Daimler (DDAIF) Q1 2016 Results - Earnings Call Transcript

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Daimler AG (OTCPK:DDAIF) Q1 2016 Earnings Conference Call April 22, 2016 8:00 AM ET


Bjoern Scheib - Head of Investor Relations

Bodo Uebber - Member of the Board of Management, Finance and Controlling and Daimler Financial Services


José Asumendi - JPMorgan

Patrick Hummel - UBS

Arndt Ellinghorst - Evercore ISI

Stephen Reitman - Société Générale

Horst Schneider - HSBC

Kristina Church - Barclays

Tim Rokossa - Deutsche Bank

Marc Tonn - Warburg Research

Sascha Gommel - Commerzbank

Stuart Pearson - Exane BNP Paribas

Michael Tyndall - Citigroup

Frank Biller - LBBW

Michael Punzet - DZ Bank

Jürgen Pieper - Metzler Capital Markets


Good afternoon. This is Bjoern Scheib speaking. On behalf of Daimler, I would like to welcome you, both on the telephone and on the internet, to this Q1 results conference call. I'm very happy to have today our CFO, Bodo Uebber, with us here, who will be looking forward to discuss our Q1 numbers and probably another topic that you may be interested in doing this conversation.

In order to give you maximum time for your questions, Bodo will begin with a short introduction, which then will be followed by the Q&A session. In order to provide everybody on this call with the opportunity to raise questions, I would kindly ask you to limit yourself to one or two questions for each time that you are in the row.

With this, I would like to hand over to Bodo. Thank you so much.

Bodo Uebber

Thank you, Bjoern, and good afternoon. Before discussing our first quarter numbers, I want to give you some additional information relating to our communication last night.

Daimler AG conducts an internal investigation regarding its certification process related to exhaust emissions in the United States, upon the request of the U.S. Department of Justice. Daimler is cooperating fully with the authorities. Daimler will consequently investigate possible indications of irregularities, and of course, take all necessary actions.

The company's experience with the U.S. authorities has clearly shown that the conservative communication supports a constructive dialogue with the authorities. In addition, the class actions are considered to be without merits and Daimler will defend itself against them with all available legal means.

Let's continue with the first quarter results. We published our first quarter figures this morning, and as you can see, we continue with the consequent execution of our strategy. Daimler's unit sales grew by 7%, driven by Mercedes-Benz cars and Mercedes-Benz vans.

In the first quarter, we continued our product offensive with the world premiere of the new Mercedes-Benz E-Class, the presentation of the new Mercedes-Benz GLC coupe and the C-Class convertible, and the debut of our new four-cylinder diesel engine OM 654.

We confirmed our forerunner role in connectivity with the world premier of three connected and autonomous driving trucks, driving as a platoon on the public highway. In addition Daimler announced the next milestones in electric mobility with the investment of €500 million in a second battery plant.

Let's move on to our financials. Group revenues increased by 2%, when adjusted for foreign exchange effects, they are up by 4%. EBIT from ongoing business decreased, as expected, through €2.7 billion mainly due to the changeover of the new E-Class, higher R&D investments and unfavorable hedge rates. Net profit reached €1.4 billion, which equates to an EPS of €1.26. Industrial free cash flow came in at €300 million in the first quarter.

Apart from lower earnings in our industrial business, negative effects resulted from higher tax payments in the first quarter, as prior year period was influenced by tax refunds as well as higher working capital and investments. As a result, the net liquidity position of our industrial business reached €18.5 billion at the end of the first quarter.

To sum up, in terms of profitability, the first quarter will mark the low point in the course of 2016. We expect significantly stronger second half of the year, driven by the increasing availability of the new E-Class, seasonally higher volumes at Daimler Trucks and improving hedge rates. Unchanged, we are committed to our full year guidance based on our current market expectations and exchange rate environment.

Let's take a closer look at major developments in our divisions. Mercedes-Benz cars increased sales by 8% in the first quarter and was again the strongest growing premium brand. The main drivers of growth were China, along with the success of our compact cars and renewed SUVs.

EBIT from ongoing business significantly decrease to €1.4 billion and a margin of 7.1%, mainly due to effects related to the renewal of the E-Class, lifecycle related lower S-Class sales and higher investments in new products and technologies.

Now, the truck sales decrease by 6% in the first quarter, as a result of the very weak market environment in Brazil, Turkey and Indonesia. The European truck market got off to a strong start for the year and Daimler Truck sales increased by 13%. In the NAFTA region, sales remained at the level of last year, as Daimler Trucks gained significant market share, especially in the Class 8 segment.

The Brazilian and Indonesian markets turned out to be more challenging than initially expected. Sales in Latin America were down by 18% and 26% in Indonesia. Order intake in the first quarter indicates further growth potential for the European markets, but a deceleration in the NAFTA.

Accordingly, Daimler Trucks has adjusted capacity in the first quarter and reduced a number of blue collar workers in the U.S. plant by around 2,200. EBIT from ongoing business slightly decreased to €517 million and a margin of 6.3%. Burdens arose from lower sales in Latin America, Indonesia and Turkey.

Mercedes-Benz vans had a strong start into this year. Sales increased by 20% and revenue by 17%. Unit sales increased by double digits in all regions, with a sole exception of Latin America.

EBIT from ongoing business climbed by a full 52% to €336 million with a corresponding profit margin of 11.9%. The main driver here was higher unit sales due to a strong demand for our new midsized vans. EBIT was negatively affected by adverse foreign exchange effects and workforce adjustments in Germany.

Sales at Daimler Buses decreased by 15% in the first quarter due to very weak business in Latin America that could not be offset by stronger demand in Western Europe. EBIT from ongoing business came in at €39 million, which equals a profit margin of 4.7%. Strong demand for our complete buses, a positive product mix in Europe and positive exchange rate effects more than offset the negative impact in Brazil.

At Daimler Financial Services, new business increased by 4%. The portfolio reached €116 billion at the end of the first quarter, which is 1% lower than at the end of 2015. Adjusted for exchange rate effect, contract volume increased by 1%.

In the first quarter, the division achieved an EBIT of €432 million, which corresponds to a return on equity of 17.4%. The higher EBIT was mainly the result of increased contract volume in all regions. Net credit losses remain at a very low level of just 25 basis points.

Now, let's look at our expectations for the full year 2016. Lower demand for cars is likely to grow from its level by about 3% this year. We continue to expect slight growth in Western Europe and significant growth in China. The passenger car market in the U.S. will probably remain at about the same level as last year.

Moving to truck markets. We raised our expectation for the European market to around 5%, as we expect the recovery to continue. In the NAFTA region, we foresee demand for Class 6 to 8 trucks to drop around 10% and the market in Japan to remain at last year's level. At the same time, we have updated our guidance for the Brazilian truck market to decline around 20% and the Indonesian market to decrease around 15%.

For van markets, w continue to foresee a positive development and expect markets in Europe and the United States to grow slightly in 2016. Our market guidance for buses also remains unchanged. Western Europe is expected to grow slightly, but the market in Brazil is likely to significantly contract again this year.

Looking at our divisions, Mercedes-Benz should continue its success building on a strong start into the year. Sale growth were largely driven by new products, with the new E-Class as a major contributor from April on. Daimler Trucks is now expecting unit sales slightly below last year's level, as a result of the very weak market development in Brazil, Turkey and Indonesia.

Mercedes-Benz vans plans to achieve significant growth in unit sales through significant sales increases in Western Europe and continued momentum from its Mercedes-Benz vans global strategy. Daimler Buses foresee its unit sales around the level of last year. Sales in Western Europe should increase significantly, but the demand in Brazil would probably be significantly lower than in 2015.

Our EBIT guidance for Daimler Group remains unchanged. We continue to expect to slightly increase revenue and EBIT from ongoing business in 2016. We expect earnings in the second half of 2016 to be significantly higher than in the first half of the year.

Mercedes-Benz cars will increasingly benefit over the course of the year from continuously higher sales of the new E-Class, full availability of our new SUVs in the U.S., hedged rates that are getting better step-by-step and ongoing favorable pricing. Daimler Trucks expect seasonally higher volumes in the second half of the year. A strong European and a continued good NAFTA business, together with further efficiency improvements should support the EBIT development.

At the divisional level, we anticipate to slightly grow the ongoing EBIT in 2016 at Mercedes-Benz cars, Daimler Buses and Daimler Financial Services. Daimler Trucks continues to expect ongoing EBIT around the level of last year. Mercedes-Benz vans raised its outlook and now anticipate a significantly higher ongoing EBIT. We have updated our EBIT guidance for the full-year, and at current spot rates expect for Daimler Group a slight tailwind.

Positive effects result from currency such as the U.S. dollar and Chinese renminbi, while negative effects arise from currencies like the Russian ruble, the Brazilian real and Turkish lira. The anticipated earnings development in our automotive business should also be positively reflected in our industrial free cash flow in 2016.

At the same time, we continue to invest considerably more in new products, autonomous driving, in particular, digitization. Therefore our ongoing industrial free cash flow is likely to be significantly lower than in 2015, but significantly above the dividend payment of €3.5 billion.

To sum up, we are working to safeguard and further improve our current performance step-by-step, with continuation of our product offensive in all divisions, structural optimization and efficiency improvements within the entire Daimler Group, further increasing operational flexibility and continued comprehensive financial discipline.

Our strategy is further on paying off and Daimler continues to make a promising investment case. We want our shareholders to participate in the success of our company by driving shareholder returns and continuing to target a payout ratio of 40% of net profit attributed to shareholders. The extensive investment in the future of this company, along with the drive of our efficiencies and structural changes of our business model should deliver long-term sustainable and profitable growth.

Now, I look forward to your questions. Thank you.

Bjoern Scheib

So, Bodo, thank you very much. Ladies and gentlemen, you may ask your questions from now on. The operator will identify the questioner by name, but please kindly also introduce yourself, not only with your name, but also with the name of the organization that you are representing. Two practical points as discussed before. Please avoid using mobile phones as well as hands-free speaking systems. And second, please ask you question, and as a courtesy I would also kindly ask you again, please limit the number of questions that you are having either to one or two, in order to give everybody on the call the opportunity to ask the question.

Thank you very much. And now we get started.

Question-and-Answer Session


[Operator Instructions] Our first question is from the line of José Asumendi of JPMorgan.

José Asumendi

A couple of items please. The first one on free cash. If you could please just give us maybe a bit of clarity behind the two categories, those older operating assets and liabilities as well as the swing we had in income taxes? I understand, there was possibly a year-on-year impact. The second element, in terms of the truck division, I think you show a very strong or solid, I think, truck efficiency gains in the first quarter. Should we continue to see those truck efficiency gains flowing through over the next three quarters and also maybe look at the nature behind that? And if you could give also a bit of color on the market share gain you have on Class 8 trucks in North America, any color behind that as well?

Bodo Uebber

First, we have a question with regard to free cash flow in the first quarter. As already commented, it was impacted by the operational performance, by far the biggest impact. Secondly, last year we had a tax refund in our books over a €200 million, of course, which we can't have again this time.

Our cash payments in this quarter are on pretty normal levels, so the effect was in Q1 2015. And of course, you see in cash flow the increase of working capital, of course, with the spring selling season on the one hand, but also, for example, European situation in trucks, where we need to produce more trucks, so to say in light of the good order intake.

On top of that we hit, of course, as we have planned. The higher investments in this quarter and that is more or less all-in-all the effect we have in the first quarter. Q1 came in according to our internal plan and expectations. So that is also so far good news and our cash flow should overtime now over the quarters improve also with regard to the second half. And we will get in as we have also committed often about the dividend payment and also about somewhat underneath the ongoing cash flow in 2015.

The second question with regard to the material cost efficiencies, you are right. So we had in Q1 a positive impact on efficiencies. There are two elements, which we can fleck, one is on the material cost side, but also an ongoing quality improvement. So both of these elements are kicking-in in first quarter. We expect this to hold on over the quarters to come. On top of that, the raw material situation is a pretty good one and that also gives us some positive effects on the trucks side, but also on the passenger car side, the raw material effects.

On the other hand, market share, as we already discussed in February in our full-year disclosure and before, the strategy in Daimler Trucks North America is also to increase market share. We have a very competitive product, including our powertrain components where we have the potential to increase the take rates on the one hand for the heavy duty engine, but also for our transmission where we have opened up the plant last year in November.

In NAFTA, also that gives us possibility to go for higher market share without jeopardizing, of course, our pricing, but on the other hand also going for higher sales contribution. The strategy is paying off. We have seen a huge effect now in Q1 and we keep the momentum, so we plan also to consider the higher-end market share compared to last year in the quarters to come.


Our next question is from the line of Patrick Hummel with UBS.

Patrick Hummel

Patrick Hummel from UBS. First one, regarding the margin in passenger cars. You've maintained your guidance, even though compared to the beginning of the year, it's probably fair to say, that U.S. market, in particular in sedans, has been somewhat weak. So what is it that is offsetting this weakness in the US market that makes you still confident to deliver the earnings growth?

And in that regard, how should we think about the margin progression in the coming quarters? Will it be completely H2 skewed, or will we already see some positive momentum in the second quarter, with the availability of the E-Class in Europe?

And my second question relates to the other line. You had FX losses there in the first quarter, and I understand that this is not included in your guidance of a slight tailwind for FX for the full year. So I wonder what can be expected in this reconciliation line, as far as FX is concerned, for the remainder of this year? Thank you.

Bodo Uebber

First of all, the first quarter came in as expected, and that holds true for the absolute EBIT on the one hand, but also for the margin behind the first quarter, so we are running on our internal plan to achieve our committed targets for the full year.

For the next quarters to come, of course, what will drive the EBIT and the profitability, that is on the one hand the E-Class availability. You know that we are starting in Europe to rollout the E-Class. You know that in September we will come up with the Estate, and you know through that also in the end of second quarter, we will come to the United States and the end of the year we have the rollout in China.

On the other hand we have a strong SUV product lineup, so that will also support our sales in the next quarters to come. Also the availability of the SUVs all over, for example, also the face lifted GLS will get into traction also in the United States. We will see some increase there also in the quarters to come.

The main impact, of course, this year will be the GLC in volume growth compared to last year, but this is also something, of course, we have already discussed. On top of this, further on, we plan for further stable and positive net pricing. You have seen us also in the first quarter doing well in this regard. Some of these aspects are price increases, for example, normal price increases on the one hand, but also the situation in markets where we have weak currencies like, for example, in Russia.

And on top, from the other cost point of view, we will have potential in the next quarters to see reduced other cost changes in the quarters to come. Efficiencies will kick in the next quarters to come also on the cost side. So to say, that will also drive us in the same direction.

With regard, you know, we don't give the guidance for specific percentages and margin for the quarters to come, but yes, over the quarters, quarter-by-quarter, step-by-step, also our margin will improve, second, third and fourth quarter, especially the second half this year will be with a higher EBIT than the first half of this year.

With regard to your foreign exchange rate question, in the first quarter, we were strongly impacted by emerging markets currency, including ruble, Brazilian real, but also the South African rand and so on and so forth and we had less high impact from the development of the U.S. dollar and the renminbi.

For the total year, we planned on the Daimler Group level for a slight tailwinds for currencies compared to 2015. This is mainly with regard to the higher negative impact from emerging markets currencies, the same I mentioned before will impact the full year guidance.

The emerging markets currency in total will be far above EUR500 million impact for the total year. That has even deteriorated compared to the situation in the January and February, even when you see this emerging market currencies in the first two months were really at its very negative levels, and therefore we reviewed our fiscal year guidance for the currency.


Next question is from the line of Arndt Ellinghorst at Evercore ISI.

Arndt Ellinghorst

Arndt Ellinghorst from Evercore. Two questions, really. One is on the earnings. The BBAC contribution fell in the quarter year-over-year, just slightly to EUR114 million and I just wonder what's behind that, despite the increase in sales of more than 34% in Q1 in China? And then also on earnings, provisions were down sequentially almost EUR900 million from the start of the year. That's really a change I've never seen in your numbers in a quarter, and I wonder whether you could talk a little bit about how much of that had an impact on earnings, and how much was just usage? And then the other part is on trucks, and I wonder whether you could share your U.S. truck inventories at Freightliner at the moment, and compared to last year.

Bodo Uebber

First of all, the BBAC contribution I do think is pretty much on the same level, so there is not big difference to last year Q1. Of course, the ramp up of the GLC, so to say, has an impact, but the number is a very good number; EUR114 million, I think is the right number, so we are staying on high levels. Although we have the launch of the GLC, so I'm very much pleased with the situation at BBAC currently.

Secondly, your questions --

Arndt Ellinghorst

If I may interrupt there. Could you give us some color on you how you see the equity contribution to shape out for the full year versus last year?

Bodo Uebber

So it will be, of course -- you know that we will increase our locally -- the E Class launch will impact certainly the profitability or the EBIT level of BBAC, so we plan also for further increase in the BBAC at equity result, but this is also mainly with regard to the second half of this year.

Second topic, provisions, I would say, normal course of business so to say. We have in every second quarter, we do have usage of provisions as we -- in the first quarter, sorry, because we spent, for example, bonus payments on the one hand, so we have normal payouts also, not extraordinary ones, in the first quarter. This is mainly the direction we are taking. Others are fluctuations, of course, in provisions for the product related stuff, but nothing extraordinary, I can tell you, nothing material.

The third question was with regard to the inventory situation. Two aspects; for the internal stocks we do have are managed in the way we see our order flow coming in. There we had done our jobs, we brought inventory in the right direction. There might be some necessary adjustments in the next upcoming weeks, but not big ones.

On the other hand, the dealer stocks are pretty low, which on the one hand is good news, so that means currently we are in discussions with the dealers about what to do. It could be the case, and we have positive discussions with some dealers to increase inventories, which could lead to further kind of momentum in the United States for ordering trucks.

So that is something we are watching right now closely, whether that is a trend already to be seen, but again, stocks are pretty low and that we regard this currently as a maybe turning point in terms of order discussions we have with dealers, and on top, also with our fleet customers. But again, we are watching the markets with regard to situation as you know. There is a lot of news in this market, so therefore we need to stay very flexible in this market.

Arndt Ellinghorst

But that's interesting really. I mean, so you're saying you might see signs that the market in the U.S. is getting somewhat better. What is interesting, when I look at your book-to-bill or your orders, sorry, they were down 53% in Q4 and 56% in Q1. So that's really the direction of the question. It seems that the market is slipping further, and you're inferring that it might actually improve a little bit?

Bodo Uebber

So our market guidance is minus 10% and for Class 8 is minus 15%. So anyway to make this guidance, we need some more order intakes to make it in this direction. All of what we know, so we say, we come into this direction of minus 15%. And of course, there is good discussions we do have with our dealers leads to some more order intakes, and on top, it will be supported by this low stock levels. So therefore, we regard this as a positive sign that we will make our guidance finally.

While we believe that the order intake now over the months to come will anyway pickup, how far we need to see, because we need some more order intakes, of course, to make our full year guidance. We have a good order backlog, yes we do have, but anyway -- of course, we need also more orders.

But again, first discussions in this direction we will regard as good news, because no discussion of course, is of course, not so good discussions. On top of this, we have also some beginning of ordering of big fleets, but at a very early stage. So, of course, you can turn it to the negative or to the better. We believe that our, due to this discussions and some regaining fleet orders that we will make our guidance of minus 15% market decrease, heavy duty Class 8.


We're now over to Stephen Reitman of Société Générale.

Stephen Reitman

Stephen Reitman from Société Générale in London. I have one question, again, on the EBIT bridges, and in particular, looking at the other cost changes. The negative EUR417 million you reported in the first quarter is about equivalent of 2.1% of margin at Mercedes passenger cars. Could you give us a little more color on how you see that developing? What your guidance is for the full year, in terms of the headwind you expect from this item?

Bodo Uebber

First quarter was impacted by higher R&D, as we have also planned for. We have announced that we have far higher R&D budget for this year. That is one element. And the second, of course, we preannounced also is the E-Class launch in the first quarter. So both of these topics are the main impacts in first quarter are the cost changes.

We plan as we have informed to you in February in our discussions about EUR500 million for the total year for other cost changes, which means that over the quarters to come, we will see some improvement, of course, in this area. That is mainly because we plan for further efficiencies on the material cost side, kicking in over the quarters to come.

We had less of these efficiencies in the first quarter, so there are more to come than in second, third and fourth quarter. Again, we have also the E-Class launch, and this impact not planned for every quarter, so therefore this number will improve over the quarters, second, third and fourth quarter, these are the main impacts.


We're now over to the line of Horst Schneider of HSBC.

Horst Schneider

It's Horst from HSBC. I try to limit to two questions. First of all, on the truck business, again, and you stress that the situation might get better soon in the U.S. In that context, I want to ask again about the profitability of your North American business. I mean, in your Annual Report 2015, you show that Daimler Trucks North America contributed EUR1.5 billion in terms of net profit, which suggests that you make roughly 80% of your truck earnings in North America, which highlights, again, the importance of the region.

So I want to know, is that the right way I should look at that business or is here maybe then the single view on the North American profitability wrong? And is maybe then the profitability of Europe higher than that what I see here at first glance? And second question is related to hedging. Maybe you can give us an update. To which extent you are now hedged for 2016, and especially, to which extent you are hedged for '17? And I would be particularly interested in your hedging on the renminbi?

Bodo Uebber

I will not talk against your comments you made. We know we have discussed North American profitability at many times and I'm very pleased with the situation we have achieved there. The business model in North America is in total a very flexible, a very profitable one we do have, and a very strong one based on very strong product, but also with our component strategy and on top with our flexibility between Mexican and U.S. plans.

So that goes on. We are shooting for more market share. And I do believe we will get also a high contribution from Daimler Trucks North America into Daimler Trucks as it was last year, so a very high contribution. Please, I ask for your understanding that I do not want to comment on specific numbers, specific profitabilities. I can tell you that Daimler Trucks North America is better than their benchmark profitability, which we have pointed out. We have targets for the different regions.

Horst Schneider

But that means in turn that there's huge room for improvement in Europe, is that correct?

Bodo Uebber

As we also discussed, I do think we have discussed the strategies in Daimler Trucks back and forth. You know that our situation in Brazil is according to the market, but also in terms of product investments we need to do and restructuring that we do have room for improvement there, but there we need also a little bit of the help of the market, but we will prepare for everything what is necessary for the future

And we have also discussed, as you know, that we have also initiatives in place for the European business, as you know, also to improve long-term our margin potential and market share potential in this area. So it's nothing unusual to say, but anyway these are the areas we need to focus on.

Second question with regard to hedging, 90% we are hedged for the U.S. dollar and the renminbi, more or less same numbers and 50% in 2017. Of course, I will also tell you --

Horst Schneider

For U.S. dollar, as well 50% only?

Bodo Uebber

50% in 2017, yes. But also keep mind that some markets like the ruble, for example, or emerging markets are less hedged, because the expenses for this market to hedge is very expensive, so it makes no sense. That is also the reason why we get hurt in these markets. We do everything on the pricing side to offset these effects.


We are now over to the line of Kristina Church from Barclays.

Kristina Church

Kristina Church from Barclays. I've got two questions. Just one, following on from your comments in terms of pricing. Could you say how strong your pricing has been in Europe, in particular? So outside of emerging markets where you're dealing with the currency, what are you seeing in terms of net pricing in Europe?

And then my second question is on the credit side of things in the U.S. Have you seen any -- have you given a ride in your provisions as a result of the recent fall in residual values? And where did you see there needs to be any further provisioning there or are you comfortable with the stake in the financial services? I know your delinquencies are currently at very low levels.

Bodo Uebber

Kristina, to your question of pricing, of course, I gave you an outlook that we expect stable and positive pricing for the quarters to come in total. Of course, one element, of course, and that's kicks in, in Europe, I do think first is the E-Class. Of course, you can imagine that the E-Class run-out needs, sort of say, some support. So in Europe, I expect even positive effects now with the E-Class in the second quarter.

All of the markets are, of course, competitive. But from the current point of view, we can differentiate us bit also by our product line up, no doubt, and by the new product kicking in, so to say. But I do think the best I can tell you is stable and positive pricing Q2 and until Q4, that is the plan of record we do have, supported also by the EBITDA Class kicking-in.

Your second question, pricing, let's give you some information. Residual values, we are, of course, adequately provisioned. We are doing so every month, every quarter, also in the last year and this quarter, the markets are pretty stable in this regard. Also, our positioning in the market is pretty okay with regard to residual values.

Markets, which we are watching a bit more closer is United States, for example, because the passenger car business, as you know, the structure in the market is shifting somewhat, therefore we are watching this markets more closely so to say. As you know, also our volume in the U.S. is driven by C and E-Class for examples, so that is what we need to watch. But nothing more specific to say with regard to residual values, as of, we have a pretty good development and see us also well-positioned with our product coming in this regard.


We're now over to the line of Tim Rokossa at Deutsche Bank.

Tim Rokossa

It's Tim Rokossa from Deutsche Bank. I also have two questions, please. The first one is just on the mix effect. You spoke a lot about the new E-Class and SUVs that should definitely be favorable in the second half. When we look at other models like the S-Class, for example, that hasn't done too well year-to-date. It will still take some time before you utilize it. Is demand there developing in line with your thoughts? And is this just the usual life cycle or is there something else going on?

And then secondly, I guess you made it fairly clear that you don't want to comment around this too much, but I'd still like to touch a little bit on the news around the U.S. from last night. Can you at least help us understand what the topic of discussion really is here and just remind us of your diesel exposure in the U.S.?

Bodo Uebber

The answer to your first question is, yes, this is normal life cycle effects we do see with the S-Class. Even if you compare to the previous, that's also to say, of the S-Class, we are doing better than we did, I don't know, seven years ago with the former E-Class. On top of this too, also development in China is good with regard to the Maybach, for example. So we're in a pretty good situation with the Maybach S-Class. And on top, the convertible is kicking in, I do think in the second half of this year, which will also support the segment development.

But normal S-Class life cycle effect -- so to your diesel questions the penetration in the U.S. in the market really what we are selling is about 1%, one point something percent, so a level, which was in the past a bit higher, last year I do think it was at the end of the year around 2% roughly. So that is the level of diesel we do have. We are selling currently in the market that is lower than it was in the past. That's it from a sales perspective.

To your other question. Please understand that we cannot -- that I will not comment on details with regard to the investigation. Our experience with the U.S. authorities has clearly shown that our conservative communication supports the constructive dialogue with the authorities. And please understand that we do not comment on either the pending proceedings or further details. I'm sorry for that.


We're now over to Marc Tonn at Warburg Research.

Marc Tonn

Marc Tonn from Warburg Research. Just coming back to the same issue if I may. Just without going into detail, have you experienced any, let's say, delays perhaps in introduction of new models in the U.S. or are you expecting any potential delays due to the fact that that you are reviewing this certification process for the U.S. in this regard? Is there anything you have observed or might observe in the future?

Bodo Uebber

Please understand that for many good reasons, and as I've already pointed out in my last call, that we don't discuss this topic here. Sorry for this.


We're now over to the line of Sascha Gommel at Commerzbank.

Sascha Gommel

First of all, they are just coming news flow over the tickers for the German KBA study, and the wording sounds like that also Mercedes is joining this voluntary recall. Maybe you can comment on that, because it seems that you already agreed to recall the cars, and maybe you can share some details on how many cars, and the potential financial impact from that? And the second one would be a question on your cash flow statement. There's quite a big swing in the industrial cash flow statement on other operating assets and liabilities. You had plus EUR572 million last year and now minus EUR409 million. Maybe you can also shed some color on the swing factor between those figures, please?

Bodo Uebber

One answer to the KBA report first. We don't have it; we don't have currently, as far as I know, the KBA report currently in place to read it. It might be the case that other branches [ph] functions have it right now, but I can't read this. So if it is available here in our company, of course, we certainly will read it and we will draw our conclusion in the one are or the other. Also, we will make some information, but I can't tell you anything about the content, as long as I don't have it officially in my hands that I can read it. So that is one question.

Secondly, of course, as we already reported also in our Annual Report 2017 we have several authorities, especially in Europe and the United States have inquired about test result of the emission control systems used in our vehicles. You know that the discussions clearly being held and the ongoing technical evaluations could result in measures being taken for the further improvement of the diesel technologies applied in our engines.

To a limited extent, this could affect vehicles already delivered with some versions of diesel engines in the car and the van segments. We currently anticipate only minor effects from that on our profitability, cash flows and financial situations. And we have also, what I said right now, disclosed in our interim report, so that you also can read this.

Your question with regard to the -- with the other liabilities. One is taxes, which is included here. But I've already commented before, the impact in Q1 last year, and on the other hand is normal earnings development. So that is reflected and I've commented earlier on in the question.

Sascha Gommel

The taxes is an extra line.

Bodo Uebber

We are sorry, please call Investor Relations.

Sascha Gommel

You will


We are now over to Stuart Pearson with Exane BNP Paribas.

Stuart Pearson

Just maybe to confirm, and come back to one answer you just gave on the diesel penetration in the U.S., you said 1%. I presume you mean for the market overall, your diesel penetration would be materially higher than that, so maybe you could confirm on that point. And that perhaps there is indeed a diesel issue, or maybe to put it this way, to rule out there's any gasoline issues involved here? Can you just confirm as well separately to us you did already have an investigation internally, and declared that you're not using defeat devices, presumably that statement still stands?

And then, separate topic on U.S. leasing just returning to the point Kristina started on there, but just maybe in terms of your commercial offer to customers, and how maybe that's evolved? And I wonder if you could comment on the residual value assumptions you're making in the lease contracts in the U.S.? I mean, how do they compare today to, say, two or three years ago, and have you started to bring down those residual value assumptions already, or as you say, is that something you're just watching at this stage?

Bodo Uebber

Well, first of all, to your question with regard, Stuart, to the diesel penetration in U.S. what I said was 1% and there is a percentage of our own sales. 1% of our own sales is diesel related in the first quarter of 2016.

Stuart Pearson

That's the first quarter, but say for 2015 then, for instance, similar or --

Bodo Uebber

Before I tell you a wrong number, call Investor Relations. We have this number available, and they can tell you, I'm sorry to say. So on your other question with regard to the investigation, and so please, I ask for your understanding. Our experience with the U.S. authority has clearly shown that our conservative communication supports a constructive dialogue with the authorities. And please understand that we don't comment on further details. We have at any point of time informed based on best knowledge. So please, that's what I can tell you for the time being.

The residual value question, of course, I can't give you too many details in this regard, because every competitor would be happy if I would do so. And therefore, I ask you for understanding as I had pointed out. Residual value development currently in all of our major markets is pretty stable. What we do have on our watch list is a passenger car development in the United States due to the shift in the market that SUVs are, so to say, more in the preference than passenger cars, for example, but other than this, there is nothing to be reported. We are adequately provisioned in all of our markets in all our divisions, mainly in the passenger cars, of course, is our highest leading share in the business.


We're now of the line of Michael Tyndall at Citigroup.

Michael Tyndall

It's Mike Tyndall from Citi. Just a couple, if I may. The first one, just on the Takata air bag recall, just wondering how that's progressing, whether or not it's in line with your costs and maybe if you could rule out the possibility of it extending anywhere else in the world? And then second one, on hopefully a brighter note, can you talk about the market reception to the new E-Class, anything you can give us in terms of details in terms of how it's performing versus your expectations? That would be terrific.

Bodo Uebber

First of all, we have made provisions for the Takata recall in the beginning of February with effect to fiscal year 2015. What we have done right now is that we have increased our provisions for the car and the van group with regard to the country coverage so to say the Canadian markets and the U.S. market are very close and they are more or less from a closest point of view ended in the same area. So we have increased our provisions with regard to the country coverage, so we have included also the numbers for our Canada in this regard. Therefore we increase the provisions.

I can't tell you anything right now about the further implementation. We are in the phase of informing the customer about the recall. So I cannot tell you, so to say, about anything out of this. And secondly, for the time being and from today's perspective, we have provisioned for U.S. and Canada. We see no reason for other markets to do any action in this regards.

E-Class incoming orders, positively. So of course, in Europe the feedback is according to our plan, which is an ambitious plan for the E-Class. So we are in line with our internal plans for the E-Class order intakes.


We are now over to Frank Biller at LBBW.

Frank Biller

Frank Biller from LBBW. Just two questions, one is, a positive one on the van segment here, record margins here 11.9% or 10.7% without one-offs. So given this margin here and guiding significantly higher earnings contribution in the course of the whole year, why you should be expect for the van segment lower margin of 9% as a strategic target against the cars with a margin of 10%? And can you guide us for the full year of that 10% margin should not have been here given?

And second one is on one-off items here. In further times it was the Q3 report, you mentioned up to €400 million for restructuring charges of the sales organization, €116 came in 2015, now €26 in the first quarter of this year. What should we expect for the remainder of the year?

Bodo Uebber

The first question with regard to van. The van business, of course, we are very pleased with the performance. It's one of the highest returns I do think I have ever seen in the van business. It was based on a very good mix, but also a very high intake on midsized van, very huge numbers. So the product is very competitive in the market.

We don't expect this margin to stay at this levels for the quarters to come, because we are investing, of course, in new product. On the one hand the Sprinter -- there's a new Sprinter on one hand. But also as you know the new pickup truck, which certainly would impact also the quarters to come, but is an investment into the future, so to say, and in future growth.

Secondly, it was your questions with regards to the restructuring of the dealer network. We are planning for this year for up to €100 million charges for this project. The project is running very well. So we are with speed in closing it, so to say, over the quarters to come. Up to €100 million is the number for 2016.


We are now over to the line of Michael Punzet of DZ Bank.

Michael Punzet

I am coming back also to the special item payable, where you've shown a loss of €222 million coming from currency transactions. Maybe you can explain what is behind that figure? Why it's now a special item? Because I think in the last quarter you have had also some losses, but that was not booked as a special item. And the last question on that issue is how this figure will develop in coming quarter? Will that return to a positive figure in coming quarters or what should we expect from that line going forward in coming quarters?

Bodo Uebber

So Michael, thank you for this question. This I think is related to the realignment of the foreign exchange management and the adjustment to a more quarterly view arising with regard to the net exposure. And moreover due to the sales development in the export business in the course of the year and the volatile exchange rates, regular fluctuations in the net exposure of the key currencies occur.

And therefore, we separate it, so to say, this effect on the reconciliation, because it's not related to the operating business of the divisions, which are €222 million. We don't expect major impacts from this topic in the quarters to come or next year. Maybe minor items, but of course it will not be as high as this number.

Michael Punzet

So does that mean the high figure this quarter is only related to the change of the accounting?

Bodo Uebber

There is no accounting change. It's just a separation, because it's not an operating item. Maybe a second topic, of course, with regard to our hedge rate that will positively impact, of course, the currency development of the divisions, mainly Mercedes-Benz Car Group. So over the quarters to come, you will see positive effect from the dollar and renminbi over the quarters impacting the divisions.


Our last question for today is from the line of Jürgen Pieper of Metzler Capital Markets.

Jürgen Pieper

I have one question left. It's on the launch cost for the E-Class you mentioned frequently. If I look at your selling expenses, they are flat. If I look at your admin costs, they are going down. So I would have expected some effects on these lines. So what am I missing or where am I wrong? And could it be that in the second quarter? We see a pretty big market income paying for the E-Class, and as a consequence, we see higher selling expenses than in the second quarter instead of the first quarter.

Bodo Uebber

Well, seen. I do think that shows that we do a good job in our efficiencies, because the sales cost as a percentage of sales is going down over the quarters and years now. And the same was true with our administrative cost, which certainly makes our company more efficient.

One thing, of course, the E-Class launch is impacted by R&D, also by R&D costs, which is not sales cost and not admin cost on the one hand, but also of depreciation cost. When you come in and you are starting, so to say, production more and more, you have more depreciation. So this is mainly impacting also a launch cost beside some incentive spending, as you know, in the first quarter.

Jürgen Pieper

So some more effects to be seen in the second quarter or will we see a similar picture there?

Bodo Uebber

As I have already said, I commented on the further cost development, that we expect further positive developments with regard to efficiencies and other elements of the cost. The delta to last year, of course, is lower and we are aiming for €500 million year-over-year impact on the cost in total.

End of Q&A


Gentlemen, can I please pass the call back to you for any closing comments.

Bjoern Scheib

So ladies and gentlemen, thank you very much for your questions today. Also, Bodo, thank you very much for hosting the call today and taking all these questions.

To all of you on the phone, you probably have already received our invitation for the Truck Capital Markets Day on the 7 and 8 of June in Stuttgart. And please don't forget, over here you not only will have the opportunity to talk and discuss with management, but you will also have the opportunity to ride on our autonomously driving F-Class on the A8, the German Autobahn. Something undisputed where others are only talking about it. With us you can already ride on a German highway.

And on top, please don't forget we are also going to host a China Capital Markets Day on the 6 and 7 of December in Beijing. You will, in due course, be informed about further details. So enjoy your day. Have a great afternoon for all of you around the world, either in the evening or in the morning. Have a great evening and morning. IR stays at your disposal. Goodbye, and we'll talk soon.


This now concludes today's call. So thank you all very much for attending. And you may now disconnect.

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