Q2 2007 Earnings Call
August 29, 2007 10:00 am ET
Friedrich Lauer - Head of Investor Relations
Dr. Dieter Zetsche – Chairman
Bodo Uebber – CFO
Johan Grabe - Enskilda Securities
Philippe Houchois – JP Morgan
Art Ellinghorst - Credit Suisse
Kean Marden - Merrill Lynch
Christopher Farwell – Global Equities
Nikki Maynard – Prudential
John Lawson – Citigroup
Jeremy van Loon
Welcome to the global conference call of DaimlerChrysler. (Operator Instructions) May I now hand over to Mr. Friedrich Lauer, Head of Investor Relations, DaimlerChrysler AG. Thank you very much.
Good afternoon from Stuttgart. This is Friedrich Lauer from DaimlerChrysler Investor Relations. On behalf of DaimlerChrysler, I would like to welcome you on both the telephone and the Internet to our second quarter 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; and CFO Bodo Uebber. Dr. Zetsche will start with a presentation, and will then be followed by Bodo Uebber. Afterwards, both of them will take your questions.
Before we start, I have the usual administrative details. The report and the slides that complement this conference call are available on our Internet site, and I would like to remind you that this teleconference is governed by the Safe Harbor wording that you will find in our published results documents.
Please note that our presentations contain forward-looking statements that reflect management's current views with respect to future events. These forward-looking statements can be identified by expressions such as assume, anticipate, believe, estimate, expect, intend, may, plan, project, or should. Such statements are subject to risks and uncertainties, examples of which are set out in the Safe Harbor wording in our documents, and are also described in our most recent Form 20-F under the heading Risk Factors. If the assumptions underlying any of these statements prove incorrect, then actual results may be materially different from those expressed or implied by such statements. Forward-looking statements speak only to the date on which they are made.
Now I would like to hand over the conference to Dr. Dieter Zetsche.
Thank you. Ladies and gentlemen, welcome to Part II of our Q2 results conference call. After providing you only with the results of selected divisions on July 25th, today we are presenting the complete financial statements. In the meantime, we have also closed the transfer of the majority interest in Chrysler Holding LLC to Cerberus Capital Management. Parameters of the transaction remain basically unchanged, meaning that Cerberus acquired an 80.1% stake in the Chrysler automotive business and related North American Financial Services. In light of the highly volatile U.S. loan markets, Cerberus and DaimlerChrysler have agreed to support the financing, by providing a $2 billion second lien loan for Chrysler's automotive business to be drawn within 12 months. Our portion will be $1.5 billion. Important to us, the obligations for pension and healthcare benefits are retained by the Chrysler companies. That means the new Daimler starts on a very solid and healthy basis.
Ladies and gentlemen, our company has achieved a lot in the last 18 months. We have systemically reviewed our group's activities, and we have made major strategic decisions based on this review. With the new management model, we have streamlined our administrative processes, thus making the organization much quicker.
In the ADS, we released 50% of the capital employed, while maintaining the same influence as a shareholder. We have optimized our business and product portfolio, and we defined long-term strategies for all our divisions. The positive impact of these decisions is clearly visible.
The Mercedes Car Group will achieve significantly more than 7% return on sales this year with Smart showing [tight] figures. The Truck Group's profitability is at a similar level as last year, and this is despite market downturns in important regions. Plus, our Financial Services division has proven its efficiencies again. Last but not least, with the transfer of the majority in Chrysler, the group's risk profile has improved significantly. So we are opening up a new chapter in our history. Whatever we do, the new Daimler will be consistently committed to excellence.
As part of that commitment, we will aim to generate substantial and sustainable profitable growth. To achieve this target, we will do four things: (1) ensuring operational excellence; (2) we will grow our business in the traditional market segments while exploiting new market opportunities on a regional basis; (3) we will enhance our service activities along the entire value chain by developing innovative, customer-oriented, and tailor-made products; and (4) we will strengthen our leadership in technologies that promote sustainable mobility and protect the environment.
We expect these combined measures to provide premium profits for our company on a lasting basis. This is the long-term prospective. But what are our expectations for the year 2007 as a whole, which already reflect the new structure of the company? Our sales expectations remain unchanged compared to our statements provided at the end of July. The Mercedes Car Group continues to assume that its 2007 unit sales should at least equal the record level of 2006.
The Truck Group anticipates significantly lower unit sales than in 2006, reflecting substantially lower volume in the USA, Canada, and Japan. However, that drop in volume will be partly offset by positive market developments in Europe and Latin America. Based on our sales assumptions, we expect group revenues to be in the magnitude of the prior year.
Regarding profitability, the Mercedes Car Group will continue to implement the core efficiency improvement program in order to achieve profitable growth and create sustained value. For full year 2007, the Mercedes Car Group expects to achieve a return on sales of significantly more than 7%. Despite increased expenditure for more efficient and alternative drive systems, we aim to increase the return on sales to 10% by the year 2010 at the latest.
The Truck Group's earnings in 2007 are expected to be in the magnitude achieved in 2006, despite market declines in the United States and Japan.
The Financial Services division anticipates a stable development of business and earnings during the rest of the year but the separation of the Financial Services business in the NAFTA region will cause additional expenses. However, Financial Services assumes it will achieve a return on equity of more than 14% once again for full year 2007.
As a result, the group expects to achieve an EBIT in the magnitude of EUR 8.5 billion in full-year 2007, compared to EUR 5 billion in 2006. Significant special factors affecting the Group's earnings in 2007 are the gain of EUR 1.4 billion realized on the transfer of interest in EADS, and charges of EUR 0.3 billion resulting from the implementation of the new management model.
As outlined before, we are confident to strengthen the earnings power and cash flow generations in the years to come. The announced share buyback program and the volume up to EUR 7.5 billion underlines our trust in the future of the new Daimler and all its divisions. We have everything in our hands to shape our future successfully.
At this point, I would like to hand over to Bodo Uebber, who will provide you with more details of the financial impacts of the transaction, and the group's second quarter financial statement. Thank you.
Thank you Dieter. Ladies and gentlemen, we closed the transfer of Chrysler as predicted in the third quarter. As the closing took place on August 3, the transfer will have a much stronger impact on the third quarter than on the second quarter results. The negative cash impact is EUR 0.5 billion and that is in line with our forecast. Additional cash outflow resulted from transaction costs in the amount of EUR 0.3 billion, and from early redemption of the Chrysler debt in the amount of EUR 0.4 billion in the second quarter. Another EUR 0.1 billion will occur in the third quarter. Total charges from early redemption are thus lower than originally expected. The total impact of the transaction on net profit is expected to be at EUR 2.5 billion, and thus better than the EUR 3.24 billion forecast provided in May.
In the second quarter, net profit from discontinued operations was positive at EUR 0.4 billion. The figure includes the results of the ongoing activities of Chrysler Group and Chrysler Financial in the amount of EUR 0.7 billion after taxes. Due to the requirements of IRFS, we had to stop depreciation of assets on May 16, when the Supervisory Board had approved the Board of Management to transfer the majority of Chrysler. This lifted earnings by EUR 1 billion before, and EUR 0.7 billion after taxes. This loss was partially offset by burdens from the early redemption of Chrysler debt in the amount of EUR 0.4 billion pretax and EUR 0.3 billion after tax. As the book value was below the current value at the end of the second quarter, no impairment was necessary.
In the third quarter however, we expect a negative impact on net profit of around EUR 3 billion. Due to the transfer of the majority in Chrysler, we have to reevaluate the existing deferred tax assets in the third quarter as a result of temporary differences between the book and the tax base. The EUR 3 billion are of course included in the EUR 2.5 billion, which represent the total impact.
So much about the impact of the transaction on our financial statements, now let's turn to the second quarter results. In the second quarter, group unit sales decreased by 4% to 516,000 vehicles, mainly reflecting lower truck sales in the NAFTA region and Japan. Group revenues decreased from EUR 24.6 billion to EUR 23.8 billion, a reduction of 3%. Adjusted for exchange rate effects and changes in the consolidated group, revenues were at last year's level.
We recorded significantly improved profitability at the Mercedes Car Group, and our Truck Group generated strong results, although unit sales decreased. In addition, our Financial Services division generated stable earnings despite higher interest rates. Group EBIT was EUR 2.1 billion, reflecting a return on sales of 9%. When comparing with the prior year, one has to bear in mind that the EUR 2.4 billion was positively impacted by a gain of EUR 814 million from the valuation of the EADS transaction. In addition, Group EBIT includes expenditures of EUR 42 million related to the new management model.
Net profit from continuing operations decreased by 20% to EUR 1.4 billion, reflecting higher income tax expenses and the development of EBIT, which was impacted by a positive special items in the prior year, which I mentioned before. Due to the lower net profit from continuing operations, the group's net profit decreased from 2.1 in last year' second quarter to EUR 1.8 billion this year. Earnings per share were EUR 1.74. The free cash flow of our industrial business improved significantly, from EUR 2.2 billion to EUR 4.6 billion. As a result of our net liquidity, the industrial business improved substantially from EUR 9.9 billion at year end to EUR 13.9 billion at the end of the second quarter.
Before I explain the net profits and balance sheet figures in more detail, please let me touch briefly on the operating performance of our divisions. The increase of 74% in the Mercedes Car Group EBIT is mainly due to the enhanced efficiencies we continue to generate in our core program. We also benefited from an improved sales structure.
The Truck Group slightly increased its EBIT compared to the prior year, in light of the special market circumstances this year in NAFTA and Japan. This provides clear evidence that our efforts materialized to improve the division's bottom line profitability, and make the business less vulnerable to market downturns. The drop in the EBIT of the Van, Bus and Other segment was related to EADS, and reflects the fact that special income of EUR 814 million, resulting from the valuation of the EADS transaction and boosted the prior year results.
Let me spend some more time explaining the business development of Financial Services division, as we did not disclose these figures at the end of July. Financial Services business development was generally stable in the second quarter. The figures provided reflect DaimlerChrysler's Financial Services business excluding the parts transferred. As a result, the remaining portfolio represents around 50% of the former level.
In the second quarter, the division's new business decreased slightly from EUR 7.5 billion to EUR 7.3 billion. Adjusted for exchange rate effects, there was a slight increase of 1%. Contract volume increased by 8% to EUR 58.1 billion; adjusted for exchange rate effect, the increase was somewhat higher at 10%.
In the region Europe, Africa, Asia-Pacific contract volume grew to our EUR 33.2 billion, surpassing the high prior year figure by 6%. Developments were particularly positive in the U.K. and South Africa.
After separating Chrysler Financial, contract volume in the America's region now amounts to EUR 20.9 billion, compared to EUR 19.6 billion at the end of the prior year quarter. Adjusted for exchange rate effects, the portfolio grew by 12%.
The earnings before interest and tax equal the prior year level at EUR 220 million. The increased portfolio and the release of certain provisions in the non-automotive services business could offset burdens from higher interest rates in euro. Returning to the group level, net profit from continuing operations after taxes decreased from EUR 1.8 billion to EUR 1.4 billion. This was the result of higher income taxes, as I mentioned before, and the development of EBIT, which was impacted by the high gain from the valuation of the EADS forward transaction in the prior year.
Earnings from discontinued operations increased from EUR 0.3 billion to EUR 0.4 billion in the second quarter. Net profit from discontinued operations no longer includes scheduled depreciation, and a [monetization ]of non-current assets of the Chrysler Group and the North American Financial Services business as of May 16, 2007, when the decision on the realignment was approved by the supervisory board. This led to a positive affect of EUR 0.7 billion after taxes. In addition, the result includes prepayment compensation of EUR 0.4 billion, resulting from the early redemption of long-term financial liabilities of the Chrysler Group. Net profits decreased from EUR 2.1 billion to EUR 1.8 billion due to lower earnings from continuing operations.
As a result of the strong operational performance, our balance sheet and financial key figures significantly improved. For the first half, the free cash flow of the industrial business was EUR 4.6 billion, significantly higher than the EUR 2.2 billion for the comparable period in 2006. The strong increase resulted from cash inflows related to the transfer of interest in EADS and the sales of real estate in Japan, but also from the business development at the Mercedes Car Group and the Truck Group, which was partially offset by cash burns at Chrysler. Further details on cash flow figures are provided on Chart 21 of this presentation, which is available on the Internet.
The Group's equity ratio adjusted for the dividend payment increased from 16.5% to 19.1%, due to higher equity and lower total assets. The equity ratio of industrial business improved from 27.2% to 33.1%. However, we expect the equity ratio to further increase in the course of the year, as a result of the reduction of excess debt. Compared to the end of 2006, gross liquidity slightly decreased from EUR 14.4 billion to EUR 13.5 billion. Net liquidity of our industrial business increased by EUR 4 billion, due to the strong free cash flow, including proceeds from the sale of EADS shares, and ended up at EUR 13.9 billion.
Ladies and gentlemen, an industrial and net liquidity of EUR 13.9 billion is substantially more than we need to run our business. In addition to that, after the separation from Chrysler and the reduction of the excess debt, the equity ratio of our industrial business will be at a level of around or even above 40%. We are significantly above the industry's average and not really efficient in terms of capital structure. The risk profile and volatility of our group has substantially improved after the separation from Chrysler.
In parallel, cash flows from the Mercedes Car Group and the Truck Group improved significantly as a result of their strong operating performance, and I expect it to continue to improve in the future. We also expect the new Daimler to finance all capital expenditure, as well as R&D expenditure and pension contributions out of the cash flows provided by the group's ongoing operating activities. As a result, the Board of Management and the Supervisory Board approved a share buyback program today. The program is designed to improve the Group's financial leverage, and to let our shareholders participate in our business success. Precisely, we have approved to cash out of up to EUR 7.5 billion within the next 12 months.
This amount shall be used to buy back a volume of nearly 10% of the shares outstanding. This corresponds with an authorization granted at our most recent shareholders' meeting on April 4, 2007. According to the German Stock Cooperation Act, the retained earnings of the parent company determined the volume of the share buyback program. As DaimlerChrysler AG has retained earnings of EUR 3.5 billion at the end of 2006, we decided for a two-step model.
In the first step, we will cash out a volume equivalent to the retained earnings as of the end of 2006. We will start that phase immediately. The remaining amount of up to EUR 4 billion is equivalent to the anticipated retained earnings to be generated in the financial year 2007. We will therefore continue with the buyback program in the second phase starting in March 2008. The precise volume of the entire program depends on the definite amount of retained earnings generated in the financial year 2007. All shares bought back will be canceled without reducing the capital stock.
Overall, the program announced today confirms our confidence in the future earnings power and cash flow generation of the new Daimler. Based on the further development of our earnings, cash flows and net liquidity, we may decide upon further buyback programs or dividends in the future.
Ladies and gentlemen, thank you for your attention. Dieter Zetsche and I will now be happy to take your questions.
Thank you very much, Dr. Zetsche and Bodo Uebber. 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 are representing before asking your question.
Two particular 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 procedures.
We will start today with Johan Grabe – Enskilda Securities.
Johan Grabe - Enskilda Securities
First of all, on Mercedes, I wonder whether you noticed, but there were some comments by your competition on the R&D level that Mercedes is putting through, even believing that you would be under-investing in the business. Could you maybe comment also in the light of the C02 debate how we should perceive your R&D spending in the years to come?
Secondly, with regards to the deferred tax assets, Mr. Uebber, I wonder whether you could tell us what deferred tax asset in the U.S. you were able to retain after the separation of Chrysler, if there is any?
Thirdly, with regards to your net liquidity, I think we all appreciate today's buyback announcement. Is this a new Daimler going forward? Is every year's net earnings going to be looked at as shareholders' first and how should we see net liquidity going forward also in the light of a single A credit rating that you always targeted? Thank you very much.
To your first question, as far as R&D ratios are concerned, I am not surprised about comments from competition. First of all, I don't think that their input measure is the only relative one, which obviously our percentage of revenues indicates. The efficiency of your spending is important and the output is important. We are convinced that we are leading edge with our technology with our efforts on the R&D side and that we'll be second to none in our capability to offer products which guarantee sustained mobility for the Mercedes brand.
Therefore, at any time we will definitely spend the amount of money necessary to efficiently guarantee the results to put us in front of our competition as far as those activities are concerned.
Johan, to your first question regarding the deferred tax asset, of course, the deferred tax assets are subject to audit in third quarter, so we provided you with an estimate here about the write-off in Q3. We expect the remaining level of roughly $2 billion in the third quarter of deferred tax assets. That is what I can say today. Every other detail you will get in the third quarter.
Of course, when you write off some stuff you have some kind of probability or you try to use the stuff that you write off but of course, we will follow up in the next couple of months and years.
The question to the shareholders first and net liquidity position, of course you can expect us to further to develop the company on a benchmark level. Part of a benchmark company is also a benchmark capital structure, so you can expect us further down the road based on earnings and cash flow developments to further optimize the capital structure.
The single A target you said, we don't have a single A target for the capital structure, but I do expect with the results of our ongoing strengths of the company, a single A rating is inevitable, so to say. It is something that the rating agencies will decide upon. But as I said before, we don't have a single A rating target, but it might be the result.
Johan Grabe - Enskilda Securities
Just on this R&D follow up, for us to measure R&D for premium auto companies in Germany, do you think it's better to look at it on a per-unit spend rather than as a percentage of revenue? Do you think that's maybe more helpful?
Not necessarily. The problem is altogether we have no problem to spend twice as much money without getting anymore output. That's what I meant in the first place. Independent if you measure against revenues or against per unit and certainly as we have by far the highest revenues per unit, on a per unit basis, the ratio as an input measurement looks better for us in comparison, which means looks higher.
Once again, the key point is what is the outcome? What do you produce with the money spent in R&D and we made quite some efforts to be as much efficient and improve our productivity on the R&D side as in other fields of operations as well. We are totally convinced that based on our technological strength and based of course on our willingness to spend all resources necessary to create the results, we will be leading in technology in most areas, especially in the area of fuel consumption, C02 emission as well. Thank you.
We'll take the next question from Philippe Houchois – JP Morgan.
Philippe Houchois – JP Morgan
Two questions, please. One, any fresh thoughts on the U.S. truck outlook in light of the difficulty in the bond market and sub-prime in the U.S.? Does it change your view of the outlook for '07 and '08?
A second question is, what is your view, without giving me a number, a flavor of what a sustainable dividend would be for the group going forward, if not an absolute amount then maybe in a payout ratio, 60% more, something like this, if you can give us some indication on that beyond buy backs?
Let me address the first part of your question and Bodo the second one. As far as the first is concerned, obviously, the trucking industry has a relatively high correlation to the overall development of the economy, in this case, in the United States. We are all somewhat concerned, obviously, about the impact of their financial market turmoil on the economy. We do not foresee a recession. We see some slowdown of growth. I think we are consensus with the majority at that point in time. That's all we know today.
In accordance with that, from all perspectives, the expected recovery and demand will just come a little bit later. From today's perspective, when originally we thought it would be the third quarter, later fourth quarter this year, we now consider it possible that rebound of demand might last until beginning of next year and then build up, but this is built in our guidance for the remaining of the year. This new perspective and that's the best we know at that point of time. Nobody can ultimately predict their impact of the debt market situation on the real economy.
Philip, to your question of payout ratio, dividends policy and so on and so forth. I already said in the future we will optimize more capital structure pace unless, of course, we will decide about share buybacks in the future based on earnings developments and cash flow, no doubt. But again, we will also look at benchmark levels; that means other DEX companies or worldwide payout ratios will be benchmarked and there you can see that in DEX companies for example have a payout ratio roughly over 40%. Without saying that we're going in the direction but guidance on the one hand and optimization on the capital structure on the other hand.
Next question from Art Ellinghorst - Credit Suisse.
Art Ellinghorst - Credit Suisse
My first question is on Financial Services. Do you see any change on your U.S. business looking at your consumer credit portfolio or change in defaults there? Could you also please let us know what your default ratio is right now? Second, also on the Financial Services business, do you see any change on your residual values in the U.S.?
Secondly, a more general question for Dr. Zetsche, maybe. You mentioned a while ago or you raised the question whether the passenger car business could not move to a stage similar to the truck business when it comes to use of cash. Is that what we're seeing in your company, looking at R&D and CapEx and what Johan referred to before, is this an outflow of what you mentioned a couple of years ago that this business can effectively be run with significantly less cash? If so, moving forward, would you probably need a couple of more JVs with other partners sharing technologies moving forward? Thanks.
To your first two questions regarding credit losses and credit risks, for the time there's no visible impact in the delinquencies and nonperforming loans in the U.S. regarding our portfolio. There are some movements, but they're all minor movements right now in California and Florida right now, but that is not an impact, I would say, which impacts us dramatically. Again, as Dieter said, there are risks and we have to put the U.S. market on the watch list.
There's no special movement in the last two months or six weeks compared to the last six months or 12 months in the U.S. so there's no risk occurring there. Even more a kind of stability right now.
To the second more general part of your question. In general the answer would be yes to the first part. We can and we are increasing the efficiency of our funding of our CapEx of all that we do. That applies to R&D and product investments as well related to that be it reuse, be it modular structure and all of that. At the same time, quite clearly, especially a brand like Mercedes is defined by its operation excellence, but as much by its revenue generation, by its top line. In order to maintain and even grow the strength of the brand, of course we have to come up with a technology and the added value to our customers which sustains this brand equity. We will never try to save ourselves to prosperity. It is just one leg, and the other leg is as important to generate growth and brand equity.
To which extent this might be supported by joint ventures with other companies or competitors or with suppliers, perhaps, to some extent it's just a balance between those two aspects. On the one hand, you might be able to reduce costs; on the other hand, it might be more difficult to differentiate yourself and to support your revenue or top line stream and you have to weigh both aspects against each other.
Another element of consideration is complexity and speed, where working together makes it a little bit more difficult to be fast and decisive. Then you put all those three things together and then you need a partner where for both sides, the outcome of an investigation of this kind defines a win-win situation. We are totally open to those considerations. They have to make sense under those circumstances for both partners and then we are all for it.
The next on the list is Kean Marden – Merrill Lynch.
Kean Marden - Merrill Lynch
Good afternoon, gentleman. I wasn't on the first part of the call in July so let me start by congratulating you on very clearly a splendid performance. I have two questions. I know that you've said you have seen no visible impact at all from what's been happening in credit markets, but I would envision going forward that one of the major areas of concern with the banks will be some of the things that have been going on in auto finance over the next two or three years. Could you elaborate a little bit more? I would expect you to perhaps to look to tighten your lending standards and therefore maybe sales might suffer and I would like to know what your strategy is for that.
I would imagine the banks will maybe want a little bit more equity in this book and can you say whether you've had any discussions on that and whether your lending rates have moved at all, because obviously we've seen some very good credits or credit spreads move out for everybody and I would like to know how you'd like to respond to that?
My second question is and perhaps this may sound a little bit greedy given that you've given us so much over the last 12, 18 months, but there is still an argument that says there are still assets within Daimler group, specifically perhaps Fuso, where you could move to do something with them because they are perhaps the wrong assets going forward. Could you give us an update on your view of Fuso, please?
First of all, thank you for your comments. To answer your questions, again, we will not change our business behavior within Financial Services because we were already smart in terms of taking risks and we will do so also in the future. We had really no sub-prime business as was talked about in the U.S.
Secondly, we have lost a very big portion of the Chrysler portfolio, so we have a reduced portfolio right now, we have a customer base which is mainly Mercedes-Benz customers on the one end. Of course, some of them, as I said will get into trouble but only some minor ones in California, maybe in Florida. While not change our portfolio.
Of course as I said, we will have the U.S. on the watch list. But if you remember, in the beginning of the year I already said that with tendencies like the increase because we were at extraordinarily low levels in the whole world. That is clearly something now that we look at, of course, and there's no question from rating agencies regarding underlying equity in Financial Services. You were already in the past told the total portfolio was roughly 7.5%, roughly, we'll stay at this level again and again in our talks with the rating agencies, as I said before, they are very positive right now.
One comment only to the overall market, the bond markets in general. We are now in a very good situation, because we have some kind of excess liquidity, so we will not be in the market, so it is a kind of benefit right now that we don't have to take the money right now in these high spreads and hope that it goes better in the next 12 to 18 months.
From the product side or the market side, as of yesterday, our U.S. sales organization confirmed its perspective for sales in 2007 in North American, specifically in the U.S. Which at that point in time, almost exclusively defined by supply. So at that point of time and as I said before, nobody has a crystal ball. At that point if time, inside of the debt markets concerns, we do not see any correction, any deterioration of our business relative to our plan.
Fuso. We do believe that it will be a strength of ours to have an integrated, strong commercial vehicle business, specifically truck business around the globe between North and South America, Europe and Asia. And of course for Asia, Fuso is a very strong building block. It's clear that at the end of the day, we're not living for size, but we're living for profitability. So a precondition, of course, is that we develop Fuso into a level of profitability which is reasonable.
This probably will not be at the level which we can accomplish the Europe and it might be a slight dilution to our overall truck return on sales level, but I emphasize the word slight. So that's our objective, that's what we are working towards, we are very confident that we will get there and therefore we have no reason to follow your argument, whether it's greedy or not.
So we take the next question from Christopher Farwell – Global Equities.
Christopher Farwell – Global Equities
The first question would be, do you view the 19.9% stake in Chrysler a long-term strategic investment, or do you perhaps reserve the right to reassess the situation in case the returns turn out to be not satisfactory for you? Maybe you could shed some light on what you expect from Chrysler in terms of returns in the future given your remark earlier that you aim to provide premium profits for the company on a lasting basis?
The second question will be for Mr. Uebber, please. Could you give us an update on the changed exposure to currency fluctuations in the post-Chrysler Europe? Do you expect higher cost for your hedging activities in the future? Thank you.
To your first point, first of all, we have two main interests, one being a successful future for Chrysler the other one being a continuation of a closed corporation where that makes sense. Both can be supported by this stake. I don't say it's a necessary precondition, but it really can be supported by the stake, including the confidence related to that stake. Those are all reasons that at that point in time, we have no intention whatsoever to divest this stake.
At the same time, you now can see the value of that stake relative to our overall balance sheet and this clearly indicates that a percentage point up or down in return on that investment does not significantly impact our overall profitability.
Christopher, to your question of the exposure, the former exposure on the DaimlerChrysler was 7 to 8 billion. That increases by roughly 15% without Chrysler. We are almost hedged for the whole year '07. We are right now with roughly 60% for the year for the new Daimler. Of course, for the higher exposure, we are now at 60% hedged in '08.
Your next question comes from Nikki Maynard – Prudential.
Nikki Maynard – Prudential
Hello, everyone. I have one question about Chrysler. You mentioned in the release there was an operating loss at the Chrysler Group, however, there were earnings from the discontinued operations. I wondered if you could walk us through that just a little bit and second if you could give us any color on the Chrysler situation, even though you didn't provide us with any specific numbers, was there a loss greater/smaller than the first quarter and the trend that it's been following?
Nikki, to your last question, please understand that we do not comment on the Chrysler Group. We have made our decisions and have a stake of 19.9% and that's it and we look forward to common projects and other stuff.
To your first question, of course the disclosed number of 0.4 billion is influenced by the stopping of the depreciation as of May 16. This is an amount of 0.7 billion after-tax and it was mandatory to do so. The redemption of the bonds were negative with 0.3 billion, so if you would exclude these two figures of the 0.4 billion, the 0.7 billion we will come up with a negative 0.3; and you extract the negative 0.3 from the redemption of the bonds, you get to 0.7 billion if you do so and that reflects the – sorry, zero and that reflects the so to say, operating performance of Chrysler. Chrysler overall, one comment for the six months where they were under our operations, they came up with the plant profit or loss numbers for Chrysler Group and for Financial Services.
Nikki Maynard – Prudential
The other question that I have is probably for Dr. Zetsche and I would like to get your global outlook for the automotive market given what's going on in credit markets and with oil prices. You indicated, you were talking specifically about the truck market, but I wonder if you could talk about the global automotive market and where you see it?
We all have seen some slowdown in the U.S., which obviously has led many market participants to reduce their forecast for the '07 U.S. auto market by some percentage points. We agree with this assessment. It's to some extent already fact-based on the last few months performance. We continue to see very strong markets in Latin America. We see very strong markets in the Middle East, which is not a surprise when you were talking about oil prices.
We have a mixed picture in Europe with some markets doing pretty well. There are some being relatively slow. Germany is leading that part with close to 8% minus, not a good number. Then the eastern part of Europe, Soviet Union, Russia, to be up to date, obviously, is doing very well as far as auto markets are concerned. Asia, China continues to be extremely strong in spite of all the attempt to reduce growth there and Japan continues to be relatively weak.
So altogether on a worldwide basis, we have some impact from their sudden slowdown in the U.S., but overall we are seeing growth and we are seeing a reasonable environment at a relatively high level, so I don't think that we have any reason to complain at that point of time as auto manufacturers far as the total markets are concerned.
We'll take our next question from John Lawson – Citigroup.
John Lawson – Citigroup
Can I return to the Financial Services, please, and therefore to Mr. Uebber. Are you prepared to say how much the valuation release was in the second quarter and can you tell us whether we were already seeing additional separation expenses in Financial Services operating expenses in that second quarter?
I wondered if you could confirm what the size of the Financial Services equity now was on which they aim to make a 14% return?
Looking rather more broadly, just on the liability side, people have talked about the asset side quite a lot, but refinancing has become quite a challenge, especially with ABS markets completely closing. Do you actually contemplate using any industrial funds to help the Financial Services side while the dust settles, or will you keep a strict separation of financing between these two parts of your business? Thanks.
John, your last question is we will not mix up here between Financial Services and industry, so we don't need any funds from the industry part to Financial Services.
In the next 12 months, our concern is how to get rid of the excess debt.
Right. As I mentioned before, we have the excess debt right now so you won't see us in the bond markets, which is a good solution right now. On the other hand, also from a refinancing perspective, we are not only refinancing ourselves with bonds and ABS, for example in Germany we have a bank. The bank is like banks are doing a very good level of refinancing itself. So therefore we have also in our portfolio some Financial Services companies which are doing a different kind of refinancing.
The underlying equity as of June 30 and don't get me wrong, but it's the first time I have this number and can talk about it, it's 4.4 billion and take it now for the whole year, I don't have a number right now for the whole year because we have done the first and the second as we look in the next two quarters. But don't assume us to put too much equity on the Financial Services side. Take the 4.4 billion, it's the only number I have right now.
Regarding your first question, what were these provisions, these were roughly 15 million, roundabout. It might be a low number, of course. A low number in terms of our guidance if I tell you a number of 15 million, but again it was 230 million over quarter, 10% so I mentioned it in terms of the development. The transaction costs we do have with the separation of Chrysler financial will as I said and we said in our guidance will burden us in the third and fourth quarter and therefore we will have some costs with our guidance. Again, it's not as if Daimler has a problem with that amount of money.
Next question from Tim Edwards, please.
Hi, gentleman. You've talked about the Mercedes auto long-term margin target. Can you give us a little guidance on the truck margin potential? On non-core assets, such as monetization of property or the EADS remaining shares, which I know are politically sensitive, can you talk about timing on possibly monetizing some of those non-core?
We had a division day in November last year for the truck division that we said that starting in '08, we would see an average return on sales at least 7%. This is our current statement since our business and our improvements have developed rather better than planned than worse. At that point in time, we have no reason to make a new or different statement, but we feel very comfortable with this guidance we have given.
On top of this more than 7% we said as well that the volatility which we would see driven by the cyclical markets shouldn't be more than plus or minus 2% to 3%. We are proving right now that in a pretty deep dip, not globally but at least in the U.S. and Japan so far this is minus fewer percent. So we try to deliver on both elements.
The question regarding our assets in total in EADS, we have, as we have done in the last two years, we have optimized our asset base, and we will not stop to optimize it further on. We have already done a lot of stuff, and as I said before always, we will catch you by surprise doing so if we have something in mind again. Regarding EADS, we have said we do the reduction of 15%, but also we have said that we'll stay at this level by 15% right now.
Next question from Philippe, please.
Philippe Houchois – JP Morgan
A question regarding the German pension funds or German pension obligation. What should be the contribution on the year to come regarding the deficit seen on the German pension fund?
As you have seen, we have lost a lot of our pension underfunding position and health care position together. If you look at the stuff due to the separation from Chrysler we are remaining with an underfunded position of 3.7 billion right now. Of course, it depends on future interest rate developments that could also reduce a little bit when you see the interest rates maybe rising. We have health care open to 8 billion. Our policy will remain the same. We have a multiple-year program that when you go back five years ago, we contributed per year a certain amount of money as DaimlerChrysler in the pension to narrow the situation of the underfunded provision. We have not made up our minds right now for the new Daimler. We will make up our plans now at the end of December and might come back with a stated policy next year.
The basic policy in principal won't change, but what amount this means now given that we have a much smaller fund altogether is not decided. We will define that.
Philippe Houchois – JP Morgan
The 7% plus margin on the truck business, but just looking at the market share of the Mercedes in Europe, there was a long, regular decline in market share compared for instance with Swedish players. Do you intend to implement a rebound of the mark share for Mercedes or is the present situation satisfactory and would provide enough profit to justify the market share?
I do not see this long-term decline in market share. We had some decline in the medium segment for specific reasons. We have annually somewhat lower shares in the first half and recovery of share in the second half of the year for certain reasons, structure of our customers so a little cyclicality per year.
I do believe the overall good profitability of the trucking industry is somewhat related to the fact that nobody shoots for crazy market share gains, including us. So it's a relatively stable situation give and take half a percentage point. We have a very strong product, we have 12 months or something like that of backlog or at least a very long time, as our competitors do and we have a market share situation we are content with, we would never find growth there either.
We take the next question from Terry Kozlowski.
I was wondering if you could give us your view of the U.S. luxury vehicle market? Do you think that may slow down along with the rest of the U.S. market in the second half, or do you think it's going to remain robust, even as the wider light vehicle market slows down?
So far, we have seen a robust market. Perhaps some realtors and some mortgage fund managers will buy less Mercedes and BMWs and Porsches. Overall, as I indicated before, the assessment of our people at the front in the marketplace in the U.S. is that they will meet and beat their plans and at that point in time, the only defining parameter is the supply. We are somewhat short in supply especially in the new C-class.
So you still see luxury performing as planned in the U.S.?
Certainly for us.
Next question from Jeremy van Loon.
Jeremy van Loon
A quick question first on a report that came out yesterday that Mercedes is considering closing one of the transmission factories. I'm just wondering if you see opportunities to further outsource a lot of components, especially in light of the fact that the consolidation in that industry, the supplier industry is moving at pace, and what kind of level of outsourcing do you see in the next few years?
The second question, wondering if you can give any further clarity on exactly what we had at Chrysler in the second quarter. Can we say there was a loss there or a profit? Thanks.
To your first question, I was as much surprised by this article as the other readers and therefore I don't see a reason for any comments in this regard. There might be areas where we might increase our activity upstream and there might be other areas where we might decrease it. Overall, there's not a change planned.
Going to the disclosure, you see this 0.4 billion after-taxes as the operating Chrysler, including Chrysler Financial profit so to say in the second quarter. In that profit, you have the 0.7 billion from the stock depreciation and the redemption of the bond. If you exclude both of that, you can say it was a balanced situation in terms of profits regarding Chrysler Group but including Financial Services.
There are no further names on my list here, so therefore I would like to ask you, are there any further questions?
As this is obviously not the case, gentleman, I would like to thank you for your questions and for being with us here today on the phone or the Internet. Corporation communications and investor relations remain at your disposal to answer any further questions you may have, and we hope to see you again soon. Let me say good-bye at this point.
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