Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  
TRANSCRIPT SPONSOR
Wall Street Breakfast

DaimlerChrysler (DCX)

Q2 2007 Earnings Call

July 25, 2007 10:00 am ET

Executives

Friedrich Lauer - IR

Dieter Zetsche - Chairman, CEO & Head of Mercedes Car Group

Andreas Renschler - Head of the Truck Group

Bodo Uebber - CFO

Analysts

Johan Grabe - Deutsche Bank

Adam Jonas - Morgan Stanley

Steven Cheetham - Sanford Bernstein

John Buckland - MS Global Securities

Philippe Houchois - JPMorgan

Ronald Tadross - Banc of America

Adam Collins - Redburn Partners

Frank Biller - Analyst

Art Ellinghorst - Credit Suisse

Philippe Barrier - Societe Generale

Mike Shields - Reuters

Max Robertson - Analyst

Presentation

Operator

Welcome to the Global Conference Call of DaimlerChrysler. At our customer's request this call will be recorded. You can listen to the replay by dialing the numbers you will find on your invitation. The replay of the conference call with indexation and synchronized presentation slides will also be available 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 (Operator Instructions).

May I now hand over to Mr. Friedrich Lauer, Head of Investor Relations, DaimlerChrysler AG. Thank you very

Friedrich Lauer

Good afternoon from Stuttgart, (inaudible) from DaimlerChrysler Investor Relations On behalf of DaimlerChrysler I would like to welcome you on both the telephone and Internet to our preliminary results presentation for the second quarter. Please note that the figures percentage today are preliminary. We will disclose the full ending report for second quarter on August 29th.

Today's conference call is a joint Investor Relations and Corporate Communications event and will therefore be attended by analysts, investors as well as the media. We are happy to have with us today the Chairman of the Board of Management of DaimlerChrysler and Head of Mercedes Car Group, Dr. Dieter Zetsche. The Head of the Truck Group, Andreas Renschler, and our CFO, Bodo Uebber.

Dr. Zetsche will begin the conference with our presentation of our preliminary second quarter results for Mercedes Car Group, the Truck Group, and the Van, Bus, other segment. The presentation will be followed by a Q&A session.

Before we start I have a couple of administrative details. Slides that are accompany this conference call are available on our Internet site. I would like to remind you that this teleconference is covered by the Safe Harbor Provisions that you will find in our published results documents. Please note that our presentation will 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 or should. And such statements are subject to risks and uncertainties examples of which are in the Safe Harbor Provisions and are documents and they also described in our most recent Form 20-F, under the heading "risk factors."

If the assumptions underlying any of these statements prove incorrect then actual results may be materially different from those expressed or implied by such statements. Forward-looking statements speak only to the date on which they are made. Now way like to hand over the conference to Dr. Zetsche.

Dieter Zetsche

Thank you. Ladies and gentlemen, welcome to our preliminary Q2 results conference call, and thanks for participating. As you know, in this call we will only provide financial results for select divisions. We'll disclose the entire interim report with full financial statements on August 29th. At that time we will present Chrysler Group and Chrysler Financial as discontinued operations.

As you might imagine the separation of our Financial Services business into Daimler and Chrysler entities is a tremendous task for our accounting department. That work is ongoing and precludes us from presenting all of our figures to you today. And as we said we expect the closing in the course of the third quarter. However, today we will provide with you results for the Mercedes Car Group, Truck Group, and the van, bus, other segment. It is important to make this information available to you as soon as possible.

Let's start with the Mercedes Car Group. We sold 320,000 vehicles during the second quarter, down slightly from 326,000 in the prior year. At 286,000 vehicles, unit sales of the Mercedes-Benz brand were 2% lower than last year. The S-class continues as the market leader in the luxury segment. Sales volume of our new generation E-class grew by 6%.

Our SUV sales decreased by 8%. For lifecycle reasons, unit sales of the A and B class were lower than the higher previous year figure. Worldwide C-class sales increased by 4%, 17,000 vehicles of the all-in-new C-Class was sold in June alone. That's a remarkable result considering that the C-Class has yet to be launched in key markets such as the U.S., and its full range of engines is yet to be made available to customers.

As expected unit sales of the smart brand decreased from 34,000 to 32,000 vehicles. This was solely due to the discontinuation of the smart forfour. Since its launch at the end of March, the new smart fortwo's unit sales have continued their positive development.

During the second quarter, we sold 31,000 units of the smart fortwo an increase of 44% over Q2 last year. Despite slightly lower unit sales, revenues of Mercedes Car Group at EUR$12.6 billion equaled the prior year result reflecting a better sales structure. EBIT increased substantially from 0.7 to EUR$1.2 billion.

The increase reflects the enhanced efficiencies we continue to achieve in our CORE program. For example, we have streamlined and accelerated our entire production and logistics process. At the same time, we're significantly improved quality. This positive development has been confirmed by our internal measurements as well as by external service, such as the J.D. Power initial quality study.

Positive effects of EUR$152 million also resulted from the optimized and extended usage for our production equipment as a result of our optimized product planning. In addition we benefited from improved sales structure. The continued appreciation of the Euro against the U.S. Dollar; however, reduced earnings in second quarter. Quality was also top priority for our recently launched models.

On Slide 4, you can see the all-in-new C-Class which we launched at the end of this past March. The S product launch is scheduled for begin of August. We will keep the excitement around the new C-Class launch alive as we continue to roll out the full product line. On the left-hand side you can see the all-new AMG version of the new C-Class that is scheduled for sale starting in February 2008. Plus, the station wagon version will come in fall this year.

On Slide five, you can see the all-in-new smart fortwo, this offered both as a coupe and convertible. As of today it is the car with the lowest carbon dioxide emission available in the market. We launched smart in the S through an independent distributor in the first quarter next year. We're encouraged that more than 20,000 prospective American customers have already made down payments just to be on the smart waiting list.

Now let's turn to our truck business. The Truck Group sold 112,000 units in the second quarter compared to 132,000 last year. This drop in demand of 15% is primarily driven by stricter emission regulations in the United States, Canada, and Japan. Unit sales of trucks Europe led America increased by 8% to 40,000 units.

Unit sales of trucks NAFTA dropped from 47,000 to 24,000 units. This reflects the effect of the new EPA '07 emissions regulations. As expected, customers pulled many purchases forward to 2006 that would have normally been made in 2007. Trucks Asia sold 48,000 units, 4% less than in the prior year. Our significant increases were recorded in Indonesia, Australia, and the Middle East, unit sales in Japan fell by 22% from a high volume in 2006 due to pull forward effects. As a result of overall lower unit sales revenues decreased 90% to EUR$6.9 billion.

The truck group's EBIT was at EUR$601 million slightly higher than prior year. In light of the special market circumstances this year NAFTA in Japan we consider this to be a very encouraging result. Please note that it does include a gain of EUR$68 million from the sale of real estate properties of MSTBC in Japan.

The anticipated decline in volume in the NAFTA region significantly impacted earnings. However there's evidence that our measures to manage the cycle and the Global Access Program show positive effects. Positive effects resulted from higher sales and improved product positioning in Europe and Latin America. Earnings were also support by further efficiency enhancements as a result of cost reductions and extended use of production equipment.

The Truck Group is strongly benefiting from its blue tech offerings in Europe, which already meet the Euro-5 emission rules today. More than 80% of all Mercedes-Benz trucks sold in Europe during the first six months of the year were equipped with the blue tech engine. The division has also strengthened its lineup in the NAFTA region in Asia.

Freightliner introduced its new heavy truck, Cascadia, in May. This new model features low fuel consumption, easier maintenance and a spacious interior. In addition, the Cascadia is the first truck to be fitted with engines from our new global heavy-duty engine platform.

In Asia we unveiled the refreshed Mitsubishi Fuso Super grade model in April. Apart from fulfilling the new stricter Japanese emission regulations, its main features included a new interior design and a driver assistant system as standard equipment that improves vehicle safety.

Let's now look at our vans, bus, and other segment. Unit sales of Mercedes-Benz vans increased by 13% to 74,000 vehicles in the second quarter. The increase primarily resulted from higher unit sales of Sprinter vans. Our Vito/Viano and Vario vans were very successful as well. DaimlerChrysler buses sold 10,300 buses and chassis and thus repeated the very high sales volume achieved in the prior year period and maintained its worldwide market leadership.

Sales development was particularly positive in Latin America. As a result of strong sales of both vans and buses the segments revenue increased by 3% to EUR$3.4 billion. Despite from unit sales of vans and increased revenues, EBIT of the van, bus, other segment declined from EUR$1.1 billion to EUR$257 million.

This drop was mainly related to EADS and reflects the fact that special income of EUR$814 million resulting from the variation of the EADS forward transaction had boosted the prior year results. In total, the income from our participation in the EADS was EUR$56 million compared to EUR$940 million in the previous year. Both vans and buses generated very positive earnings in the second quarter.

On Slide 11, you can see a sample of our van and bus offering. The Setra Top-Class 400 touring bus and the Mercedes-Benz Citaro city bus were voted Best Commercial Vehicles of 2007 by readers of the Euro Transport Media Magazine. Due to the high demand for the new Sprinter production capacities in the Dusseldorf and Ludwigsfelde plants are fully utilized. So, with the production launch of the new Sprinter in Buenos Aires in February and in Charleston, South Carolina in March we now have the capacity in place to better serve those markets and build on the success story of the previous Sprinter model.

This leads me to our expectations for remainder of 2007. Let me start with assessment of our volume growth potential. In full-year 2007 demand for passenger cars in the market of North America, Western Europe and Japan is likely to slightly fall. Demand for trucks is expected to sharply fall in North America. Demand should also be significantly lower for trucks in Japan than in 2006.

As a result of positive economic conditions, we anticipate slightly positive truck market development in Western Europe. We expect a strong growth of demand for passenger cars and commercial vehicles to continue in emerging markets.

Mercedes Car Group continues to assume that its 2007 unit sales will at least equal the record level of 2006. This assumption is based on the success of our new high-volume C-Class sedan models and of our new smart fortwo. The Truck group anticipates significantly lower unit sales than in 2006 reflecting substantially lower volume in the U.S.A., Canada, and Japan. However, that drop in volume will be slightly offset by positive market development in Europe and Latin America.

We expect unit sales of vans to increase compared to the year 2006 as a result of strong demand for the Sprinter and the very positive development of the Vito/Viano models. We anticipate unit sales of buses at the high level of prior year due to the very positive market developments in Latin America. Despite cyclical market downturns in other key bus markets.

Two years ago we announced that we would aim for return on sales of 7% for the Mercedes Car Group by 2007. With our improving performance you asked me to lift our target, and I always answered, let's talk about it when we have clear evidence that we will deliver the 7%. Meanwhile, we are confident to achieve a return on sales of significantly more than 7% for the current year.

Looking forward at the Mercedes Car Group, the initiatives we've implemented under the car program are driving continuous improvement in efficiencies. We expect to build on this trend and realize further benefits, for example, with our modular strategy, mainly by leveraging efficiencies across our different model lines.

In addition, we should be able to realize growth thanks to the success of our recently introduced vehicles and to additional new products we launch in the future such as the SUT and SUV based on the C-Class. We also anticipate first growth in demand for product in Asian markets. Given this overall picture, we are encouraged to lift the mid-term profit target for the Mercedes Car Group.

Despite higher expenses for more efficient and alternative drive system, we are now targeting a return on sales of 10% for the Mercedes Car Group by the year 2010 at the latest. Ladies and gentlemen, thank you very much for your attention.

Our colleagues, Bodo Uebber and Andreas Renschler and I will now be happy to take your questions.

Friedrich Lauer

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

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

Question-and-Answer Session

Operator

(Operator Instructions).

Friedrich Lauer

We take the first question from Johan Grabe, please.

Johan Grabe - Deutsche Bank

Yes, good afternoon. Johan Grabe, Deutsche Bank. Three questions if I may. First of all on Mercedes on your updated margin guidance I wonder whether you could provide the framework, i.e. what currency conditions you're working with, what type of top-line growth we are going to see in that target, and what type of maybe cost cutting is built into that.

I wonder whether you could share some light on that. Secondly, in truck, within the second quarter could you outline what the main drivers were for this very positive development, cost versus maybe price in Europe for how much was the effect from that side?

And thirdly, you're probably also seen that Conti has just acquired VDO, so we are seeing quite significant in supplier concentration in Europe. Wonder if you could share some thoughts with us with regard to future pricing in the auto industry and maybe cost cuts that you are about to go -- to achieve or not. Thank you.

Dieter Zetsche

Thank you very much for your questions. As far as the Mercedes Car Group is concerned, on the currency side, we are obviously on the one hand considering the short-term developments which we all observe, and secondly, more strategic outlook on the long-term which we do not change every other day but try to understand the long-term drivers which define exchange rates.

As far as top-line growth is concerned, we do see superior growth potential for the markets we are in with the Mercedes car brand verse the total passenger car market. We obviously do see significant growth opportunities in emerging markets as was mentioned before. And we do see chances for market share growth in some of the markets we are present. We do not plan on a significant further product offensive in the sense of entering significant more segments in the market than we are already present in with Mercedes, and this is due to two reasons.

First, we already in many segments. Secondly, brand is our top priority, and we will not dilute the brand by any activities we should not be in line with Mercedes car brand. The cost development we very much drive by benchmark considerations, so we look at our best competitors and their developments. Those are moving targets. And try to close the gaps where they still exist as far as performance is concerned.

With that set of parameters, we have our overall development of continues system of the Mercedes Car Group. We have considered the 10% target as a very ambitious target in light of the significant investments we have to make into fuel consumption and lowering the fuel consumption. But we define it as a realistic target, ambitious but realistic, and that's why we announced it today.

Andreas Renschler

Let's come to the trucks and Andreas Renschler speaking. First of all, I think the second quarter is the first time that we could prove our strategic initiative Global Excellence and that includes, of course, our project managing the cycles. I think it is very good market condition in Europe, better than we expected last time. This is driven mainly through economic figures in Europe, of course, but also through the eastern part of Europe where we see a very high demand.

In addition, also, like I say, international markets, like we call it, rest of world. That means sir, you asked us specifically about the cost impact. We had in our Global Excellence program a lot of initiatives for operational excellence is concerned. I think this one we can also see, so we gained a lot through our cost efficiency programs. There is also a smaller portion of the price, that price is concerned it is more or less the situation that we were able in Europe to put through additional costs for the Euro-4 and Euro-5 Emission Legislation.

So we were able to put it through to the customer but mainly the effects are coming out of cost efficiency program. This is the overall situation, and if you look to Asia for a second, we had also minus 20% in the Japanese market overall, like Dr. Zetsche mentioned, we were able to stay with the minus 4, it is driven through the international market of Fuso, mainly through new kind of version in Indonesia, Thailand, also Middle East and Africa.

We are very successful with this. So overall with this kind of effect we were able to manage that we can deliver the second quarter results.

Bodo Uebber

Thanks. As far as the announcement of today's concerns between Semes automotive and Aconti, among the different alternatives, which were in discussion, this was, from our perspective, the preferred one. Yes, it's in concentration, on the one hand, which might make it more difficult for us to deal successful with our partners in the supply industry.

On the other hand, it puts more equally based suppliers on to the table, which we appreciate, and specifically obviously this is now DaimlerChrysler perspective. There's a portion of the CORE automotive business of Aconti which is a former Daimler activity where we obviously have very close relations with and very good cooperation. On that basis we appreciate the decision of today.

Friedrich Lauer

Next question from Adam Jonas.

Adam Jonas - Morgan Stanley

Hi, it's Adam Jonas from Morgan Stanley. First, specifically on pricing in North America, you mentioned you were able to put up pricing in Europe for Euro-4 and Euro-5 engines but we were hearing from Pacar yesterday there's some increasing difficulty of being able to do similar type of price increases in North American environment.

That might not be so surprising given the trend in volume but are you seeing it -- can you elaborate a bit on that? Are you also seeing pricing environment in the U.S. being a bit more difficult than you perhaps anticipated at the start of the year and also for North America in trucks, we're seeing signs that the anticipated recovery in both orders and eventually production may be pushed out a little bit more than perhaps many observers would have thought earlier in the year.

Any change on your part just with the last couple -- with benefit and hindsight, last couple of months of data and discussions with your customers in the U.S. of whether that is the case as well? Finally, can you confirm now, and if this is done before, forgive me, but group wide, just as housekeeping, what's the FX open position now with the U.S. dollar on a post-Chrysler basis, and how much of that would be MCG versus truck?

Dieter Zetsche

To your question about the pricing, as I said before in a demand situation like we have it in Europe here, it's of course easier to put such dramatic high costs for new emission regulation system through the market that we're successful year. We anticipated a little bit an issue because the demand as you know in the U.S. specifically in Canada is very low for Class-8.

So we said at that time beginning if it's really possible to put the price through in such a market condition we were unsure from the beginning we put this in our plant but I think we see there a kind of different situation than when the demand is starting again. So first of all we are prepared and you are right, meantime, based on the low demand, there's a little bit tendency to give to the customer some more special discounts to be on a certain level.

Overall, if you're asking me when the market is coming back in the United States specifically, I think we already said it's the end of the third quarter or the fourth quarter. The fourth quarter and this is still, I think are own aggression, I think the trend is going more or less to somewhere end of the year.

I'm expecting it personally maybe at the beginning of the first quarter now. But many, what we said from the beginning, we try to be prepared for such situation, and we want to stay, and this is now I can really confirm, as a half year is over, we will stay in such condition, stay profitable with Freightliner.

Adam Jonas - Morgan Stanley

Thank you.

Bodo Uebber

Adam, your question to the U.S. dollar exposure, you know that we do not disclose the total amount, but between analysts, it's analyzed that it is between 7 to 9 billion. It will increase by roughly 15% ex-Chrysler, and it is mainly related to the Mercedes-Benz, to the Mercedes Car Group.

Within the Truck Group we have higher translation effect because we have Freightliner in our scope. From a hedge position I can tell that you we have more than 80% hedged ex-Chrysler for 2007, and we are over 50% hedged in 2008.

Adam Jonas - Morgan Stanley

And that was 7 to 9 billion U.S. dollars, so we're clear?

Bodo Uebber

Yes.

Adam Jonas - Morgan Stanley

Thank you very much.

Friedrich Lauer

We take the next question from Steven Cheetham, please.

Steven Cheetham - Sanford Bernstein

Hello, Steve Cheetham from Sanford Bernstein. Two questions really. First of all, on Mercedes, the 10%, you're going to be benefiting from significant positive product cycle over the next couple of years, replacing the C and E.

Can you confirm whether the 10% margin target is a product cycle peak or the sort of thing you expect to be able to sustain in the medium term? The second very simple question do you still expect the Chrysler deal to close as expected in the third quarter?

Dieter Zetsche

First question, the announcement is meant, or the guidance is meant in the sense that later starting in 2010 we want to accomplish ever sustainable level of 10% with some ups and downs related to cycles, but not a peak but an average performance level.

As far as the closing is concerned, we are completely within the anticipated time schedule for the closing, and we therefore expect that the closing of the transaction will take place in Q3 2007 as we said all the time.

Steven Cheetham - Sanford Bernstein

Excellent. Thank you.

Friedrich Lauer

Okay, next question from -John Buckland, please.

John Buckland - MS Global Securities

Good afternoon. John Buckland from were now called MS Global Securities. I've got a question on the -- on your targets. Again, you talked about what your assumptions were in very general terms on currencies.

You seem to imply that you didn't expect the Euro to remain as strong or the Dollar to remain as weak as it is. So I wonder if you could just put some more sort of hard numbers against what your long-term assumptions are for the Dollar, because that's quite crucial for what Mercedes could achieve in margin terms, I guess.

Dieter Zetsche

I mean, in general terms, I would not say that we were specifically surprised by the exchange rate development, as you know, about the trading relationships between the U.S. and Asia on the one hand, and the limited adjustments being allowed in the Asian currencies, and therefore the impact on Euro has evolved.

That has been obvious before. If we were right by $0.01 or $0.02 or $0.03, it's a different question. So generally, we were, I think, realistic in expectation to where we are today, and the same applies going forward.

Without giving you a specific number on our strategic exchange rate expectations, I think it's to some extent competitive assumption, but unless something traumatic will happen, we do not intend to tell you in 2012 that what we said was based on different exchange rate.

John Buckland - MS Global Securities

Okay. I'm still not really wiser, based on what you said. Would you generally have a conservative view about the dollar? I mean, the trend going as it is now -- without giving anything away, you could either say we expect weakness, or we expect to base on where we are or where we've been the last year or two.

Dieter Zetsche

What I just wanted to say is that we do expect generally continuation of weak dollar, and that in general terms, we try to make our plans on conservative assumptions and not on aggressive assumptions.

John Buckland - MS Global Securities

Okay. What about the situation on CO2? Are you basing your market assumptions and the potential for selling cars in the margin potential for premium cars in Europe, we talk about CO2 here. Are you assuming that the EU will allow CO2 to achieve targets perhaps in 2015, which I think is what you see as suggesting is a more realistic target than 2012? Is that a baseline?

I got the impression when listening to the Fiat conference call there still is this regard between the premium German carmakers and the French and Italian small car makers about who should take the burden and how this whole CO2 issue is going to pan out.

Dieter Zetsche

Well, the ACA has agreed upon unique position on this topic. This is certainly not a given. And as a result of a number of very focused discussions, but that is where we are. And of course, we know what the requirements are at that point of time to the extent they're already defined, and what I said before is, as I mentioned it, with awareness that we will to have meet very tough CO2 emission targets which are not exactly defined today, and that this will require us to further accelerate the pace of improving our fuel efficiency, which we have done during the last 15 years by 30%.

We will have to increase that going forward and to have invest a lot into technology and without, of course, having all the plans together by today, even not knowing what the exact requirements are, we have set the target to ourselves that in spite of those requirements, our target is 10%.

John Buckland - MS Global Securities

Okay. Thank you.

Friedrich Lauer

Next question from Philippe Houchois, please.

Philippe Houchois - JPMorgan

Good afternoon. My question is on the truck margin in North America, and I apologize if that's been discussed. I joined the call late. But from the beginning of this planning period you were looking at left being break even in North America at the trough of the cycle.

Curious if you can give us some indication how profitable you are in the region and how you're looking at Q3 production levels as I assume maybe the trough will be in -- the trough will be in Q3 and how you feel also about being in the black in the next quarter in the North American division of your truck business.

Andreas Renschler

As we said, our expectation is still that the Class-8 market will be down approximately 40% compared to last year, and we said at the beginning through all our programs like managing the cycle and efficiency programs, that includes, for example, fixed cost reduction. In NAFTA operations we will stay profitable.

Philippe Houchois - JPMorgan

Q3 as well?

Andreas Renschler

Yes.

Philippe Houchois - JPMorgan

Thank you.

Friedrich Lauer

Next question from Ronald Tadross, please.

Ronald Tadross - Banc of America

Thanks and good afternoon. Banc of America. Your margins are going up couple hundred basis points. How do you weigh whether or not to cut prices a little more in order to accelerate your growth versus letting the cost reductions accrue to the margin line?

Dieter Zetsche

Are you talking trucks?

Ronald Tadross - Banc of America

I'm talking Mercedes. Sorry. I guess I'm trying to understand why you wouldn't cut prices a little bit and try to accelerate your growth a little bit.

Dieter Zetsche

My understanding is that we are in the business in order to make money and not to participate in any games, who has the highest unit sales per year. That is not our game. We consider growth as a lever to improve our profits, and not as a target in itself.

And on that basis, we clearly have the interest to maintain our position being the Company -- the car manufacturer with the highest revenues per unit, and we clearly are striving to continue to be able to sell a premium for our vehicles to our customers and, of course, at the same time, offering the customers the best deal because of the value of our vehicles, and we are not in the volume game, and we are not trying to dilute our brand with unreasonable actions in the marketplace.

So we feel very comfortable with the developments we are seeing in the markets for us on both sides as far as margins are concerned and as far as volumes are concerned.

Ronald Tadross - Banc of America

Thanks. So how fast do you think -- if you look at your markets around the world, I guess it's primarily the luxury markets for Mercedes, how fast do you think they're growing a year?

Dieter Zetsche

Well, we definitely do believe, and that was the track record in the past, that in the future as well, our competitive markets will grow faster than the overall markets, and as you know, they're therefore all together for the world something like in the range of 2.5% per year growth assumptions.

We do believe, once again, that our market, the luxury markets, are growing significantly faster.

Ronald Tadross - Banc of America

Okay. Thank you. Just to clarify on the truck profits, is it possible that truck -- commercial truck profits will be flat 2006 to 2007?

Andreas Renschler

We are not giving any information about it. End of August we will have -- we have the final quarter results, second quarter results, then we will give a forecast.

Ronald Tadross - Banc of America

Okay. Thank you very much.

Friedrich Lauer

We take the next question from Eric Selle, please. Eric Sell from Merrill Lynch. Okay. Then we take next question from Adam Collins, please.

Adam Collins - Redburn Partners

Good afternoon. It's Adam Collins from Redburn Partners. I had a question on the development of margin at Mercedes. Could you give us a sense of to what extent that has being driven by better smart results and also lower warranty expenses and how will smart results develop, do you think, as the new model is launched in the U.S.?

Dieter Zetsche

Well, first of all, we intend and expect to deliver on our promise to not have losses with smart in 2007, and it's easy to calculate what difference that makes compared to 2006. And all together, there are significant improvement on the quality side of course has shown significant impact on our cost position as far as warranty or lack of warranty cost, lack of quality costs are concerned.

Overall, the significant bigger portion of the margin improvements were driven by cost improvements or to be specific, about 80% versus revenue, i.e. structural improvements for the top line.

Adam Collins - Redburn Partners

Thank you.

Dieter Zetsche

You're welcome.

Friedrich Lauer

Next on the list will be Frank Biller (ph), please.

Frank Biller - Analyst

Good afternoon. Just two questions. One on the engine side on passenger cars. Maybe you can give us a glance at what engines are you bringing to the market, especially talking about DeSoto side is it direct injection and how this will influence your margins.

And the other thing is, the projects, which are rumored that you have together with BMW in the future, especially on the small car side. Maybe you can give us some hints what's going on there.

Dieter Zetsche

I didn't open my Mike. I repeat. Thanks your question as far as engines are concerned. You heard some news most recently about our development on the DeSoto side. The idea there is to basically come up with engine which combines the virtues and benefits between a gasoline engine and the diesel engine, including the intention that you get about fuel efficiency of a diesel engine with obviously the emissions levels and kind of the cost position of the gasoline engine.

And to that extent, if we can accomplish our targets there, I do certainly not see a margin deterioration based on these new engines but rather an improvement. And as far as gasoline direct injection is concerned, I guess you refer to the second generation of those direct injecting gasoline engines which at that point of time do carry a significantly higher cost, based on the injection system and their exhaust system, and for that reason, we will see to which extent we are able to get the pricing potential in the marketplace which is related to the significantly better fuel efficiency of those engines. So that's an open question.

This has a potential for some margin deteriorations on that basis. You were talking about rumors, and that's what they are. We obviously heard some statements in the media which we welcome, and we have cooperation with BMW as you know, for instance, hybrids, where we have very good persons in working together. And if we find any further opportunities in regard, we would welcome that, but there are no specific plans or decisions at that point in time.

Friedrich Lauer

Next question will be asked by Art Ellinghorst.

Art Ellinghorst - Credit Suisse

It is Art Ellinghorst from Credit Suisse. If I look at your cash R&D and CapEx spending within Mercedes it appears that you're running the business currently on really industry low capital spending.

Do you think that this 4% that we've seen on R&D cost and 3% on CapEx last year, that this is sustainable level or we should expect moving forward that we should see at least slight increase in your spending? Thanks.

Dieter Zetsche

Even though those numbers in comparison in the industry are the only ones available, I prefer to look more at the output than at the input. It's very easy to spend more money in any one of those fields. It's more important to get more output.

We were striving for maximizing our efficiency in those areas and I think we are making very good progress. Still, facing this significant challenge as far as emissions are concerned, and the areas where we have to further accelerate our technological strength where we do believe we are number one, we do see some increases in absolute numbers as far as our spending in R&D is concerned and potentially as far as CapEx is concerned.

If that means relative increases as well as percentages is concerned it's not totally clear at that point in time but certainly we have to further increase our efforts there. We do believe that independent of the question, if it's 4% or 3.8 or 4.2%, we are in a very strong position as far as technology is concerned, as Daimler, and we have all intentions to maintain, if not further increase, this strong, if not leading position in technology in our industry.

Art Ellinghorst - Credit Suisse

Thanks a lot.

Dieter Zetsche

You're welcome.

Friedrich Lauer

We take the next question from Phillippe Barrier, please.

Philippe Barrier - Societe Generale

Yes, good afternoon. I'm Phil Barrier from Societe Generale. I have two questions. First, regarding the Fuso situation in Japan. Can we have some view about the trend, either Japanese sales or market in 2007?

What should be the decline of the market, and Fuso in term profitability, actually what is level of profitability and what can we expect in Japan and due to the sales of the Cantor and the second question is regarding the Sprinter.

When will the Sprinter reach the full capacity production everywhere, and the second point, when can we get some maximum leverage on the profitability of the vans business due to the highest production of the Sprinter in the coming months?

Andreas Renschler

Let us start with truck. At Fuso we have in Japan market decrease of 22%. Many also driven through emission law change that so-called Japanese 09, and in international markets, so for Fuso we could gain some volume.

So overall, we are 4% behind the first quarter, last year. That means overall in Japan, market share development is positive. We are following -- we are better compared to -- 22%, in the market share we could gain slightly better in Japan with Fuso International we are very successful, mainly driven through the new (inaudible) that we launched in Indonesia, Middle East and also in Africa.

In (inaudible) forecast, I can only say that we will be profitable with Fuso, and if you ask me, I'm starting to get satisfied with development in the right direction with Fuso.

Dieter Zetsche

As far as Sprinter is concerned, we have reached full capacity in Dusseldorf and Ludwigsfelde. We have started production in Argentina and the U.S., therefore in all plants we will get to full production in Argentina and the U.S. within the remainder of this year. As far as leveraging the tremendous strength of this product margin-wise in the markets, the one thing is reaching capacity, full capacity.

The other one is taking the hours per vehicle down to the planned levels, which takes a little longer beyond reaching capacity, still next year we should very much be in position to leverage the full potential of the Sprinter, which is significant.

Philippe Barrier - Societe Generale

What is the production expected in 2008 for the Sprinter?

Dieter Zetsche

Well, we typically do not give information about future sales.

Philippe Barrier - Societe Generale

Okay. But -- capacities prediction (inaudible).

Dieter Zetsche

Our sales are very much defined by capacity. At that point in time, obviously talking about capacity about sales is the same.

Philippe Barrier - Societe Generale

Thank you.

Dieter Zetsche

You're welcome.

Friedrich Lauer

There are no further names on the list right now so therefore are there any further questions? Okay. Michael, please go ahead with your question.

Mike Shields - Reuters

Thank you very much. Mike Shields from Reuters in Frankford. I just wanted to call because I see on my screen a story that just came up saying that Chrysler Corp has postponed the $12 billion auto loan deal that was supposed to have in place.

I know recording Financial Services on this so it is not official but I'm wondering if there's anything you might be able to say on. That thank you very much.

Dieter Zetsche

I'm sorry for that but I cannot comment because I have to look again at the information you have. So please come back to us. I cannot comment on this.

Mike Shields - Reuters

Thank you very much. Okay.

Friedrich Lauer

There's one more question from Max Robertson, please.

Max Robertson - Analyst

Good afternoon. Actually a question on the same subject. I mean, just to reiterate what the former caller asked, there's a story saying as has been rumored for a long time that the financing for the Chrysler deal is getting complex and is being postponed.

My question really is, from a Daimler manage point of view, could you help us understand how this process works? Could you just give us some clarity and reassurance that the financing is in place and that you're confident that even if servers or bankers have to pay a higher rate of debt that you're absolutely certain that that can't delay this deal? Thanks.

Dieter Zetsche

As I said before, we are completely within the anticipated time schedule for the closing. We therefore expect the closing will take place in Q3 2007 as we indicated all the time and I ask for your understanding that we cannot discuss any details in public.

Max Robertson - Analyst

Thank you.

Dieter Zetsche

Thank you.

Friedrich Lauer

There's one more question from Art Ellinghorst.

Art Ellinghorst - Credit Suisse

Thanks a lot. I basically had the same question. Thanks a lot. Good afternoon.

Friedrich Lauer

So obviously we have no further questions. Probably last opportunity for the day. Okay, ladies and gentlemen, thank you very much for your questions and for being with us today on the phone or on the Internet. Corporate communications and Investor Relations remain at this post to answer any further questions you may have. We hope to see you again soon, and good-bye.

Operator

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

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 Q2 2007 Earnings Call Transcript
This Transcript
All Transcripts