DaimlerChrysler (DAI) Q3 2007 Earnings Call October 25, 2007 8:15 AM ET
Friedrich Lauer - Head of Investor Relations
Bodo Uebber - CFO
Adam Jonas - Morgan Stanley
Avaneesh Acquilla - UBS
Steve Power - The Wall Street Journal
Christian Breichtspringer - Oppenheimer
Kieran Mon - Odie
Arndt Ellinghorst - Credit Suisse
Johan Grabe - Enskilda Securities
Tim Everett – Amber Capital
Philippe Houchois – JP Morgan
Good afternoon from Stuttgart.This is Friedrich Lauer from Daimler Investor Relations. On behalf of Daimler, Iwould like to welcome you on both the telephone and the Internet to our thirdquarter results presentation.
Bodo Uebber, a member of the Board of Management of Daimler,responsible for finance and Daimler Financial Services, will start with a presentationand we'll be happy to take your questions afterwards.
Before we start, I have the usual administrative details. Theinterim report and the slides to accompany this conference call are availableon our Internet site.
I would like to remind you that this teleconference is governedby the Safe Harborwording that you will find in our published results documents. Please note thatour presentations contain forward-looking statements that reflect management'scurrent views with respect to future events. These forward-looking statementscan be identified by expressions such as assume, anticipate, believe, estimate,expect, intend, may, plan, project and should. Such statements are subject torisks and uncertainties, examples of which are in the Safe Harbor wording inour documents and are also described in our most recent Form 20-F under theheading Risk Factors.
If the assumptions underlying any of these statements proveincorrect, then actual results may be materially different from those expressedor implied by such statements. Forward-looking statements speak only as to thedate on which they are made.
Now I would like to hand over the conference to Bodo Uebber.
Ladies and gentlemen, good afternoon and thank you very muchfor attending our third quarter results conference call. We are pleased topresent our quarterly results for the first time under our new name Daimler.
In that context, we also decided to rename our reportingsegments in order to sharpen the positioningof our brands. We now have the following segment names: Mercedes-Benz Cars,Daimler Trucks, Daimler Financial Services and Van, Buses, Other as a segment.The units are called, of course, the Mercedes-Benz Vans and Daimler Buses.
Please let me stress that the segments' composition remainsunchanged except for the Vans, Bus, Other segment which in the future also contains our holding in Chrysler atequity. Like with other interests in EADS, this will occur with a time lag ofone quarter.
The third quarter and the first nine months were heavilyimpacted by the transfer of the majority interest in Chrysler to Cerberus thatwas closed on August 3. Interms of cash, Daimler received cash of EUR 25.6 billion from Cerberus. EUR 24.7billion of that amount were repayments of inter-company loans related to thetransfer of Chrysler's Financial Services portfolio.
Overall, the transaction had a negative impact of EUR 0.5billion which also includes expenses for Chrysler's restructuring plan untilclosing. In addition, cash was reduced by transaction costs and expensesrelated to the early redemption of debt in the amount of EUR 0.3 billion and EUR0.5 billion respectively.
In terms of profits, Chrysler impacted our after-tax resultsduring the first nine months negatively by EUR 3.1 billion. On the one hand,this result reflects the loss from Chrysler's ongoing operations in the amountof EUR 0.9 billion. On the other hand, the transaction led to after-tax burdensof EUR 2.2 billion. You will find all of the details on the chart.
The valuation allowance on deferred tax assets impacted netprofit negatively by EUR 2.2 billion Euros. These tax assets arose fromtemporary valuation differences between commercial accounting and taxaccounting. Previously, these deferred tax assets had been accounted for at theChrysler units. These assets are still to be allocated to the Daimler Group butas a result of the Chrysler transaction, the conditions to use these deferredtaxes have changed and the assets had to be impaired by EUR 2.2 billion.
Changes in the estimates could lead to adjustments in the followingquarters. For the time being, we stick to our previous forecast that thetransaction could lead to a total after-tax result of EUR 2.5 billion.
Ladies and gentlemen, I would now like to focus on theresults of our continuing business. In the third quarter, Daimler sold 537,000vehicles, an increase of 4% compared to the prior year, despite the anticipatedsharp decline in truck sales in the NAFTA region.
With an increase of 10%, Mercedes-Benz cars soldsubstantially more vehicles than in the third quarter of '06. Mercedes-Benz vansand Daimler buses also increased their sales significantly. As a result ofhigher unit sales, group revenues grew by 6% to EUR 25.7 billion. Adjusted forexchange rate FX, revenues increased by 9%.
The group's EBIT which solely relates to the continuingoperations, was EUR 1.9 billion compared to EUR 1.8 billion generated in the prioryear third quarter. Mercedes-Benz Cars earnings rose significantly. Daimler Trucksreported decline due to the difficult market situation in the NAFTA region and Japan.
The earnings of Daimler Financial Services were impacted byexpenditures related to the creation of the separate organization in the NAFTAregion. Furthermore, we had a negative impact from pending legal proceedings. Thisis also the primary reason for the deterioration of the line itemreconciliations.
In addition, the prior year quarter included a gain of EUR 86million from the sale of real estate no longer required for operating purposes.
Net profits turned to loss of EUR 1.5 billion. The decrease ismainly due to valuation allowances to be recorded on deferred tax assets in theamount of EUR 2.2 billion. Earnings per share were negative EUR 1.47. Free cashflow of EUR 5.7 billion and netliquidity of EUR 13.7 billion reflected the financial strength of Daimler.
Let me now look at the segments contributions starting withMercedes-Benz cars shown on slide 4. Inthe third quarter, Mercedes-Benz cars continued its positive business development.The division's unit sales rose by 10% to 337,000 vehicles; unit sales of theMercedes-Benz brand increased 9%, mainly driven by significant higher sales ofthe new C class, but also strong growth of the S class of 11% and our SUVsegment of 12%.
C-class deliveries increased substantial by 32% to 105,000of which 78,000 vehicles are attributable to the new C-class sedan, making itthe market leader in its category worldwide. Gross and unit sales were alsosupported by higher Smart sales. Due to higher unit sales, revenues grew by 12%to EUR 14.1 billion.
The division's third quarter EBIT improved substantiallyfrom EUR 850 million to EUR 1.3 billion, reflecting the positive development ofunits sales and further efficiency gains in connection with the core program.
In addition, the more efficient utilization of productionequipment resulted in a positive effect on EBIT of EUR 159 million. Burdensresulted from the appreciation of the euro against the U.S. dollar.
Let me point out that despite the fulfillment of our core targets,we will not end our efforts to realize further improvements. As a result of thetransfer of the structural and process-orientated changes into the lineorganization, the ideas developed under core will continue to show positiveeffects and will further contribute to achieving the new return target in theyears to come.
The Frankfort Motor Show was the highlight of the thirdquarter. We not only presented 19 fuel-efficient and lower-emission premiumvehicles to be launched within the next three years, we also unveiled the allnew station wagon version of the new C class for which orders have been takenall over Europe since September. In August, the C class sedan also becameavailable in the U.S.The U.S. launchof the Smart is scheduled for 2008.
In the third quarter, Daimler trucks sold 118,000 vehiclesworldwide compared to 136,000 inthe prior year. The decrease reflects a market downturn in the NAFTA region aswell as lower demand as a result of stricter emission regulations in both theNAFTA region and Japan.However, unit sales of trucks, Europe/Latin Americaincreased by 12%, particularly due to strong growth in Latin Americaand Eastern Europe. In Europe,demand was particularly strong for heavy-duty trucks.
Trucks NAFTA sold 24,000 units in the third quarter,substantially fewer than the 50,000 units in the prior year. The shortfall wasparticularly sharp for class 8 trucks. This was a result of emissionregulations EPA-07 which led to pull forward effects in 2006 and a drop indemand for cyclical reasons.
Trucks Asia sold 52,000 units, 5%more than in the prior-year quarter, while sales in Japanand Taiwandecreased substantially compared to the extremely high levels of the prioryear, unit sales rose in Indonesia,Australia andthe Middle East. As a result of lower unit sales,revenues decreased by 12% to EUR 7 billion.
Daimler trucks EBIT declined from EUR 565 million to EUR 480million, mainly reflecting the lower unit sales in the NAFTA region and Japan.On the other hand, the ongoing growth in Europe and Latin America, as well as further efficiency enhancements realized underthe global excellence program, impacted earnings positively. The extended useof production equipment, part of our group efficiency enhancement, measures improvedEBIT by EUR 34 million.
As with our products, demand in Europeis mainly driven by our BLUETEC technology. Since the market launch of thistechnology in '05, we have sold more than 90,000 BLUETEC trucks. In view of themarket success of BLUETEC 5 technology in the S truck, which allows the fulfillment of the Euro 5emission standard, we decided also to implement this technology in our Ategomedium and light duty trucks. Very strong demand in Europecaused us to expand our production capacity in Germanyin order to eliminate the existing bottlenecks for supply.
Let’s now turn to Daimler Financial Services shown on Slide 10. In the third quarter, thedevelopment of Daimler Financial Services was substantially impacted by theseparation from Chrysler's North American Financial Services business. Afterthe sale of Chrysler, Daimler Financial Services contract volume now comprisesroughly 50% of the prior portfolio. This causes negative economics of scale inthe NAFTA region. In addition, we have to set our own financial servicesorganization for the NAFTA business.
New business of EUR 6.4 billion was 6% lower than in theprior year quarter. Adjusted for exchange rate effects, the decrease was 4%.Nevertheless, contract volume grew by 3% to EUR 57.6 billion; adjusted forexchange rate FX, the increase was 8%.
The division's EBIT decreased from EUR 221 million to EUR 87million. As a result of separation from Chrysler’s financial services business,we had to incur expenses for the development of a separate financial servicesorganization in the NAFTA region. Looking forward, I am confident that DaimlerFinancial Services will return to prior profitability levels in the foreseeablefuture.
Last but not least, our vans, buses and other segment is shownon slide 12. Mercedes-Benz vans continued its very positive businessdevelopment, increasing third quarter unit sales by 23% to 73,000 vehicles.With an increase of 30%, demand for the Sprinter remained very strong. Also, unitsales of Vito and Viano vans continue to increase by 12%, setting a new nine-monthrecord level for the vehicle segment. In the third quarter, revenues ofMercedes-Benz vans were 30% higher at EUR 2.4 billion.
The Daimler buses unit sold 9, 400 buses and chassis in thethird quarter, up 9% compared to the prior year quarter. Sales wereparticularly positive in Latin America. Due to the highlevel of orders received, Daimler buses' production is sold out until the endof the year. Daimler buses revenues increased by 4% to EUR 1 billion Euros.
EBIT was EUR 319 million compared to EUR 341 million in theprior-year quarter. The units, Mercedes-Benz Vans and Daimler Buses benefitedfrom the favorable unit sales development and both achieved higher earnings.However, substantially lower contributions from EADS offset these improvements.In addition, prior year EBIT was boosted by a gain of EUR 86 million related tothe sale of real estate.
After the sale of the majority interest in Chrysler, the equityresult from our 19.9% holding in Chrysler is also included in this segment.However, due to the time lag of one quarter, such net equity result was not yetto be considered in the third quarter.
On slide 14 you can see the Sprinter and Vito vans I justmentioned. Daimler Buses gained a follow-up order of 500 units of Mercedes-BenzCitaro city buses to be delivered from 2007 until the end of 2009. The firstorder of The City of Bucharest at the end of 2006 of 500 units of Mercedes-BenzCitaro has been completely delivered this summer. In North America, thefirst units of the successor model, the Orion 7, were delivered to customers inboth diesel and diesel hybrid versions.
Following the discussion of the segment results, let us nowreturn to the group level. The composition of the after-tax results is shown onslide 16. Net profit from continuing operations decreased from EUR 1.1 billionto a loss of EUR 1 billion. This is solely due to the valuation allowance ondeferred tax assets of EUR 2.2 billion mentioned earlier.
Net loss from discontinued operations of EUR 530 millionreflects a loss from deconsolidation in the amount of EUR 0.8 billion and a positiveoperating result of EUR 0.2 billion at Chrysler that was solely the result ofdiscontinued depreciation.
All in all, the group's net profits turned from EUR 0. 9billion to a loss of EUR 1.5 billion Euros. All transaction-related issues inthe third quarter amount to EUR 2.6 billion, including the valuationallowances. Excluding this impact, our net profit would have been positive at EUR1.1 billion and thus 21% higher than last year.
As a result of the closing of the Chrysler transaction andthe strong operational performance of all of our businesses, our balance sheetand financial key figures significantly improved. Compared to the end of 2006,the group's equity ratio, adjusted for the dividend payment, increased from16.5% to 27.5%. The equity ratio of our industrial business improved evenstronger from 27.2% to 43.3%.
The increase at both the group and the industrial businesslevel reflects significantly lower total assets resulting from the transfer ofasset and liabilities held for sale. In addition, equity increased mainly as aconsequence of the earnings generated during the first nine months of the year.
As aresult of the cash flow in connection with the Chrysler transaction, thegroup's gross liquidity was boosted by EUR 9.1 billion. This surplus liquiditywill decrease over the next quarters when we pay back maturing bonds. This is alsothe reason why we currently are not issuing any debt instruments in the capitalmarket.
Compared to year end 2006, the net liquidity of ourindustrial business increased by EUR 3.8 billion to EUR 13.7 billion. Wecontinue to have strong cash flows from the operating business; on the on theother hand we had outflows relating to the share buyback. For the nine-monthperiod, the free cash flow of the industrial business was EUR 5.7 billion, significantlybetter than the EUR 28 million for the comparable period in 2006.
The strong improvement resulted partially from cash inflowsrelated to the transfer of interest in the EADS and the sale of real estate in Japan,but also from the business development at Mercedes-Benz Cars and Daimler Trucks.Unlike the presentation in the income statement, the cash flow statement alsoincludes the Chrysler business for the first seven months of the year, and thusa burden of EUR 1.3 billion. The details on the liquidity and cash flow figuresare on charts 22 and 24 of this presentation which is also available on the Internet.
Slide 17 provides you with an update of our current sharebuyback program which started in late August. By September 30, 15.8 millionshares had been bought back; this is equivalent to EUR 1.05 billion Euros orroughly one-third of the cash-out volume planned for the first phase. At theend of September, we had cancelled 13.2 million shares of that volume. At theend of the year, we will cancel those shares bought back between the end ofSeptember and the end of December. Overall,we are in line with our plan to buy back shares in the amount of EUR 3.5billion by the end of December 2007.
So much about the financials of the third quarter, let menow turn to our expectations for the full year starting with our sales outlook.As far as our businesses are concerned, we assume that at Mercedes-Benz Carsunit sales will exceed the record level of 2006, reflecting strong demand forthe newly launched C-class and Smart cars. On the other hand, Daimler Trucksanticipates lower truck sales in 2007 than in 2006, mainly due to a sharp dropin demand in the United States,Canada and Japan.This is expected to be partially offset by rising unit sales in Europeand Latin America.
Due to the strong demand for Sprinter and Vito Viano models,Mercedes-Benz Vans expects to increase its unit sales compared to the prioryear. As a result of the very positive development in Latin America,sales of Daimler Buses, are also likely to surpass the high prior year level.
In terms of profitability, the earnings trend ofMercedes-Benz Cars will be positively impacted by the structural and process-orientedchanges made in the context of the core program. For full year 2007, thedivision now anticipates a return on sales of significantly more than 8%.Despite increased expenditure for more efficient and alternative drive systems,we aim to increase return on sales to 10% by the year 2010.
Daimler Trucks expects earnings to be of the same magnitudeas in the prior year despite lower demand in some key markets The underlyingbottom line improvement reflects the results of implementing the globalexcellence program.
At Daimler Financial Services, expenses for the separationof the financial services business in the NAFTA region will have a negativeimpact on earnings. However, the division assumes that it will achieve a returnon equity of more than 14% this year. As a result, we expect the group in itsnew structure to achieve an EBIT of at least EUR 8.5 billion in 2007. Thisassumption includes a gain of EUR 1.4 billion realized on the transfer ofinterest in EADS and charges of EUR 0.3 billion resulting from theimplementation of the new management model.
Ladies and gentlemen, thank you very much for yourattention, I am now happy to take your questions.
Thank you very much, Bodo. Ladies and gentlemen, you may askyour questions now. I will identify the questioner by name, but please also introduceyourself with your name and the name of the organization that you arerepresenting before asking your questions.
Two practical points: firstly please avoid using a mobilephone as this distorts the quality of the call for everyone. Secondly, pleaseask your question in English. Before we start the session, the operator willexplain the procedure.
We'll start the day with the first question from ArndtEllinghorst - Credit Suisse.
Arndt Ellinghorst -Credit Suisse
I have two questions, the first question is on Mercedes.When I look at your regional sales mix, you are reporting I think plus 28% in unitsales in other markets and you’re your SUVs are quite strongly up in the SClass from a high level, again it is pretty strong.
Does that highlightthat you're strongly growing in let's say “brick” markets and can you give us abit of an understanding of your performance in markets such as Middle East,Russia and China, please?
Secondly, on your industrial free cash flow, you mentionedif I understood that correctly, something like a negative EUR 1.3 billion forthe first seven months from Chrysler. Does that include your cash contributionto Chrysler or is that a really clean free cash flow figure from Chrysler?Thank you.
Of course you are right, we are talking about the growth inthe brick markets, of course, some which we have Mercedes-Benz. If I would rankthese increases, we start first with China.China is theoverall market where we have the strongest growth. Year-to-date we are roughly21,000 units. We have imports of roughly 14,000 units and 7,000 units of E classesin China.
The growth I do think is roughly somewhat 50% in China;and of course, that should also lead us there into a good outlook, let’s say, forthe years to come in China,even getting also the C class in CKD, completing of [down] business in China,so it will give us some opportunities there.
Followed by Russia;from a sales perspective I don't know the number precisely in mind. How much itis lower than with Brazil,of course, and India.In India we areI do think 2,000 or 3,000 units there. We are assembling the staff there, asyou know, we are investing now in a new plant to reassemble the C, E and the Sclass. So of course, the growth rate in China,as you know the composition in that market is a different one. It will also bebig, but not as big as in China.Russia, again,is one of the markets we are pushing, of course, again not only for thepassenger car business, but also for the truck business.
Your question regarding the free cash flow, the EUR 1.3billion does include, so to say, everything. So the EUR 1.3 billion is the totalnegative impact of the Chrysler transaction and the Chrysler ongoing cash flowburn within the free cash flow.
Arndt Ellinghorst -Credit Suisse
So if I may, the EUR 5.6 billion you reported, we can assumethat the hit there from Chrysler would be significantly higher than EUR 1.3billion, I would assume?
You might assume it, but of course it is not the case. Youknow, the EUR 1.3 billion you can separate it. On the one hand, the cash fromthe transaction which we got in on the one hand so the underlying operatingcash burn of Chrysler was a higher one. But again, I do think it is importantto know for you, of course, that for total means transaction and ongoingChrysler cash burn from their operating Q1, Q2, to August 3rd was of course, ahigher one.
We will take the next question from Johan Grabe - EnskildaSecurities.
Johan Grabe -Enskilda Securities
Good afternoon. I have three questions, if I may. First, startingwith the truck division, Mr. Uebber, I wonder whether you can help us looking alittle bit further out and especially with the helpful market rebound in the U.S.which appears to be a little bit prolonged, what is the scenario for Daimlergoing into next year? Do you feel comfortable also with yourselves, larger than7% EBIT margin guidance starting from '08 including the fact that North America might not rebound. That is my first question.
Secondly, on financial services, I wonder whether you couldsketch a little bit the development going forward -- how high were theseburdens in the third quarter that you described? Will they reoccur in thefourth? And might we even see something of that in the year 2008?
And thirdly, on Mercedes, how much of this marginimprovement was due to the new C-class? I wonder whether you could clarify thatsituation. Thank you.
You have very detailed questions, or course. Let me startwith the truck division. First of all, the situation within truck U.S.straightliner, of course, as we said last year, we thought that the auto intakewill pick up as of the third quarter, slowly. That we have to revise. We don’tsee an upcoming order intake in Q3 and Q4. We do think that the order intakesand the growth in the U.S.will pick up earliest in the first quarter of 2008.
So what does it -- and of course, I move to the other areas.In Europe and Eastern Europe, theMercedes-Benz business is this year of course very strong. We also expect aslight increase in Western Europe in the market but Eastern Europe counts to that, and also the Middle East,for example. So taking that altogether, I do think the outlook for next yearmarket wise will not be bad. We will finalize that, of course, in December andgive you this information in February next year.
And Fuso, of course, in Japanyou know the situation, so it might get a little bit better in 2008. So takingall of this stuff together, I do think there is no reason that we should changeour more than 7% assumption for total cyclical business on the one hand, and onthe other hand, straightliner will stick this year to positive results over thewhole year. Again, if I would assume that after first quarter ’08, we will seesome upcoming order intake in the U.S.,it would even lead to positive developments compared to ’07.
You asked a question regarding Daimler Financial Services.Of course, the biggest relative down year of our divisions, from $220 millionto $87 million, something like this. Two-thirds of this decrease is related tothe separation and [cash-out] of the Chrysler Financial Business in the U.S.,and roughly half of that is related to some kind of one-time cost.
It is difficult when I now say one-time cost because thiskind of one-time cost, like convergence, we will see over the upcoming quartersagain because we have first of all legally separate Daimler Financial Services.We need now to, IT wise, separate Daimler Financial Services, which will bedone until April, 2008. Which means that this kind of development will go intothe year 2008, and what I said to the -- further on in the foreseeable future,I would see then ’09 or ’10, the performance of financial services, afterhaving done all that work within financial services to separate on the one handand to repair then on the other hand, to get them again in a better situation.For the year 2007, we stick to our target of more than 14% return on equity.
I would like to mention here, although you haven’t asked,about the risk situation in the U.S.,which was also a question in Q2 end of August. We have put into reserves EUR 15million, compared to the second quarter ’07 in terms of risk allowances for thebusiness in the U.S., which is -- let’s see, I talked about that in secondquarter of EUR 30 million to EUR 50 million. It is now EUR 15 million and wehave to watch the U.S.market, but again, it’s not a huge impact from the risk cost side.
You asked for the Mercedes-Benz impact on the results. Ofcourse we have an impact on the results because in the year we had, untilSeptember, we had delivered 100,000 units, whereas 70,000-something -- they’vedone business, I do think so -- no, it was 100,000 they’ve done year-to-date.So of course, it has an impact also in the third quarter but you know that I donot differentiate the business and the earnings between the C-class, S-class,A- and B-class and so on and so forth.
Adam Jonas, please ask the next question.
Two questions, the first just a follow-up on Russia;I believe that your sales year-to-date are around 11,000 units for Mercedes in Russia.They are up 75% year-to-date, so you are annualizing at around 16,000 units,15,000, 16,000. At what point would the volume in Russiabe large enough that you can justify local CKD production? And just generally,can you elaborate a bit more on if you have any more objectives strategicallyon the growth in this important market? I believe that if you set up CKD with aminimum 25,000 units, you get obviously a very tremendous import tariff reliefunder current Russian laws. That’s my first question.
Secondly, just a bit more strategically, you are obviouslyseeing a lot of the discussion swirling around the press, ever since theFrankfurt show, about you begin open to participation in some cooperation onthe engine side with partners, and BMW specifically was mentioned. Can you justelaborate -- I mean, do you think that you could be in a position to benefit fromworking on a cost side with a vicious competitor and be able to kind of have amutually beneficial scenario if you kept the commercial side dependent? I mean,can you just -- can you kind of fill in for us whether this could work, whetherthis really makes any sense?
And going a step further, could you say whether you thinkthat Daimler could benefit in any way from having a long-term equity partner,given that right now you are one of the only OEMs in the world without a familyor government custodian of some sort? Thank you very much.
Adam, coming to your question, of course Russia is I dothink a very important market for us for the future growth of Daimler, butthat’s not only true for the passenger car business but also especially for thetruck business. We already said that we are close before deciding to doanything in Russiawithin the truck business, but again that is not only regarding a plant, or areassembly plant. That also holds true, for example, for the network, sales andmarketing, for example. Which we have to expand, so to say, for the numbersincreasing within trucks.
I do think your numbers in Russia,what you said about the passenger car business are right and again, it was alsotrue that at some point in time, when these markets grow for the foreseeablefuture, that we also think about passenger cars CKD, but it is too early tosay. That’s not a decision here but again, if markets are picking up as we haveseen it in China,you step in in this regard.
For the truck business year-to-date, we have a thousandunits sold in Russiayear-to-date, just as information here, and it’s up 60%, so the growth ratesare intact there.
Coming to your more general question of cooperating withother auto manufacturers, I do think we should -- let’s say from my point ofview and from our point of view, it’s the normal course of business that we areworking together with other manufacturers, with ones more and with other ones,less. It depends on the opportunities we have in engine business, in axels, insales, for example, which we are doing for Chrysler, but okay, that is comingfrom our heritage, so it’s the normal course of business, what we are doingthere, and again, why are we doing it? It’s on the one hand, we can see if wecan share investments, or we can come to time to market, with more speed to themarket with some technical solutions.
We always said we will not do anything where we jeopardizeour brand positioning. That is especially true for the passenger car business.But again, with BMW, and Dieter’s actually confirmed that we are in touch totalk about engines, which is also decisive, of course, for our A and B segmentbusiness. Again, that could leverage something in this regard. But for example,you have seen that in the truck business, where we have for the light dutytrucks, a cooperation with Fiat, so you see us moving in some directions forthe sake of doing a very efficient manufacturing and developing of trucks andcars, again with not jeopardizing our brand position. It’s the normal course ofbusiness there.
When it then comes to -- and again, I would also state herethat we do achieve the 10% margin target for Mercedes with our own. Nothing isin there which is a precondition of cooperating with somebody to achieve this10%, and that same holds true for the over 7% target of trucks.
Your general question regarding then equity partners in thisregard, you know, as I can work together with these guys with cooperating on aproject-by-project basis, I don’t see any necessity to have equity stakes inthese kinds of peers.
Adam Jonas - MorganStanley
Thanks very much.
Next question from Avaneesh Acquilla, please.
Avaneesh Acquilla -UBS
Just a couple of questions; first one on the truck business,it’s good to see the data that you’ve provided on incoming orders, and justlooking at that data, it looks as though the orders are running well above yourretail sales, especially in Europe. I wonder if you could give us an idea ofwhat your order backlog is in European heavy truck at the moment?
And just a second question, there’s been a couple of storiesin the press about Mercedes rebates in Germanyin Q4 of up to a EUR 1,000. Can you confirm whether or not this is somethingthat’s happening and what the rationale for these kind of rebates in Germanymight be? Thanks very much.
To your questions, first of all, we have now providedtransparency. I do think that it’s okay from an order intake point of view,also they’d be comparable to others who are presenting these numbers. The onlything I would like to say here without now getting into the next numbers ofproviding to the market, which we might do in the future, we have to consider,the only thing I can say is in Europe, we have an order backlog which is sohigh, six months, roughly, which is the highest one that we had right now andwe do everything to increase capacity in our plants in Woerth and Aksaray inTurkey to speed up, here’s where we are, very high order back -- and you canassume that our order backlog within freightliner is down due to the orderintake we have there. With Fuso, it’s a little bit different because there wehave the Japanese situation, which is down but the Southeast Asian markets andtheir export markets are Fuso, which is up, so there we are on a bettersituation.
Your question regarding the rebate situation in Germany,I ask for your understanding that I do not comment on single country strategiesor anything else within the countries or car lines. We have a policy that forbusiness which is the end of the cycle, that there is some of that spending to-- at the end of the cycle, but again our business system in total is veryclear and we will not do anything with incentive to jeopardize our residualsand our total business system we do have.
So everything that we have seen here is everything is inline with our business strategy overall which we have in Mercedes-Benzpassenger cars.
We’ll take the next question from [Phillip Poushoi], please.
Good afternoon. My questions were on, if you can talk aboutSmart a little bit, how things are going with the new model in terms of orderintake and cost space and profitability. And also something we never hear youtalk about, which is Maybach. How is that doing? I’m afraid of asking if itsearnings cost of capital, but how you see the Maybach brand going forward, aswe see more and more of you product or future direction of Mercedes growingdefinitely more at scale. What’s your general thoughts on Maybach and thebusiness liability of the business?
Phillip, your question regarding Smart, Smart is totally inline with our plans for 2007 inall aspects. That means on the one hand, looking at our sales as of September,we have -- in September, we delivered 10,500 Smart fortwo to customers, whichis again a highlight, and we have the market introduction for the Asian marketsnow in the last quarter of ’07, so there is something which also could pick upgrowth in the fourth quarter. We have sold already 50,000 Smart fortwo for theyear until September.
Regarding our profit position, it is as we stated last year.Our plan was to break even and our estimation of this year, what I can see inthe books, is that we will meet this target or overachieve that target of beingbreak-even within Smart. That means all the assumptions which we have made toachieve that, that was -- for example, last year under the restructuring of25%, I do think, for the fixed cost position and 20% for the G&A areas, forexample, and also the [mature] area, will come true for the year ’07. I canonly confirm our assumptions which we had made before.
You mentioned then Maybach and Maybach, of course -- I havealso to say that Maybach from the unit sales which we have there and togetherwith the Smart brands of course is not pretty much a huge impact on theMercedes-Benz cars, not only sales wise and also not, of course, sales timesthen the margin, which we have. It’s also not a huge impact but again, theMaybach is doing fine in regard of market share in this competitive class andtherefore it contributes overall to the Mercedes-Benz car situation.
And we’re not in a situation, you know, Smart used to bevery small but still a big problem in terms of earnings. We’re not in asituation where Maybach could become a problem?
Maybach delivers a positive sales contribution and apositive earnings impact on Mercedes-Benz.
And if you can squeeze just a quick comment on the truck,your European truck deliveries are pretty much flat in the quarter and we seeother truck makers having better deliveries. Why are your deliveries flat? Isit production bottlenecks?
On the one hand, it is bottlenecks in production. On theother hand, you have to look also on the last line item. There’s a mention,“Rest of World”. And what you can’t see in our disclosure in Europe,you don’t see, for example, deliveries to the Middle East,which has picked up very much. And you can see that in the last line item.
We might change next year but we are in discussions herealso a little bit of our regional disclosure. But again, that is too early tosay how. But again, the Mercedes-Benz brand is also part of that last lineitem.
Thank you very much.
But what’s also very big is Eastern Europe,for example.
Okay, thank you.
Steve Power, would you please ask the next question.
Steve Power - TheWall Street Journal
Just another question on Smart; does the weakness of theU.S. dollar in any way threaten Daimler’s hopes of making money on the fortwowhen it goes on sale in the U.S. next year?
And the second question is, if you could just elaborate alittle bit on the talks with BMW, how likely do you think it is that you mighthave a cooperation with them on engines or small cars? And are the talksbecoming more intensive with time or are they sort of just episodic and notbecoming so intense? Thanks.
Coming to your second question regarding BMW, I have alreadyanswered the question from Phillip or somebody, regarding BMW. In total, it isthe normal course of business that we talk to other auto manufacturers withsome more in-depth, and others not. BMW is certainly a partner where we mighthave more talks because in some areas, we are fitting good together, but allother stuff is more speculation. That is normal course of business that we arein touch with somebody, discussing an engine, for example, and with others discussingother stuff.
And again, we have General Motors, we have BMW for ofcourse, in the hybrid area, for example, where it also makes sense that we worktogether. We’ll see as we do that again in the truck business with fourcylinders and we might see other stuff in the truck area where we can worktogether.
That is, as I said before, we tried to reduce investment. Itis not only one shoulder, it is two shoulders, three shoulders, where you canthen share fixed cost on the one hand, or you are better then in time tomarket, or even have a better solution than we, but again, what we do not do,we are not jeopardizing our brand position.
Again, it is part of a scale game which we are doing,combining forces. But nothing more, but on the other hand, also important thatwe are doing that for improving our profits.
Then you had a question to Smart again. I can only confirmthat we are happy to launch the Smart next year, also under the currentassumption of the U.S. dollar. Of course, the U.S. dollar again, on the onehand, you need to look at the short-term impacts. Short-term impacts you canoffset on the one hand with hedges, which we have done before, for example. Butlong-term, you have to look at other issues and there you have to look at thelocal content in this country, so U.S. dollar local content, for example,bigger sourcing decisions, which will come up from now into the future, otherdecisions about new product, when we are starting to develop them. We have tolook at the natural exposure, so that is more the issue when you look atspecial car lines that you look at the overall exposure you have for thelong-term.
In a short position, you will see the Smart in the U.S.,of course, and you will see that also totally, as we said, break even.
We’ll take the next question from David Green, please.
Just one quick question for you; your guidance for this yearof a margin significantly above 8% in the Mercedes Car Group, I just wonderedif you could follow this train of thought; I think you’ve said that you willhave done 8.6% margin for the first nine months within Mercedes Car Group, andhistorically we’ve typically seen an out-performance for Mercedes Car Group interms of margin on the fourth quarter over the third quarter.
Now, just to clarify, would you expect the same pattern tocontinue this year? And if so, that would seem to imply mathematically that youwould be doing a margin in Mercedes Car Group of around 9% for this year. Ijust wondered if you could make any comments on that.
I can only make a short comment to that, David. We are notgiving quarterly guidance. We are doing a yearly guidance, as always, and themessage is here significantly more than 8% for the total year.
Next question from Christian [Breichtspringer].
ChristianBreichtspringer - Oppenheimer
Good afternoon. It’s Christian Breichtspringer from Oppenheimer.I have one question remaining on the potential negative impact from theChrysler disposal. Maybe you can clarify that a little bit. What is thepotential additional amount that we could see and would that be a cash burden,or just an accounting burden? I don’t quite really understand this statement onpage three of your investor relations release where you are talking about anadditional potential net income burden of $2.5 billion that could occur in thecoming quarters.
Thank you for this question. I might have to clarifysomething. The $2.5 billion is our former target, which we have given in thesecond quarter, and we say that we stick to the $2.5 billion. It is notadditionally to be added to the 2.2, so it’s a good question. So it’s -- the2.5 is the maximum we do see right now from today’s point of view, which for thetotal deal in our books. We have already $2.2 billion year-to-date, which meansokay, there might be another $3 billion to come and that depends on theestimates we have made regarding in the third quarter.
You may imagine that, for example, when you don’t havefinalized the [stick] statement, for example, there could be some movements upand down and fluctuations, and therefore we stick to the $2.5 billion as anoverall guideline.
So that’s nothing to be concerned about that there’s another$2.5 billion coming. And again, you asked for certain risks and cash. Ofcourse, you know, I can make a presentation of 10 minutes. Again, the pensionguarantee of $1 billion, we have a $1.5 billion credit, which is not taken yettoday. It might get -- they might get it in the future but again, for example,I would also like to mention that what [Zabo’s] management is right now doing,for example, with the healthcare deal and other stuff might also have positiveimpacts over time on us.
So again, there are many things to be mentioned. I do thinkfor the conference call, it is too much.
We’ll take the next question from [Kieran Mon], please.
Kieran Mon - Odie
Hello, gentlemen. It’s Kieran Mon calling from [Odie].Congratulations, another excellent quarter. I’ve got two or three questions, ifI may. The first one is about the guidance on financial services. If I look atthe documents, you’ve still got slightly less than EUR 9 billion of equity inthat business now. A 14% ROE would imply about EUR 1.2 billion of profit andyet, that would imply an extremely strong fourth quarter. Can you just givesome clarity on what’s going on there?
My second question is about the cash flow number. I alwaysstruggle to sort of understand cash flow statements very well. My question isthis -- you referred to Cerberus repaying money to you prior to you redeemingbonds. Was there any boost from that specific issue within the $5.7 billioncash flow number that you declared?
And then, two final questions; dollar hedging this year,could you just give us details on what your dollar hedging has been over thecourse of the year?
And then finally, have you ever given any number for whatthe core program has saved year on year? Just to help me understand what is asustainable step up and what has perhaps been more driven by product cycle anddemand. Sorry it’s a lot of questions at one time.
Of course you asked four questions, and you stated with yourfirst sentence two or three questions, but again, I do think I will shoot forthe four.
First question, your assumption is wrong, sorry to say.Financial Services does not have anymore EUR 9 billion equity. Of course, dueto the separation, it -- also kind of half. It is, as of the 30th of September,it is EUR 4.1 billion equity. Now, if you times that by 14%, you get to let’ssay roughly around something EUR 600 million. Okay? Only a clarification.
Then you questioned the cash flow and you asked whetherthere was anything from the bonds -- transfer of financial liability, which weget back. It was EUR 24.7 billion, on top we got EUR 900 million from thetransaction, it’s EUR 25.6, something like this. And this has no impact, ofcourse, on the free cash flow because it is only part on the net liquidity andthere it is zero because you have matched, on the one hand, you get the cashand on the other hand, you have the bonds and the commercial papers. And thisequation on both sides is zero. So the impact on net liquidity of that is zeroand it is not part of free cash flow.
Then you had the question about dollar hedgings. Of course,for this year, we are fully booked, means near to 100%. We are normally goingto 90% because you don’t match it by 100%. We are. You don’t ask for thisquestion but I give it to you the answer of 2008, we are over 60% hedged andfor the year 2009, we are something like 20%.
Kieran Mon - Odie
And the rates? Can you give us rates?
And the rates are always deteriorating over time, the longeryou wait. Again, that is -- we don’t give this kind of competitive data, ofcourse, but we also that regards to price positioning, other stuff and transferpricing and so on and so forth.
Your last question regarding core, just to quickly walk youthrough, we had in 2004, we had $1.7 billion I do think, so as earningsstarting. And if you put this [$7.1 billion] on top of that, of course, and youhave only a difference between -- no, the 7.1 billion has to match 1.7 in the past when getting toroughly $4 billion or something like this in earnings, which isfive-point-something. The difference of that is $2 billion, so the question iswhere is the $2 billion between the earnings improvement and the core program?And that is honestly U.S. dollar.
Secondly, wage increases, which we have not in the coreprogram and some other movements in costs and raw material stuff. So if you putall this stuff together, the net effect you can see in earnings isfive-point-something, is the gross effect, so to say, is the $7.1 billion ofcore.
Kieran Mon - Odie
And just specifically, ’07 on ’06, what’s the gain being oncore, roughly?
I cannot say now. You know, that’s your fifth question and Idon’t have those numbers here.
We’ll take the next question from Daniel Schwartz, please.
Good afternoon. Daniel Schwartz, [inaudible]. I have onequestion concerning Mercedes. Despite higher Smart and C-class sales and aweaker dollar, revenues per vehicle increased. What’s the driver for this? Doesit imply that you achieved much higher transaction prices in some growthmarkets like Chinaand Russia.
The second question is concerning trucks. The 41% drop inorder intake in Japan,is that in line with your assumptions or will you have to do some adjustmentsat Fuso going forward?
The revenue per unit on the one hand is mix, and of coursealso the options which are in the cars. So we have better options, so to say,engine-wise for example and C class, for example. Of course, the regionaldistribution, the higher the growth rates in some countries where we do havehigher sales contributions; China,for example. There, of course, a little bit from this comes also to therevenues per unit.
Your question regarding Fuso, everything is in line with theassumptions there. We are in a not very good market, but we are as planned --precisely.
We take the next question from Tim Everett – Amber Capital.
Tim Everett – AmberCapital
I think in the past on the C class you said modularproduction decreased your costs by 30%. I'm curious if the magnitude in the Eclass newly designed, if you'll get the same benefit?
On the balance sheet, I know you talked about addressing itfurther in 2008. I'm curious if you have any further thoughts on continuingwith another buyback or special dividend?
Tim, the 30% from the modular strategy, I don't know thisnumber for the C class. The only thing Ican say is that of course the share of modular strategy with the E class wouldbe higher than in the C class, and therefore the relative comparison from theecono model to the new model would be attributable to the modular strategy.That is a higher impact than for the C class. That is the only thing I can saythere.
Your question regarding our capital structure within thebalance sheet, I will repeat what we have already said. We would like toimprove our balance sheet capital structure regarding more leverage and we areusing two instruments for that. On one hand, it is operational; on the otherhand, structurally we said we would target it with share buyback. We are intoshare buyback right now, and again, it is too early to speculate what will comeafterwards in ’08 and ’09.
Tim Everett – AmberCapital
If I could add one more question.
We will take the next question from [Evan Harte], please.
Three brief questions. Firstly, could you give us someguidance for 2008 group CapEx and cash R&D spending?
Secondly, if you could give a little bit more guidance onMercedes. When we look at R&D accounting, can you give us some idea as towhat the capitalizing rate for Q3 was and how that compared to last year andhow it has been year-to-date. Also then, the net impact of capitalizing andamortizing within Mercedes.
Finally, and it is a question on the group, really. You havelowered your depreciation charge by extending the useful life of assets. Iunderstand you did this at the beginning of the year. Can you confirm that youare comfortable with the level you have at the moment and that you don't intendto extend them anymore, and that's as effective as the one-off change you havealready made and we shouldn't expect anymore changes on that front?
You had a question regarding 2008 on the group level, CapExand R&D. Having not finalized all operative plan, I have to pass thisquestion to February when you ask it again. But from today's perspective,preliminary, I expect R&D investment going up, somewhat, if I look at thetotal group of Daimler.
There are some spendings, of course, within trucks to theSFTP, for example, that is the successor of X class and the super grade, withinFuso, for example, where their development will pick up somewhat. The mediumduty engine, for example. so I expect there some increase within trucks butalso it holds true for the Mercedes-Benz Cars. They also confirmed thatregarding also our spending and investments in terms of C02 answers, so to say.The Road to the Future of the 19 cars we have mentioned in the Auto show in Frankfort.Of course, that needs some investment so the number in '08 will be higher thanin '07.
You asked for the capitalization rate of Mercedes-Benzpassenger cars. We started in '06, I think it is roughly somewhat 20% when weintroduced [inaudible] I do think I mentioned these numbers. This year it willpick up. Also we mentioned that in the direction of around 25%. Of course, ifwe do some more investment in that, of course, this number could also be in thefuture somewhat higher.
Again, these higher capitalization rates are allincorporated in our margin targets of the 10%, so nothing to worry about there.I do think from a comparison to other competitors we are conservative in thisaspect because the capitalization rate of others are somewhat higher. That meansthat we expense also a lot.
The other data, I don’t have available right now where youasked for how much is now pro rata expense in this year. You asked for the useof production equipment. First of all, I would like to state that we madeassumptions technical-wise from core. It is a technical-driven measure. We areusing production equipment longer, so that makes total sense. As I don'texpense us to change this, I will not have a next accounting change in thisregard. So that's it and now we are fitting together the technical lives andthe economical lives and we don't change it in the future.
Just to follow up alittle bit on Mercedes, broadly, is it a significant increase on CapEx andR&D in 2008? Is it of the order of more than 10%, just to get a feel forthe magnitude?
We stated that also at the Auto Show, a couple of hundredmillions.
We take the next question from Michael Punsit.
I have one question regarding your new management model.Generally in '06 when you introduced the model, you said that you expect someearnings savings of roughly EUR 1 billion on a net base per annum, and that youexpect costs of EUR 2 billion for ’06 to ’08. Could you give us an update of both figures after the disposal ofChrysler, please? Thanks.
It is a difficult question right now because the comparabledata for the baseline for this number, we have not yet here anymore, so to say,because we left it with Chrysler. A rough number right now, and we have to lookinto that issue also for '08 and '09. Roughly 20% lower than the EUR 1 billionand the EUR 2 billion. But that is a rough number which we have to look againinto our operating plan as of December and come up with a better guidance for '08 in February. It is not a perfectcalculation, it is 20%. It is 20% out of this amount but again, we have to lookinto our operative plan and to again review this number, the 20%.
But if you look tothe EUR 2 billion figure you have booked roughly EUR 400 million in '06, andyou will book EUR 300 million in '07, so that means that EUR 1.3 billion left.
Therefore, as I said , we have to review the number of EUR 2billion again within our operative plan. This number of 20% you can take forthe EUR 1 billion. For the EUR 2 billion I don't have yet an estimate for theyears '09 and '08 and we will come up with this stuff in February. Again, weare more efficient in the using this EUR 2 billion, so the number will be farlower.
We will take PhilippeHouchois – JP Morgan.
Philippe Houchois –JP Morgan
Regarding the legal proceedings, what is the topic of theselegal proceeding which have burdened in Q3 net profit does it concern the totaloperation? There are new provisions. Second point regarding the U.S.operation, have you had some feedback from the sub-prime impact on the recentorders underway, financing coming from the dealers?
Philippe, your first question, of course, we do not mentionthe legal proceedings even if they are current and not fixed. I will notcomment on this question. The only thing I can say is that the amount ofexpenditures we have there in this area is mainly the difference between thetwo numbers third quarter '06 to thirdquarter '07; the deviation between and the reconciliation line item.
The U.S.operations, of course, we have a weaker U.S.economy in the U.S.and I commented on that at the end of August that we have in some states somehigher delinquencies and the impact on that was 50 million in reserves for thethird quarter in 2007. That is not a sub-prime impact that because of a weakereconomy and not of huge concern. We are fine with our operations there. I alsostated we will get to the 14% return on equity for the whole year in financialservices.
Philippe Houchois –JP Morgan
The discontinued operation, actually in Q4 will we have noitem regarding discontinued but we will get a part of the profit or loss ofChrysler put on equity?
I cannot confirm that we have nothing there, because we havestated that we will maybe change estimates and that might lead to some impactsin the fourth quarter. Therefore, I stated also that we stick to our objectiveEUR 2.5 billion as a total amount of the transaction and we have year-to-dateEUR 2.2 billion booked.
Philippe Houchois –JP Morgan
The question regarding discontinued operation on anotherline which does not tell [inaudible] to the deferred tax assets?
It does not defer, you'reright, the deferred tax assets are a part of continuing operations.
Obviously there are no further questions, ladies andgentlemen. Thank you very much for your questions and for being with us todayon the phone or on the Internet. Corporate Communications and InvestorRelations remain at your disposal to answer any further questions you may have.We hope to see you again soon.
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: email@example.com. Thank you!