketplace.

We do see growth in the outside regions of international, but if there’s any more headwinds or competitive pressures we have not seen, we have it there just in case.

Analyst (Phillip)

Okay, thanks.

Operator

Okay, we take the next question from (inaudible).

Analyst (inaudible)

Question for Dr. Zetsche.

Given the stock reaction to your statement this morning about all options being open to Chrysler, the market clearly wants you to diverse the business, whether that’s feasible or not it is a different question. And certainly you are not willing to discuss it today.

But what has changed from your stance, from your presentation back in September, where it appeared that you are going to stick with Chrysler no matter what?

Dr. Dieter Zetsche

First of all, we said today that all options would be open. So it’s speculation as to which one of those options the market reacted. In the event of that, I tried to explain that we last year were in the process to better understand the direction we want to go and to define the direction we want to go to, and to analyze our different business and their chances, their risks, their opportunities.

And in that context, we ultimately came up with a plan which Tom presented today, as it was just mentioned, as a conservative plan and a very realistic plan to bring Chrysler back to profitability.

But we came to the conclusion that we could enhance the sustainability and the chances for Chrysler and for DaimlerChrysler by checking out further strategic options. And this was the process. This process is underway.

And obviously at the beginning of the process, you have the different point than at the middle and the end of the process. I think it’s acceptable and natural that our statement develop over a period of time they way you were mentioning it.

Unidentified Analyst

Good afternoon. I have three questions. Two of them relate to Chrysler.

First of all when I look at the cash cost per year, EUR 800 million net cash applied to the year 13,000 people, it suggests an average cost per head that is more or less half than that of GM and Ford, if I look at their recent restructuring plan. Is there any reason why this cost is so low for Chrysler?

Secondly, would you comment on the outlook for the fleet retail mix that you expect between 2006 and 2009?

And a Third question on the Truck side, if you could have maybe an update on the outlook for the truck business in the U.S. and where do you currently stand in terms of workforce reduction and flexibility adjustments? Thank you.

Thomas W. LaSorba

Relative to the fleet and retail mix, was roughly 29.9% for 2006. We’ll cut the daily rentals this year roughly from 70 to 75,000 and we’re looking at even more. Between now and ’09 we’ll be down in the low 20 range, 22, 23% and we may even take it lower.

We’ll continue to look at that.

As far as the cash costs, the programs that GM and Ford did were pretty much widespread that affected every single employee. We will be targeting our program towards those employees who are in specific regions of where the head count needs to come.

2,000 of our reduction of the hourly are in Canada and 9,000 of the hourly are sitting in the U.S. It would be a targeted program verses a widespread across the board program.

Dr. Dieter Zetsche

The U.S. market is going like we have said already last year, it means the first quarter will still be a very good one because we can sell off our engines and from the second quarter on it will go down.

Our focus was at a maximum of 40% and when we are looking to a situation it seems that it will come had it in our own mind.

On the opposite, in Europe it is doing very good, better than expected, though we have a different situation there and that helps us overall.

Unidentified Analyst

Dr. Zetsche, after a very strong year in Mercedes, how comfortable to do you feel with the possibility of a perhaps even better than 7% earnings performance at Mercedes to capitilize on its truly remarkable revenue realization?

Certainly, if you compare it with the guys in Munich, one would suggest that Mercedes have to be more profitable.

And secondly, can you concern whether your dual role as both of the total and traditional head of Mercedes is something that you regard as strategic or a temporary measure that you are changing over time?

Dr. Dieter Zetsche

Thank you. As far as the first question is concerned, we stated today that we will expect to achieve at least 7% with Mercedes Car Group in 2007, which obviously opens up the possibility beyond. And we said as well that once we have achieved the 7%, we will set up a plan of where to go from there, and opposite direction should be to go upward and not downward.

So yes, we do believe we should have a very strong position to become the most profitable premium manufacturer in the world.

For that reason we are still expecting a first quarter below the average of the year and below the 7% we are shooting for. But clearly, we have a lot of momentum and January went very well. So, we are looking optimistically forward including the first quarter.

Operator

Okay next question from Christian Breitsprecher please.

Christian Breitsprecher - BHF Bank

Yeah, good afternoon it’s Christian Breitsprecher, BHF bank.

I’ve three brief questions, one on healthcare. Can you just give us a number, what would be the savings if you got a similar deal to GM and Ford? Just what would that mean if Chrysler in terms of absolute savings?

Secondly, can you give us cost saving number that you expect from the head count reduction and thirdly when we look at the balance sheet in the fourth quarter, I mean also the net cash position improved significantly versus the end of the third quarter. Is there anything unusual specific that we should know about, what happened on the liquidity side in the fourth quarter?

Dr. Dieter Zetsche

Relative to savings, if we were to get the similar deal to GM and Ford, its roughly $340-350 million per year. In a note, we have a liability reduction of somewhere near $2.5-3 billion.

As far as the headcount reductions savings, the whole restructuring savings and all the entities that we are doing would range by the time of 2009 being done, somewhere in the neighborhood of $600-800 million.

Thomas W. LaSorba

Just to answer your question of netly credited and cash flow in the fourth quarter.

Of course the performance of all the fourth quarter was a very strong one operating profit wise. But on top also fiscal wise, it did very well. We had no very specific items in the fourth quarter; of course there is some outlook on the restructuring of SMART.

But again, we have the inflow of the sale of the property which is more or less kind of a wash. So, the bouncing bag of the cash flow performance is related to operating performance which is mostly related to strong cargo cash flow and truck move cash flow and of course also Chrysler Group Bonds paid.

Christian Breitsprecher - BHF Bank

Okay, thank you.

Operator

Okay we take next question now from Jon Backland please

Jon Backland - Man Securities

Good evening, it’s Jon Backland from Man Securities.

Now obviously, the success of the Chrysler turnaround and going forward is related to you achieving growth. That’s pretty crucial. Because in the past, fairly cross segments have been eroded by falls in volume increasing senses all over.

One thing I just wonder if you can just give us a little bit more details about those assumptions for growth? I mean, one thing that just strikes me is that we have discussed this before.

Is the fact that you have this assumption that the U.S. market is going to fall a minor amount this year? You know and then grow there after? What are the risks to these assumptions? Perhaps you can tell a little more about the whole market share assumptions? What happens if plans don’t quite as you envisioned? Perhaps you can give us a more numbers for the international element of your growth to offset any short fall in North America?

Dr. Dieter Zetsche

Jon, there was a slight cut in and out but as relative to growth and what about the U.S., what are your market share assumptions in an internationally, what are you assuming as far as growth as well?

We finished the year at about 12.6% share in the U.S. for 2007. 2008 and 2009 are seeing a modest increase in share growth. To get back to the 2005, 2004 levels range.

And of course we sold 207,000 units internationally. We are expecting that to grow in the neighborhood of almost 100,000 units to 150,000 units over the next two or three years, in places like Western Europe as well as Asia.

So, we are looking at growth in the United States but it’s only to get back to kind of where we were a couple of years ago. And when I look at the product offensive like I said earlier, both in 2007 and 2008, with two of the bigger pillar brands for us in the minivans segments and the big RAM truck segment, we can certainly see growth there.

We are moving jeeps into the new segments around the world. Quadruple the number of offerings throughout Europe.

Right hand drive and diesels are about 60-70% now of our offerings for the Chrysler group.

In Europe, we are now with diesel engines so we’ve got the commercial trucks segment that we have been moving into. We will have a commercial 4500-5500 commercial truck segments that we are moving into as well.

Tom said some potential risk with regards to the RAM as it gets refreshed next summer of 2008. The minivan should be big for us as well this year. So, we’ve got the product pipeline coming. Now we’ve just got to get the revenue rolling through the dealers.

Jon Backland - Man Securities

Is there a contingency in this overall market level, when you are quite optimistic about the market and don’t see a big downturn? But I guess there is a risk that could be that volumes may not meet your expectations. What happens then? What do you do?

What’s the worse case scenario? Have you looked at that and what are the implications?

Dr. Dieter Zetsche

Jon, in the plan that we have talked about where we said $4.5 billion U.S. cost reduction of 80% of that and 20% on the revenue side. We built an inherence…what I’ll call headwind contingency, in the event that these particular sales numbers are not achieved.

The other thing is moving out a fleet as a big force is to help us with residuals as well to help us where incentives might need to go. We are going to continue to look at every segment that we’re in and how profitable these segments are and determine some of those areas as well.

Jon Backland - Man Securities

What are your assumptions about the fuel costs and stuff?

Thomas W. LaSorba

From a future…if I knew how to forecast oil prices, I would be investing in that and see how much money I’d make…Dieter and I would love to do that. We could probably make more money.

As far as a future product portfolio however, to be serious, we are looking at oil prices that would be in excess of $3.

That does not mean we will walk away from the segments that we have strongholds in which our trucks where we have announced a light duty diesel, blue tech diesel coming and our minivans segment with new engines that I have mentioned, new transmissions and axels all for fuel economy in these very important segments for us in the future.

Jon Backland - Man Securities

Okay, can I just ask one question on the debt side.

When I looked at the all results versus what consensus are expecting, you seem to overachieve operating profit and underachieve net income. I understand taxes(inaudible), but in financial income, was there a profit or a loss on the EADS hedging in the fourth quarter?

Thomas W. LaSorba

Regarding EADS, we had a profit included in the fourth quarter and you are right. The main issue here was a tax issue.

Jon Backland - Man Securities

Okay, thank you.

Operator

Okay, we take the next question now from Kieran Mann please.

Kieran Mann - Ode

Yes, good afternoon gentlemen. It’s Kieran Mann from Ode in London.

I get the impression that the UAW are much more sanguine these days. They would welcome anything that offers a sustainable future for Chrysler.

But at the same time I get the impression that they haven’t been consulted on this restructuring yet. We haven’t had a resolution of your outstanding healthcare situation and now we have to sort of talk to them about the partnerships as well.

Can you just sort of say anything around this whole issue as Ron Gettlefinger is a board member already given any indication where the UAW will sit on all of this? Do you need to discuss with them prior to even concluding what your options are?

That’s my first question and my second question is for Bodo. A nice move on the pension and on the balance sheet but it strikes me from your description as to why it moved. You haven’t moved your discount rates much which I expected to be another incremental positive. Can you just say what you did on your discount rates please?

Bodo Uebber

Relative to the discussions of our restructuring plans, it’s pretty obvious that we had discussion with Ron and his team relative to the Chrysler group. As it relates to options and what might happen there, it’s certainly premature, but obviously we keep the lines of communication with Ron Gettlefinger, and that we would not have pre-discussed the restructuring plan with the UAW.

Actually, UAW was very complementary today in comparison to other company relationships that they had a high involvement for the preparation for today's announcement.

Kieran Mann - Ode

But I can presume that you will pre-consult with them now about this partnership initiative.

Bodo Uebber

No comment.

Kieran Mann - Ode

Okay. And the pension photo?

Dr. Dieter Zetsche

Yeah, Kieran, sorry I will step in regarding the pension plans. The numbers are the following: we are up with the discount rate for the German plant from 4% to 4.5% and for the non-German plant from 5.4% to 5.7%. You said a positive intake on the difference of the underfunded ranges of $1.7 billion and the asset returns were more the main driver of closing again, amounted to $4.3 billion of the total difference of roughly $5 billion.

Kieran Mann - Ode

Very good. Thank you very much.

Operator

Okay next question from Daniel Shwartz please.

Daniel Shwartz – Commense Bank

Good afternoon. Daniel Shwartz – Commense Bank.

Firstly, regarding material costs: Are the material cost reduction of EUR 1.1 billion in addition to annual material cost savings or including these savings. And secondly, what capacity utilization rates do you expect in '07, '08, and '09 in the US and what is in your views a long term target capacity utilization rate for Chrysler?

Thomas LaSorda

The material cost is an inclusive number, a total number. As far as capacity utilization going into '08 we should be over 100% and going into '09 we should be greater than106%.

Daniel Shwartz – Commense Bank

Okay. Thank you.

Operator

Okay next question from Phillip Ayaye please.

Phillip Ayaye – Unidentified Firm

Three questions. First is what is the bench market say with regards to Chrysler profitability and when doesn't a bench market rate abuse headers and a Truck that actually…what need comparably does a company of a 2.5% margin for cost size within it to actually be lower for a Japanese company in the US?

And second question concerning the (inaudible) cost. We could see that 80% of the cash impact will take place in 2007 and for '09 and we could also see that the distinction will take three years for all of UAW people so actually there is a discrepancy between the cash pain in '07 and '08 and the length of the total?

And the last question is maybe it's to Mr. Uebber a mixed comment about the switch which may take place between (inaudible) for the financing companies. Those think that actually it could lead to lower profitability as the financing companies may pass on to customers the inductive interest rate met in disguise it could support the sales of the group.

Dr. Dieter Zetsche

Let me try to answer a couple of your questions relative to the bench marking rate on return of sales in the volume segment where we are we're looking at 5% would be the kind of rate we'd be looking at. As far as the cash impact of EUR 800 million and you asked about the employment trends I believe, we said that 13,000 would be the reduction. Of the 13,000 almost 6,800 to 7,000 would end up happening in 2007. And we're looking at accelerating some others as well.

Thomas LaSorda

Phillip, I hope I got your question right. What we said and what Dieter also said in the press conference that we would like to be in our e-range between 14-20% for the financial terms as business and to cope with our two roles. On the one hand to deliver our profit target, which should not, let's say, increase so far that we cannot cope with the other task we do have. That is to work with our colleagues in terms of grant partner support in terms of loyalty, customer satisfaction, and other stuff. So in balancing this stuff out, we say we would like to go into the middle of that range.

Regarding your question of interest rates, that is an issue we do cope at everybody in the market. The question is how far can we pass it on to the customer and how fast.

And as I always said, it's roughly half a year to do so. In this aspect, last year we did well and I hope we do again well or I suppose even although the interest rate environments are different in the US. But I do not expect big increases of interest rates even more to the downside and in Euro more to the upside.

Phillip Ayaye – Unidentified Firm

Okay. Thank you.

Operator

And ladies and gentleman, as I do not have further people on my list here, we would like to thank you very much for your questions and for being with us here today, on the phone with us today.

This does conclude today’s conference. Thank you all for joining us. You may now disconnect.

TRANSCRIPT SPONSOR

Better Than AdSense

What if there was a way to promote your company to a perfectly targeted group of potential customers, partners, acquirers and investors? What if you could tailor your pitch to them at the moment of maximum interest? And what if you could do this for a no-brainer price?

This is exactly what Seeking Alpha is offering with transcript sponsorships.

Six types of companies are sponsoring earnings transcripts on Seeking Alpha:

1. Company sponsors its own earnings call transcript (example).

2. Company sponsors partner's transcript (example).

3. Company sponsors competitor's transcript (example).

4. Issuer-sponsored research firm sponsors client's transcript (example).

5. Investment newsletter sponsors transcripts of successful stock picks (example).

6. IR firm sponsors transcript of micro-cap company (example).

7. Consulting company sponsors company's transcript in sector of interest (example).

Your company's name and promotion could have been on this transcript! Learn more, or email Zack Miller for details.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: DaimlerChrysler AG Q4 2006 Earnings Call Transcript
This Transcript
All Transcripts