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Executives

Michael Mühlbayer - Head of Investor Relations & Treasury and Senior Vice President

Bodo K. Uebber - Chief Financial Officer, Member of Management Board and Head of Finance and Controlling At Daimler Financial Services

Analysts

Horst Schneider - HSBC, Research Division

Stuart Pearson - Morgan Stanley, Research Division

Daniel Schwarz - Commerzbank AG, Research Division

Kristina Church - Barclays Capital, Research Division

Rabih Freiha - Exane BNP Paribas, Research Division

Stephen Reitman - Societe Generale Cross Asset Research

Jochen Gehrke - Deutsche Bank AG, Research Division

Frank Biller - Landesbank Baden-Wurttemberg, Research Division

Fraser Hill - BofA Merrill Lynch, Research Division

Arndt Ellinghorst - Crédit Suisse AG, Research Division

Charles Winston - Redburn Partners LLP, Research Division

Philippe Houchois - UBS Investment Bank, Research Division

Austin Earl

Christian Breitsprecher - Macquarie Research

Daimler AG (OTCPK:DDAIF) Q3 2012 Earnings Call October 25, 2012 8:00 AM ET

Operator

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

I would like to remind you that this teleconference is governed by the Safe Harbor wording that you find in our published results documents. Please note that our presentations contain forward-looking statements that reflect management’s current views with respect to future events. These forward-looking statements can be identified by expressions such as assume, anticipate, believe, estimate, expect, intend, may, plan, project and should. Such statements are subject to many risks and uncertainties, examples of which are set out in the Safe Harbor wording in our disclosure documents and are also described in our risk report in the Daimler Annual Report and in the most recent interim result report. If the assumptions underlining any of these statements prove incorrect, then actual results may be materially different from those expressed or implied by such statements. Forward-looking statements speak only to the date on which they are made.

May I now hand over to Dr. Michael Mühlbayer, Head of Daimler Investor Relations and Treasury. Thank you very much.

Michael Mühlbayer

Good afternoon. This is Michael Mühlbayer speaking. On behalf of Daimler, I would like to welcome you on both to the telephone and Internet to our Q3 conference call. Now to give you maximum time for your questions, our CFO, Bodo Uebber, will begin with his short introduction directly followed by Q&A.

Now I would like to hand over to Bodo Uebber.

Bodo K. Uebber

Thank you, and good afternoon. We published our third quarter figures this morning, which were below our original expectations and the result of weaker and more difficult markets. The risks which we had reflect [ph] have been materializing over the summer months, they then further accelerated, especially in September. Nevertheless, considering the difficult market environment, our current position in the respect of relative product age and spending cycle for earnings demonstrate that our past efforts and initiatives are paying off.

Now our key figures for the third quarter. Total unit sales continued to increase in our automotive divisions by 1% to around 530,000 vehicles. Our revenue came up to EUR 28.6 billion, 8% more than last year. Adjusted foreign exchange rate effects revenue increased by 3%.

Group's EBITs from ongoing business was $1.9 billion, slightly below the last -- the level of last year. Profits in the third quarter were driven by higher sales at Mercedes-Benz Cars and foreign exchange on the positive side. We faced headwinds from higher expenses in connection with the expansion of Mercedes-Benz Cars product portfolio and the current product offers at Daimler Trucks and charges from the discounting of one current provisions at around EUR 200 million in the third quarter, and EUR 450 million year-to-date.

Free cash flow from industrial business was a negative EUR 200 million in the third quarter. This was mainly a function of higher inventories due to seasonal patterns in connection with model changeovers. In addition, we continued our high investments in future products, technologies and markets as planned. We do not expect support from the macroeconomic and market environment in general, or from the European passenger car and truck markets in particular. This is why we have already initiated production adjustments in order to avoid overstocking and net pricing erosion in the forefront of our upcoming product launches. We've also intensified our efforts to improve efficiency, production flexibility and to increase sales dynamic at all of our 4 divisions. In Mercedes, we have launched a program called Fit for Leadership. I will come back to that later.

Let's also have a look at our performance by division. Mercedes-Benz Cars once again increased unit sales in the third quarter with sales of more than 345,000 units, we were 2% above the number for the prior year quarter. While SUVs in particular showed high sales growth rates in the third quarter, but also the new compact class is very successful. We've already sold more than 100,000 new B-Class cars and since June, we have more than 70,000 orders for the new A-Class in our books.

Our third quarter EBIT amounts to EUR 1 billion, again this is a good number considering the more difficult environment. EBIT includes charges from discounting of provisions of around EUR 100 million and in connection with the adjustments to our technology portfolio.

Mercedes-Benz Cars return on sales for the third quarter was 6.4%. At Daimler Trucks, we increased our worldwide unit sales by 3% to over 119,000 vehicles, this was preliminary due to strong demand in Asia, while demand in both Latin America and Europe was below our expectations. Daimler Trucks was able to increase market share in all core markets which underlines the strength of our product portfolio. Daimler Trucks EBIT of EUR 507 million was 9% lower than in the third quarter of last year due to lower demand from Brazil, charges from discounting of provisions of around EUR 40 million and burns in connection with the current product offensives. The division's return on sales was 6.3%.

Mercedes-Benz Vans unit sales decreased compared with the prior year quarter by 12% to 56,000 vehicles. The division suffered from the significant market decrease in Western Europe in the third quarter and intensifying competition. EBIT fell to EUR 75 million and the return on sales to 3.6%.

Daimler Buses sold 8,300 units in the third quarter, 10% less than in the prior year. EBIT from ongoing business was minus EUR 29 million, mainly due to the difficult market environment in Latin America. The division also booked further charges of EUR 16 million for the ongoing repositioning of our bus business in Europe and North America.

At Daimler Financial Services, new business increased 16% compared with the prior year quarter to EUR 10 billion. Contract volume reached EUR 77.5 billion at the end of September, which is 8% more than at the end of 2011. The divisional EBIT of EUR 322 million was slightly below the prior year level as a result of normalizing cost of risk.

Too much for the current developments in various divisions. Next, what does the more difficult macro environment mean for our full year results. The economic climate at the beginning of the fourth quarter still features uncertainty. Thanks to the robust development, year-to-date, we expect an increase in worldwide registrations of new cars in the magnitude of 4% to 5% for the full year, mainly driven by China and the U.S. market. We expect Mercedes-Benz Cars to post higher unit sales than in the prior year period. We benefit from the strong demand for our SUVs, the C-Class and our new compact class.

With regard to Daimler Trucks, we also anticipate higher unit sales. The North American market is likely to be the most important driver of sales with an extension of approximately 10%. The European truck market, we must expect a contraction of about 10%, which was clearly a less positive economic outlook and the introduction of stricter emission standards. The Brazilian truck market is now likely to contract by roughly 20% to 25%.

Regarding Mercedes-Benz Vans, we anticipate unit sales in 2012 at slightly below the prior year level. The launch of the new Citan in the small van segment will help to put sales in Europe. At Daimler Buses, we assumed that unit sales in the year 2012 will be significantly lower than in 2011, which is also driven by a weak Latin American business. At Daimler Financial Services, we expect to achieve continued growth in contract volume and new business in 2012.

What does all this mean for our expected earnings at Daimler in the full year 2012? With the development of EBIT in our divisions, we can give the following guidance based on the most recent market expectations. Mercedes-Benz Cars expect to earn an EBIT of around EUR 4.4 billion. Operating performance in the last quarter will be mainly driven by weaker European market, support of our dealer network in China, higher unit sales driven by new compact cars. Daimler Trucks anticipates an EBIT of around EUR 1.7 billion, mainly impacted during the last quarter by weaker-than-expected European and Brazilian markets, slowdown of demand in NAFTA and expenses related to the start-up business in India and China.

Mercedes-Benz Vans expect an EBIT of roughly EUR 650 million. The last quarter performance will be driven by weak Western European markets, continuing to impact our business and higher unit sales, thanks to the Citan launch. Daimler Buses anticipates an EBIT of around minus $80 million. The last quarter will be mainly impacted by lower unit sales due to weak Western European and Brazilian markets, and further charges of around EUR 40 million for business repositioning. Finally, Daimler Financial Services foresees an EBIT of around EUR 1.3 billion due to the normalization of cost of risk. Overall, the Daimler Group expects to achieve an EBIT from ongoing business of around EUR 8 billion in 2012.

Let's take a quick look beyond 2012. We have outlined clear strategies for each division. Mercedes-Benz 2020 for passenger cars, Daimler Trucks #1 for trucks, Mercedes-Benz Vans Goes Global for vans, GLOBE 2013 for buses and Daimler Financial Services 2020 for financial services. It's now important to execute these strategies, that's exactly what we continue to do. At the same time, the overall difficult market situation will continue into 2013, that's why we complement our strategies with additional measures to further enhance efficiency, production flexibility and to realize optimization potentials to safeguard our strategic targets.

At Mercedes-Benz passenger cars, we launched the program Fit for Leadership, which is a key element of our Mercedes-Benz 2020 strategy. It focuses on 2 levers: Short term, its preliminary about cost reduction. We targeted EUR 2 billion cost improvement by the end of 2014. We'll achieve this by enforcing and accelerating both already established and new measures. One example is the net-zero approach, which we outlined to you at our Capital Market in Hungary. We have accelerated this initiative to achieve the goal at an earlier point in time. Two other measures are, that we further intensify our efforts to improve productivity in terms of our [indiscernible] and to reduce overhead cost. The addition to these short-term levers, we have also developed longer-term structural measures to improve the Mercedes-Benz Cars business system to deliver a sustainable 10% return on sales performance.

However, at each of our divisions, achieving the midterm targets in 2013 has become more challenging based on current market developments. We still target this over the cycle return on sales goals, supported by the programs at the divisions, however, from our latest starting point. Investment in new products, innovative technologies and gross markets, nevertheless, continue as planned.

In 2014, Mercedes-Benz Cars will then have a significantly younger model lineup than today, then the trucks, the product offensive and regional launches will also be completed. Additionally, we will optimize our business model and better exploit our potential in China. Executing our strategies and efficiently utilizing our resources will enable us to better leverage the benefits of our ongoing product offensives, as well as the growth potential of new markets in the coming years.

And now we will be happy to take your questions.

Question-and-Answer Session

Michael Mühlbayer

Thank you very much, Bodo Uebber. Ladies and gentlemen, you may ask your questions now. [Operator Instructions] Before we start, the operator will explain the procedure.

Operator

[Operator Instructions]

Michael Mühlbayer

The first question we take from Horst Schneider.

Horst Schneider - HSBC, Research Division

It's Horst from HSBC. I've got actually 3 questions, if I may. The first one relates to the statements you made this morning in the press conference. So if I got it right, we should assume that you keep the margins in 2013 in the car division and truck division stable, or have I got something wrong and that what I have seen on Newswire. And then the second question I want to ask is relating to the one-offs. So we switch -- about how many one-off charges we should calculate with regard to Fit for Leadership and what does it mean in the end in terms of production of employees? And then the last question that I have relates to trucks. I remember that you have said, I think it was 2 years ago, that if you are not meeting the target in trucks, you would be prepared to spin off the truck division or to dispose it. So I would like to know now, given the fact that you're here below targets, do you see now any need to come back to that promise? So for example, to spinoff the Asian business or to get rid of Freightliner?

Bodo K. Uebber

Thank you for the questions, Mr. Schneider. With regard to the margin statement this morning, I said that we had -- the operating performance and run rate of the second half in 2012, I referred to Mercedes-Benz Cars is around 7%, that is due to the fact that we have this compounding effect on the interest rates on the long-term provisioning, then we come up with the 7%. In trucks it's around 5% to 6%, and that is what I said this morning. And please understand that at the current point of time, we do not give any specific guidance for 2013, but please keep in mind that our markets in Western Europe, and especially in Brazil, will remain difficult and we will only get meaningful benefits of our programs and product cadence in the end second half of 2013. That is what I said this morning. So it was not the guidance of 2013, but a statement about the performance in 2012 and somewhat about the markets and product in '13. One-offs in the program of -- I only can tell you right now, because we are working on the program and if we would have something to announce currently, of course, we would tell you. So I can't tell you any one-offs currently if you would need it. So we are going there for further efficiencies with regard to the personnel stuff. I made the comment this morning that we -- I do think we are in a good position using attrition, for example, using part-time retirements, using voluntary leaves, for example. And also the gross, which we do expect due to our product extension and bucket developments, we use to come in with efficiency measures. Please keep in mind that we have also the sales targets in 2015 of 1.5 million cars -- '14, 1.5 million cars, and we will use this growth, so to say, to make the efficiency happening.

Horst Schneider - HSBC, Research Division

Okay. Sorry, just to follow up. If I get it right then, you -- I mean, whatever the charges will be in the end, but you will likely -- I mean, if there are any charges you book them in Q4 and you have to cash out then probably next year, right?

Bodo K. Uebber

I don't expect us to report anything on special charges in the fourth quarter. You are -- and of course, it's the same, which holds true for trucks, it's the same kind of message. We will review the trucks of our Brazilian operations with regard to the market, because the market's pretty much down there. We need to review our fixed cost provision in Brazil, but that is a different topic. But it's -- then we have to see what the outcome of this discussion will do. Your third question was with regard to the long-term target of trucks and whether we can make them, and what actions we would like to take. I'm pretty optimistic that we finally will make the targets in trucks. What we're currently doing is that we react on markets -- the changes in the market. And you have to keep in mind that Europe is, again, 10% to 15% away from the average market we have seen in the last 15 years. It is a topic which we have adjusted for example and the slowdown in NAFTA, what we have seen, and the Brazilian market currently. So there is no reason to believe that we will not make the 8% margin target finally. It depends, of course, a lot of the bucket development on the one hand then secondly, we will like to safeguard our underlying profitability with our Daimler Trucks #1 program. So there's no reason to discuss any structural topics within Daimler.

Horst Schneider - HSBC, Research Division

Sure, about it. But I mean, in general, from today's perspective, is it safe to assume that you don't make the 8% in 2013 at Daimler Trucks, right? And that's mainly due to Europe and not that get much due to the North America and Asia?

Bodo K. Uebber

Right. You are right. It's more indication of Europe and the Brazilian market, right.

Michael Mühlbayer

The next question we take from Stuart Pearson.

Stuart Pearson - Morgan Stanley, Research Division

Morgan Stanley. I have 2 or 3 questions as well. Starting on the cash flow, I think we started the year targeting the best part of 2.5 billion or at least to cover the dividends. Clearly, that's not gone to plan. I wondered if you to just update us on what you're expecting for the year and whether you think there's any -- do we have structural issues in terms of cash generation at Daimler that will be addressed as part of this efficiency program? Following on from that, given the cash generation this year, it's unlikely to cover the dividends. And given the, I guess, the high payout ratio that will be involved in maintaining the dividends flat at 2.2, I mean, is that a realistic expectation just noting your comments from the press conference earlier about a stable dividend, does that mean flat or could we see some reduction there? And then finally, just on China, the third comment, just noting your comments in the press release regarding supporting the China dealer network. I wonder if you could give us an idea of how much that support would you cost you in the fourth quarter and how that support will be delivered to the dealer?

Bodo K. Uebber

Mr. Pearson, thank you for questions. First of all, our cash flow target, of course, had to be adjusted, there's no doubt. I told you during the last 9 months that we are aiming for a substantial high cash flow from today's perspective. The total year cash flow will be slightly positive. Including this slightly positive cash flow, we have M&A activities and contribution to pension plans, worth roughly of EUR 1 billion, which mean, excluding this EUR 1 billion, it should be in operating cash flow of EUR 1 billion roughly, which misses is somewhat, the dividends, but should not be a reason to change the dividend policy. So therefore, of course, we were shooting for a high cash flow contribution in the fourth quarter to make this slightly positive cash flow happening. Having said this, with regard to the dividend, the second aspect is the net profit development, which is year-to-date, including the expectation for the fourth quarter, the synergy which makes a dividend on the last year's level possible, therefore, I'm shooting further in that direction and not reducing it but keeping it in minimum, stable. Of course, I'm also not too optimistic, honestly to say, to increase it in that environment, but a stable dividend should be, in this regard, possible and should be supported by the net profit development. You had a third question, do we -- also, in the programs target of working capital and cash flow topic, I can clearly only say yes. Because beside any inventory development of finished cars, where we are not so bad, in this year, we are pretty good flexible on that and you see us acting on production capacities to make this final inventories happening. But we will also shoot for looking into other parts of working capital as it is for the suppliers. You know that receivables and other topics where you have inventory, so to say, in the production plants, for example. And I do see some potential to unlock also in the cash flow area there. So we are targeting both the trucks and in cars the working capital topic. With regard to your China question, of course, [indiscernible] what it is in there, does it come from -- it is a very low or a very high double-digit number, pretty close to a 3 digit, if I may say so, without saying too much.

Stuart Pearson - Morgan Stanley, Research Division

Okay. And what kind of support, will that involve, is it a pricing support to the dealers? Does that mean rollouts or...

Bodo K. Uebber

No. I think, I told this already this morning, we will invest in this. But of course, it is a support for the dealer network, no doubt. But we will combine this support with the new margin system, for example. We will invest into training, coaching, so to say, quality of the dealer network and also corporate identity of the dealer system, so to say. Also, IT systems we have in mind. So it's a total support. Of course, the dealer will earn somewhat more money with that, but it is, on the other hand, also invested into the quality of the dealer network and that will hurt our fourth quarter number.

Michael Mühlbayer

Okay. Next in line we have Daniel Schwarz.

Daniel Schwarz - Commerzbank AG, Research Division

One additional question on the dealer network in China. The rollout of new dealers, what's the number you get in 2012, and what is your planning for 2013? Have you slowed that due to your difficulties in the dealer network? And then with regard to inventories of trucks, with the production cuts you are planning with your market assumptions, you will get to a level you're pretty comfortable with at year end. So from today's perspective, you're not planning for a more production cuts in the first half 2013? That would be my questions.

Bodo K. Uebber

To your questions with regards to the dealerships, we are currently having 220 dealer outlets. We have been for 15 -- 50 -- expansion of 50 for this year for them -- are coming up a couple of others more. We had a strategic target or a long-term target of 50 for the year to come, that is a number we might increase further up with the current position. You had a question with regards, whether we further do production cuts. One is on trucks, let me mention that. Production cuts in the fourth quarter in NAFTA and in Europe, of course, we will take out some days off production. I do think that's good news that we are adjusting our capacities to the demands, so we are flexible in that topic and also for the cash flow management, it is the right measure. Within cars, of course, we are -- you have seen our A-Class third shift increase, or you see us reacting on the compact cars side, ramping it up on the one hand, having a good order intake. In this regard, and of course, we will adjust as you have seen also in other discussions we had, product life cycle related topics in other plans. That said, so we are doing here not because of business, so to say, but adjusting as quick as we can to different life cycle topics and market topics.

Daniel Schwarz - Commerzbank AG, Research Division

Okay. I will have one quick follow-up question. You confirmed the truck targets in September. What's the incremental situation, was it across all markets or is it more the European markets?

Bodo K. Uebber

Those much -- what happened between -- within September is pretty much a slowdown in Western Europe. Pretty drastically. So hesitating of ordering, so a lot of talks with customers but no orders. Brazil did not realize -- did not materialize an increase in the recovery. There are a lot of talks about the new FINAME program which reduces the interest rates from 5% to 6% to 2.5% for customers. That will not materialize, we don't think so in the fourth quarter, it will slowly, slowly and will materialize maybe next year. So that's an uncertain situation we had and that was not foreseen. And NAFTA, of course, order intakes came also down. We reacted there in production capacity, and the order intakes we are getting right now are big fleets. But these big fleets are order intakes, and discussions we have are pretty promising. But they are not for the fourth quarter and might not be -- really come into the first quarter, but they are for 2013. So that was somewhat the change we had over the couple of weeks. And finally, of course, the years -- 2 months from now, and therefore, the impact on the fourth quarter cannot be baked anymore. And therefore, we had to reduce also the profits expectations for the fourth quarter.

Michael Mühlbayer

Okay. Next in line is Kristina Church.

Kristina Church - Barclays Capital, Research Division

It's Kristina Church from Barclays. I think, firstly, my question is, given your track record, in terms of volumes and market share gains when compared with your premium peers, what would you say to investors in terms when you're talking about increasing spending on products and on technologies that they will see a return in the future for that given that your track record has not been so great on returns. And then another question on pricing. It looks from your EBIT walk down, that you gave on Page 34 of your presentation, that pricing across-the-board was positive in the quarter, presuming that mix with the A-Class was slightly negative. Could you give a little bit more of an update then on sort of what the negative factors where and what is in this -- the other cost changes line in the EBIT walk down? And those are my 2 questions.

Bodo K. Uebber

Sure. Of course, when you see we're investing currently in the product, in the new product, I do say pretty promising. When you see the B-Class currently, for example, pretty successful in the last 10 to 12 months in order intakes; and production is up to 200,000 units. The A-Class, as I said before, we have very good feedback on the first launch. So the investment into compact car, from my point of view, seeing also the CLA, which we had on the auto shows is very good and looks promising also for the returns we get from these cars. We will add also a small SUV in this segment, you know that. And of course, we have started now with that strategy and the payoff I do think we will see. Other investments we do and what I'm pretty optimistic is the kind of investment we took in the E-Class now for next year. So it's a more, it's a new car, facelift new car, looks pretty promising. So I think we can make Europe a good return on this one. Having in mind then the S-Class and C-Class, but now I'm talking about 2014 and so. So I do think it's good investment. Let me do a side remark to trucks. Here, we have in market share gains, currently, all over the globe. We see a strong Actros in the market with market share gains old and new together, so to say. We see us in pretty good developing in Freightliner. In this market shares, we are #1 in both segments, 6 to 7 and also in Class 8. We have market share gains in Brazil on the depressed market, of course. And in Fuso, over a couple of months, we could regain momentum. So therefore, from what we are investing in new products, I'm pretty confident to get all the things back, take rate of the engine in NAFTA, it's also very good. So therefore, also that investment I do think pays finally, off. With regard to pricing, your question, we had a quarter which were positive in cars compared to the third quarter last year. We had other quarters, of course, when you remember our first quarter, so we changed, of course, also our -- you know that in China, we balance more volume and pricing better, which also gets us in pricing a benefit. But also, we can see that our new products, like our new SUV, new M-Class, new B-Class, for that pricing is positive. And for the others, of course, we are very competitive and therefore -- but if you put both things together, pricing is positive. The other class changes we have in the work, let me start with trucks. In trucks, we have the impact of the new Actros, which we announced in the early -- beginning of the year, there is no change to that number. We addressed EUR 300 million incremental cost burn so to say, in the Actros area, which you can clearly see in our cost work. And the same is to against our plans for Mercedes-Benz Cars. We said we invest a lot in material cost due to parts. One is the CO2 related costs, which are hitting, so to say, our material cost. On the other hand, we put also a lot of money into the attractiveness of the cars. Secondly, our R&D costs are up. You see that in our disclosure, the third element is the interest rate effect on the long-term provisioning, which we disclosed with roughly EUR 100 million in cars. And of course, we have some investment in technologies which are burned in the third quarter. These are more or less the main areas of the cost burden on cars.

Kristina Church - Barclays Capital, Research Division

If I could ask a follow-up question then. How do you think that management expertise within the company is viewed by the market right now, considering how far behind peers you are lagging. And could you confirm whether [indiscernible] contract has been extended for the next 3 years?

Bodo K. Uebber

I can't get the question right. So of course, if you mean now the management contracts of the management team, of course, nothing -- I can't answer it right now, it's subject to our supervisory boards member to make these kinds of decisions, if you refer to that.

Michael Mühlbayer

So we take the next question from Rabih Freiha, Exane.

Rabih Freiha - Exane BNP Paribas, Research Division

Rabih Freiha from Exane. My first one would be on your cost-cutting program. When looking at the EUR 3.1 billion, can you tell us maybe how ambitious this target is? I mean, should we view this number as maybe a best case scenario or is there any room for potential to make further cut? And my second question would be, on your divisional margin targets for 2013. Obviously, you scrapped the previous ones. I guess, now you have an idea about where we could end up next year. If I look at 2013 consensus today, it's expecting around 8.1% group margin next year. Given your assumptions for 2013, can you tell us what your view is on this number? Is it close to what your forecasting or it seems too high? And maybe last one on dividends. You have communicated this morning that you're committed to supporting a stable dividend for this year. Should the net income deteriorate next year? Should we assume also some sort of support in that sense?

Bodo K. Uebber

Of course, a lot of questions you have to the year 2013, and seriously, currently is not a discussion about the -- it's not February yet. But I'm happy to answer this question in February, so to say. I made a remark to the margins on the second half of 2012, I repeat. And now once again, so we have a 7% run rate in cars and a 5% to 6% run rate in trucks, which I also said in the morning. But please understand that we cannot make currently specific guidance for 2013. But please keep in mind that our markets in Western Europe and Brazil will remain difficult, and we will only get meaningful benefits of our programs and products in the second half of 2013. And you know the Western European markets and Brazil will start weak in the first quarter, first and second quarter, please keep that in mind. The dividend, of course, I also said this. So I do think that the dividend can be stable based on our net profit development for 2012. This is also the message for 2013, for 2012. And I also commented on the cash flow that it should be slightly positive, including EUR 1 billion of special items like pension and M&A and that should give the management enough reason to keep the dividend stable. You had the question whether it's ambitious programs. Of course, programs are always ambitious. The truck program of EUR 1.6 billion, the car program of EUR 2 billion in cost-cutting, of course, is an ambitious target. And should, of course, safeguard on the one hand of profitability, but also enhance and give us possibility to achieve finally, our 10% target in cars. And what we said, what we try to do to accelerate things which we saw for later part of time to get them all ready in 2013 and '14. So we try to get these things from 15 to 16 back to this year's and to extra miles that we somewhat can offset the market situation and our product portfolio. That's the name of the game for the next 2 years. And we have also said that we go for a long term structure measures, but it is later on the vertical integration, for example and other topics that we need to be finally also competitive. In trucks, it's more the same from a concept point of view, we discussed it in June already in different tasks, 30% of that is revenue based and 70% cost based, which is good. The higher portion is on the cost side. Of course, some of the topics in the revenue side depends on market developments, and that was one reason. But we also said in 2013, it's not possible to get to the 8%, but I'm pretty optimistic that we, with the markets up, getting back based on our programs that we will make the 8% in the later part of stage.

Michael Mühlbayer

So our next question, we take from Stephen Reitman.

Stephen Reitman - Societe Generale Cross Asset Research

Stephen Reitman from Societe Generale in London. A question about 2013 or some allusions you're making. You're mentioning that the revamped E-Class will be an important factor in 2013. And then you also mentioned the S-Class, but then you suggested that may be more of a 2014 impact. Does that confirm that the launch of the S-Class has been delayed from what was generally thought to be a May launch to something later in the year?

Bodo K. Uebber

Stephen, of course, the E-Class is an important factor, of course. It's a lot of volume also for Mercedes-Benz Cars. That will roll in more in the second half of 2013. The S-Class, I have not commented, sorry to say so, but I don't discuss the S-Class. We will launch the S-Class in the summer. We have also confirmed that, I do think a couple of days before. But of course you know that the ramp up, so to say, then of course will have not an immediate effect, so that will roll in, so to say, into the third quarter, and will speed up, so to say, over the months in the third quarter. Therefore, of course, I can't -- it's so to say, it was pre-sized when the sale will happen so there's no delay in the S-Class. As I said, it will come in to the market in summer.

Stephen Reitman - Societe Generale Cross Asset Research

And you can confirm that you're not expecting any extraordinary launch costs in 2013, as we had in the sort of 2011, 2012 period, relating to the front-wheel drive architecture?

Bodo K. Uebber

On a normal basis, of course, it's nothing, of course, which we are now highlighting. Of course, there will be some burdens, no doubt, but not very extraordinary.

Michael Mühlbayer

So next in line is Jochen Gehrke..

Jochen Gehrke - Deutsche Bank AG, Research Division

Just 2 questions, please. First of all, on your Chinese business. I understand that you're trying to address this market in a completely different way. Can you just talk us through whether you are willing to make in kind of like a restart to that business, and whether or not there will be any personnel changes given the underperformance that we've seen there in this market? And then secondly, more broader on Mercedes. I remember, there was about a year ago that you engaged in a very aggressive growth plan, ever since, we've seen record sales in any quarter, but equally negative operational gearing in pretty much any quarter as well. Now I'm fully aware of your product cadence, but nevertheless, do you not feel that the risk is very high, that Mercedes is engaging itself in a 2-growth focus strategy that leaves apart the credentials of the brand and the pricing power that should actually be around this brand, especially in light of S-Class discounting back in February, A-Class starting with pricing support right from the beginning?

Bodo K. Uebber

With regard to China, of course, we have a lot of elements what we are currently discussing and implementing in China. One is, of course, the sales organization topic. We have 2 sales organizations, as you know. And we have currently achieved a common opinion with our partners to get to one organization, also with the legal entity, shell, so to say, a management company. So I expect in 2013 that we can start, so to say, to bring this organization also legally together. So everything of that was done, we need some, of course, some approvals, no doubt. But we have achieved there kind of a milestone. Having said this, of course, we have seen also a management changes, one that we have a new head of sales in China, as of October. I do think, he will start his position, a very experienced guy, having done a lot of markets within Mercedes. So there's also a management change in that. We will also set up, as we also clearly said, also, a new regional center. We opened up, we have opened up a leasing company, which is also decisive for supporting the business because it gets mature and mature. And of course, we also mentioned in the sales company that we have increased our share in our imports company from 50% to 75%, which is good news. Of course, that we are controlling it more and further, and to bring this into our next stage of optimization. Midterm wise, we go further for professionalization and expansion of the network. We will ensure that China-specific product and market requirements go into China through further extension of local R&D capacity and competence. And of course, we are working on the production capacity, as you know. And finally, we will also, organizational-wise, talk about more responsibility within China for the Chinese business. That is something which we will discuss during the year 2013, to make it even an organization which can be used -- be responsible for all the parts in China. So I'm pretty optimistic that we will -- good changes, but of course, it will need some time to finally implement that. So you asked a question compared to gross and cost to balance gross and cost. Finally, I can only tell you, I do think the answer is kind of yes, we have to balance this. And one answer to that and one reason for that is our Fit for Leadership program, to come on with a very disciplined way on the cost side to even go for more cost improvements and lowering this kind of down to make this growth really on a very efficient structure happening. So what should not be the case, that we leave this structure as it is, so to say, and we have to keep the cost control one the one hand and having a good structure for this growth. That is the goal also of Fit for Leadership, therefore, you're answer is on the one hand is yes, and the answer is Fit for Leadership program.

Michael Mühlbayer

So next question we take from Frank Biller.

Frank Biller - Landesbank Baden-Wurttemberg, Research Division

There's a question on revenues per car. I mean looking at the revenues per car in the third quarter, I calculate about a EUR 44,000, so this is significantly up versus last year's figure, about 7%, and also versus last quarter, second quarter, it is more than 6%. Maybe you can give us the reason for this sharp increase, and what you're expecting for the quarters to come? And the other question is in buses. I recognized here after a loss in the first 9 months, you are calculating was only a minus of EUR 80 million, that should include this EUR 40 million restructuring charges, so EUR 165 million for the fourth quarter. What makes you so optimistic in the operating performance of buses in the fourth quarter?

Bodo K. Uebber

The difference in revenue per unit is more or less 2 topics. One is foreign exchange. And the second is, so to say, we call that secondary business. So we have an after-sales business, for example. And other components business, of course, which makes this happening. So therefore, it's not a structure and mix topics are less of the difference, so to say, so the main aspect this year is foreign exchange and the underlying maintenance and spare parts business, for example in used car business.

Frank Biller - Landesbank Baden-Wurttemberg, Research Division

So should we expect such a magnitude also for the fourth quarter?

Bodo K. Uebber

No, it should go down, it should go down because we have, of course, a lot higher unit sales on the -- it should go down. As we note, to what precise number but somewhat down substantially, it should go down. For bus, of course, it's a seasonal business. Fourth quarter is always the best, more or less the best quarter in Europe. It's not to say in Brazil, it's not, it's in Europe. Therefore, of course, we expect this kind of seasonal, normal pattern in the fourth quarter. That's more or less the reason.

Frank Biller - Landesbank Baden-Wurttemberg, Research Division

So mainly the same margin than in -- like last year's fourth quarter?

Bodo K. Uebber

I don't kind of saw -- of course, we gave you the numbers, the precise EBIT numbers. So please stay with that, I don't want to make lower margin target here, but you have the precise Q4 number and you can expect us to deliver this number in the fourth quarter.

Michael Mühlbayer

Okay, next in line is Fraser Hill.

Fraser Hill - BofA Merrill Lynch, Research Division

Fraser Hill from Bank of America. Probably 3 questions. Firstly, on the restructuring. You've mapped out this EUR 2 billion program in the cars business, and really it seems like there's 4 bullet points around this material cost, production cost, fixed cost and R&D and CapEx. Can you give us more granularity as to how those cost savings break down between those categories? And when you will be harvesting the benefits from each of those areas just to get us a bit more comfort as to your approach on all of those factors? Following on from that, in terms of the R&D reduction. How does that tally with your comments about C02 related legislation cost, and obviously what we're hearing from your peers in terms of having to increase R&D to meet CO2 hurdles. How are you squaring the circle there? And then moving on to the margin. Sorry to belabor this point but you talked about the second half margin run rate for 2012 being applicable for 2013. Did I hear that correctly, is that the right message there or are you just talking about the second half run rate for 2012 being equivalent for the first half in 2013? And then finally, on the EUR 8 billion for this year, is that an absolute floor, you talked about a magnitude of EUR 8 billion or do we look at EUR 8 billion as a floor, what kind of assumptions have you taken for the rest of the year? Have you assumed some sort of flexibility there in terms of worsening of conditions?

Bodo K. Uebber

The other question to the EUR 2 billion program, the main topics, you were rightly saying, although the different baskets. The main area here of the EUR 2 billion is a material cost topic, it is between 1/3 and 50% of that number. I don’t want to disclose no more of this packages. Of course, we'll get further information when we roll down through the year, and give you some information where we've been at this point of time. You had a question with regard to the R&D reduction. I do think it's less here in terms of capacity reduction for R&D, it's not the topic in R&D. Here it's more in the program, the cooperation within the company between R&D productions, how do we steer our business, so to say, in the company. The pure capacities we need, of course, you can imagine we need a lot because there's a lot of work with regard to CO2, so we are further focusing on the topic in the long run. So we need to deliver CO2 targets in Europe, in the U.S. in China and everywhere in the world. That is a competitive necessity, so to say, to sell cars. The margin, again, I have not given any 2013 guidance. I've made a comment to our run rate in 2012. And I gave a comment to the markets, which I do expect, especially in Western Europe and Brazil to be very weak in the first 2 quarters 2013. Just to give you that advise to keep that in mind. Secondly, that when you look at 2013, we have follow-up product renewals more in the later half of 2013, so second half. And therefore, of course, the benefits are more in the second half than in the third half, also based on our program. This is what I said, so no guidance. Guidance, you will get in February 2013. The EUR 8 billion, of course, is the floor. Take it as we said, it's around EUR 8 billion. So that I do think is pretty precise guidance for the ongoing EBIT. And the assumptions for that are clearly the market assumptions which we have given to you. Unfortunately, I have also to say that the market assumptions but that is based on the market as they develop in cars and in trucks then we look to the first and second quarters, most of all of that bench which we have given you on the worst side, so to say. And that of course reflects also the EUR 8 billion here, the EUR 8 billion target and we have given clear guidance about the markets also. When you look at our disclosure, please read it again for the first quarter, we made also a special market assessment. And you see in Europe and NAFTA, of course you can imagine that the fourth quarter is kind of the worst quarter in the whole year, so to say.

Michael Mühlbayer

So next in line, we have Arndt Ellinghorst.

Arndt Ellinghorst - Crédit Suisse AG, Research Division

Arndt Ellinghorst from Crédit Suisse. Two questions. The first one is on your 50,000 employees in the sales organization. In Hungary, you mentioned that you're looking into your labor intensity and the vertical integration of the sales organization in Daimler Mercedes, specifically. Given that you now stated not to cut any headcount in the restructuring process, does this imply that you've finished your analysis and that you're happy with your structures, especially in the sales organization? And then secondly, the question we've asked many times, and I have to stress this because it's really coming up in every debate with investors in the market and also your peers. The question is really, what is embedded in Daimler's DNA that the company keeps running behind reality. We've seen that now for many, many years that your targets are too ambitious. Like this year again, another example, your truck orders, we've been mentioning many times this year that the U.S. is slipping. Suddenly, you're waking up in the third quarter, that the U.S. is slipping. In China, you've been initiating a price war in the first half of the year, now you've got to restructure your dealer network. The question really is, is there anything special in Daimler that you think you can change moving forward?

Bodo K. Uebber

So the answer to your first question, a question with regard to sales organization, but the same answer for also other areas is, you know we have not finished our evaluations [ph] in this regard. But that, too, is also true for other vertical integration topics. So answer is no. The second bigger question, of course, you had -- I do think you see us currently acting with regard to market changes. I do think when we go back, as I said before, first quarter, second quarter, I cannot agree with your assessment of the markets. I do think there are very positive signs also in the U.S. We had market shares up, of course, overall in the truck business and the assessment was clear to deteriorated over time and it's heavily deteriorated now in September. So therefore, we reacted, I do think, very fast. I do think also better maybe than in the past. That is my conclusion also to avert operations, to adjust our productions, with regard to the changes. Of course, in that situation, management takes action with the program, which I like, of course, that we go this fast which also means that we have to deliver EUR 1.6 billion, and we have clearly to follow up with you transparently where we are in this point which keeps us also running, which is also good news so to say, we do that voluntarily. On the car side, there is certainly, beside any market developments, which also over time, over the last 6 to 7 months, deteriorated in Western Europe. In September, we had 21% in Italy. We had 8% market down in Germany. So that reflects somewhat the dynamics. But on top of that, of course I have to say that we have a challenge in China and that is something of course we cannot push to the market, no doubt. But it's something we have to change, so to say, first of all we have to see it, we have seen it. And when something wrong and that is something we have to reorganize on the one hand. And to make it a very good and lean and dedicated operations. We have made management changes on the one hand. We have given some directions, we are not through with everything that we would like to do with regards to China. We have a lot of ideas which I commented, and that is something of course I have to admit that is something we have to work on and that is something which is our responsibility. Seeing is acting also here in cars, pretty active in Fit for Leadership is the right answer to that situation right now for the market side, and get us to short-term measures to secure our business, so to say, for the profitability side and get us to a discussion about long-term structural topics which I do think, Arndt, if I may quote you in some regards, you also discuss some of the topics. These kinds of discussions will happen within the company, and I'm happy that we can go this fast. So overall, not all of that is management, but also markets. But on the other hand, it's also not only markets.

Michael Mühlbayer

So next in line is Charles Winston.

Charles Winston - Redburn Partners LLP, Research Division

Charles Winston from Redburn. Three quick questions for me, thank you. Firstly, many of your competitors tend to add content cost inflation to their pricing impact and net profit bridges. So I'm just wondering if you could give us the net impact of price and the increased content cost on the profit in the quarter. Secondly, did I hear you right that there was 50 new dealers in China planned for the year because there's only 4% to 5% sales growth. That implies quite a sharp decline in the same-store sales of existing dealers? So I just wanted to confirm that point.

Bodo K. Uebber

Of course, to your second question you have, not every new dealer is an effective, so to say, in the first year. You have to calculate that you need some point, you need some time to get a dealer into a 100% efficient way. Therefore, you can't make this kind of reference to the current sales expectation. Of course next year is another year that might be not only 3% up, but maybe higher in China. The other topic, of course, we are not differentiating to the outside this kind of question you had. So we are, of course, commenting that pricing, no doubt, but we don't disclose any further contents and pricing elements, sorry to say so.

Charles Winston - Redburn Partners LLP, Research Division

Can I just follow up on the China point? Would it be fair to say that a reasonable number of your dealers are looking at to make the same store sales this year, just I mean, given that distribution or is that incorrect?

Bodo K. Uebber

It's very difficult to understand you, sorry to say so and even other people. Of course, there are negative sales, and of course there are also the kind of dealer profitability, so to say, that is also one topic why we decided of course to make this support in the fourth quarter for the dealers to make it of course an efficient network. And I commented on that why we are investing this money.

Michael Mühlbayer

Okay. Next in line is Philippe Houchois.

Philippe Houchois - UBS Investment Bank, Research Division

My question is on cash flow, it's been the weakening for Daimler for some time. I have 2 specific questions. The first one, looking at your CapEx, PP&E CapEx for the next few years. It looks like -- can you communicate when is the peak of CapEx for the group? It looks like the people being around the EUR 5 billion EUR 5.1 billion or EUR 5.2 billion, which would be below 5% of industrial revenue versus your peers guiding between 5.5% and 6%. So if you can indicate whether my numbers are broadly right and when the peak of that CapEx spend would be? And the other side of cash flow is the working capital, which you seem to be slow in improving. Inventory, in particular, I look at, though, the past 5, 6 years, you've always run inventory at least 80 days of COGS, compared that between 10 and 20 days more than Volkswagen and BMW. And I'm curious about: one is, what are you doing about this in terms of action plan? It's nice to talk about cost but that's a big part of your cost base, which impacted cash flow. And also, in which part of the organization is particularly inventory heavy? Is it the truck side or is it the car side, and there is a comp rate there?

Bodo K. Uebber

Philippe, your question first to the CapEx peak. Let's talk about cost in trucks. I do think mainly within trucks, it goes on in 2014, the CapEx. This year, next year it goes slightly down, and '14, more. And for cars, it's after 2014, it will go down. There we are then, so they say, through with many of our products and launches. So in cars, after 2014 and trucks beginning next year. So on the cash flow side, of course, we are looking also there in further improvements. On the inventory side, currently we are planning for the fourth quarter strong decrease in all of our divisions, that is true in trucks and in cars. And so we prepared in the third quarter for the peak, in the first quarter within cars it was also mainly driven by the new A-Class. The inventory increase and of course in trucks we will adjust, as we said, our production capacities that we make our targets end of the year, which should unlock cash flow, which I need to, so to say, to make my statement come true that we have a positive cash flow over the whole year.

Philippe Houchois - UBS Investment Bank, Research Division

But I'm talking more about year-over-year, obviously when you had Chrysler in your consolidation, it was lower because they carry no inventory. But ever since you got rid of Chrysler, you've been carrying a very, very high level of inventory compared to your peers. There must be a part of the organization that is particularly inventory heavy or am I missing something? Is it just insufficient management across the board or is there something specific about the way you work in trucks in terms of vertical integration, although we think Volvo [ph] has a higher vertical integration than you do. So I can't quite square those numbers. It'll be helpful if you could shed some light there.

Bodo K. Uebber

Of course, you are right there, there is one big part which we have also told you before. So in Germany, for example, we have a very high share of own retail. Of course when you look at our balance sheet and asset side, of course that makes us heavier than other companies. And of course, we said under Fit for Leadership, we will also look into the topic. We look at every topic. So I don't want to hide that one specific into our vertical integration processes, components but also own retail to ask also whether that it's efficiently positioned. And if not, we have to make it efficient. On the other hand because we should have a positive impact on that higher share of assets. And that is the name of the game, and we will certainly look at that profitability and competitiveness. Within the overall inventory, of course, the main share is cars, no doubt. It's 60% of the overall inventory, so to say, and the next one is trucks with 30%. And of course, vans and buses are lower and that's why because we are using a lot of the components from trucks and cars. So the main lever here is on the car side, of course, and the truck side.

Michael Mühlbayer

So we have 2 persons left. The first is Austin Earl.

Austin Earl

Austin Earl from Marshall Wace. I have 2 questions. The first is, I just want to understand a little bit on the dividend policy. I understood your message on 2012. But it's morel in 2013, I mean, is the dividend based on headline EPS as a payout ratio or maybe a normalized EPS or is it based on the free cash flow? And is there a strict policy or you may be, use some of the cash you have in the balance sheet if there is enough free cash flow to pay the dividend? That's the first question. And the second question was just on the reductions of production you alluded to for the fourth quarter of this year. I didn't quite hear if you did mention it. What sort of quantity that, that might involve both the bus and truck? And actually, if can just ask a third question which is from the truck in Brazil. Your Scandinavian and German peers have actually talked about intensive signs of a recovery in Brazil. I just wondered if you're seeing that as well.

Bodo K. Uebber

Of course, dividend policy I commented a lot of times in this conference call. We think that we can keep the dividend stable based on the net profit development year-to-date, and expected fourth quarter cash flow.

Austin Earl

Sorry, it's not 2012, I understood that, it's 2013.

Bodo K. Uebber

It's the payout in 2013, and of course, please, I can't give you guidance now for '13 dividend payout in '14. So what I mean is that payout in April, which is decided in February based on the performance of 2012. And that's our policy there is 50% payout -- 40% payout ratio, sorry, and I do think that means that more or less we can keep the dividend stable compared to last year, last year 2011. But don't ask me now about 2013 is not the time to give guidance for 2013. The production, topics, I have already told you, something in trucks. With regard to Brazil, we have a different opinion within the truck side. So we see a very slow recovery in the Brazilian truck market based on the FINAME program. In buses, a bit different, where we see an accelerating of intakes and discussions with customers. So we see good tenders there. Also we have a school bus tender we won for 2013, and one for the operator, which makes us a little bit of optimistic for bus in Brazil. So currently, trucks is a little bit where we have the visibility, it's not yet there, very slow, slow, slow start of the FINAME program in Brazil, which makes us also kind of a bit nervous what happens now in 2013 with the market. So I do think there's a bandwidth which goes from negative to slightly positive. We will see where this market is going.

Michael Mühlbayer

Okay. Last but not least, we have Christian Breitsprecher.

Christian Breitsprecher - Macquarie Research

Christian Breitsprecher of Macquarie. I have 2 questions left. One on China, you said you increased your stake in the wholesale up from 50% to 75%. Can you tell us, what the cash out was for that increase or at least when the cash flow, cash outflow happened for that? And secondly, on the vans business, pretty much like the buses business, you seem to imply a hefty improvement in EBIT in the fourth quarter, in absolute terms and in margin. Can you explain a little bit where that's supposed to come from?

Bodo K. Uebber

Christian, you have 2 questions. On the van side, it's seasonality. So we always have a very strong fourth quarter sales. And that should then roll in this EBIT which we have forecasted and given as a guidance. The second question with regard to China and the restructuring of our wholesale company, import company, it's cash neutral so to say, because we are using equity in China and moving it to this consolidated entity. So therefore, it's cash neutral.

Michael Mühlbayer

Okay. Thank you. Ladies and gentlemen, thank you for all your questions and hoping [ph] with us today. Investor relations remain it duty to answer any further questions you may have. We hope to talk to you again soon. Thanks, and goodbye.

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