Expert Meeting Minutes | Daimler Truck Holding AG (DTRUY) Q4 2022 Earnings Call Transcript

1. Russia’s war against Ukraine is not only a humanitarian catastrophe, but it also had a severe economic consequences, particularly regarding energy prices. In addition, our entire industry continued to face severe bottlenecks in the supply chains. This led to significant cost increases, multiple interruptions of the production and to volume losses due to allocation, especially at Trucks Asia. This situation lasted throughout the year and is still ongoing.

2. At Mercedes-Benz do Brasil, we are restructuring our entire business. Clear ambition is to make the business significantly more resilient and profitable by 2025.

3.China’s truck market contracted significantly in 2022, but it is expected to recover in 2023, and we are well prepared to participate in this upturn. And last but not least, to further leverage our digital technology, we entered into a partnership with Deutz AG earlier this year.

Christian Herrmann - Head IR and M&A

Jorg Howe - Head, Global Communications

Martin Daum - CEO

Jochen Goetz - CFO

Michael Jacks - Bank of America

Jose Asumendi - JPMorgan

Nancy Ni - Goldman Sachs

Nicolai Kempf - Deutsche Bank

Klas Bergelind - Citi

Miguel Borrega - BNP

Anthony Dick - ODDO

Stephen Reitman - Societe Generale

Himanshu Agarwal - Jefferies

Good morning, ladies and gentlemen. My name is Christian Herrmann. I’m Head of Investor Relations and M&A at Daimler Truck. I warmly welcome you to our annual results conference. Thank you all very much for joining today. Today’s presentation material can be found on the Daimler Truck Investor Relations website.

On our request, this conference will be recorded. The replay will also be available as an on-demand webcast in the Investor Relations section of the Daimler Truck website. We are hosting this event today jointly for investors, analysts as well as for the media community. Therefore, Jorg, I’m very happy to have you with me today.

Thank you, Christian, and a very good morning from my side as well. My name is Jorg Howe, I’m the Head of Global Communications at Daimler Truck.

Let me briefly tell you what to expect today. First, our CEO, Martin Daum; and our CFO, Jochen Goetz, will present our business results of the fiscal year 2022. This will take about 45 minutes.

Meanwhile, there will be a simultaneous translation into German. Afterwards, our executives will do 2 Q&A sessions, 1 for analysts and investors and 1 for media representatives. Active participants on the Q&A calls already received their personalized access data with their registration. Media representatives will be able to participate via chat tool on the event website.

Now let’s start with welcoming our speakers: Martin Daum, our CEO; and Jochen Goetz, our Chief Financial Officer.

Martin and Jochen, the stage is yours.

Yes. Thank you, and hello, everyone. Welcome to our annual results conference. When we look back at 2022, we can definitely say last year was a very special year. It was our first full year as a stand-alone company.

We achieved a lot, and it was packed with challenges. Russia’s war against Ukraine is not only a humanitarian catastrophe, it also had a severe economic consequences, particular regarding energy prices. In addition, our entire industry continued to face severe bottlenecks in the supply chains. This led to significant cost increases, to multiple interruptions of the production and to volume losses due to allocation, especially at Trucks Asia. This situation lasted throughout the year and is still ongoing.

Yet at Daimler Truck, we do not complain about challenges. We act and make the best of them, showing our entrepreneurial fighting spirit. Only 3 days after the start of the war, we put our Russian activities on hold. This shows how fast we can move with our independent setup. We managed the bottlenecks in the supply chains and limited their impact.

We have set clear priorities in the allocation of parts. We actively focused on supplying the region products with the highest contribution margins. As always, we put customers first, and in some areas, we therefore even accepted higher cost to get more trucks and buses faster to our customers. At the same time, with respect to cost inflation, it was up, yes, that we could not compensate such dramatic price increases through internal measures only. We had to pass them on to our customers, and we did this very successfully through constructive dialogue.

In some, supply was a limiting factors throughout 2022. Our customers would have liked to receive significantly more vehicles than we could deliver. This was a situation I had never experienced in my long professional career. The positive message regarding our 2022 environment is this, last year’s market demand was strong and demand for the product of Daimler Trucks was particularly strong. In North America, the heavy-duty market increased versus prior year.

Our market share in Class 8 remained at exactly 40.0%, the same higher level as in 2021. In Europe, the heavy-duty truck market also increased versus prior year. Here, we could grow our market share to 20% versus 18.6% in 2021. This shows once again our customers deeply trust our trucks and buses. Along with our products, our active portfolio management also is an important success factor.

With our active portfolio management, we continue to optimize our footprint and product portfolio. We focus on heavy-duty, the biggest profit pools and the most attractive return on investment. At Mercedes-Benz do Brasil, we are restructuring our entire business. Clear ambition is to make the business significantly more resilient and profitable by 2025. One of the first initiatives is to outsource noncore activities with the front axle and medium-duty transmission at our factory in São Bernardo do Campo.

These measures will affect approximately 1,750 employees. In addition, the context of around 1,000 temporary employees were not renewed. At Daimler Buses, we are optimizing our production footprint in Europe. We had already announced that we would move our body in white shop for buses to the Czech Republic. Last week, we reached an agreement with the General Works Council to implement the plans for the body in white shops as part of a larger package to ensure long-term competitiveness.

In the U.S., we launched our Tourrider, a Mercedes-Benz-branded motor coach. With this product, we are entering one of the most attractive coach markets we had not previously participated. In February, we handed over our first Tourriders to customers. In the U.S. Truck market, we introduced our Western Star 57X.

Our 57X gets great customer feedback for its fuel efficiency, safety and connectivity. It completes the renewal of our vocational trucks to further grow our position in the North American truck market. In China, the world’s largest truck market, we launched our locally produced Mercedes-Benz trucks. Start of production was in fall 2022. By now, the first trucks are already on the road.

As you probably know, China’s truck market contracted significantly in 2022, but it is expected to recover in 2023, and we are well prepared to participate in this upturn. And last but not least, to further leverage our digital technology, we entered into a partnership with Deutz AG earlier this year. In the future, Deutz will exclusively use our heavy-duty diesel engines platform for off-highway applications. For us, this means higher economies of scale. Now let us move on to some key targets we set ourselves.

First, the development of our CapEx and R&D. Our ambition is to hit a reduction by 15% between 2019 and 2025. By the end of last year, we have already achieved a reduction of by 12%. We accomplished this by strictly prioritizing zero-emission technology, large profit pools and return on capital employed. In concrete terms, this means by increasing our R&D for zero-emission technologies, we are maintaining our overall spending discipline.

Next to the development of our -- is the development of our fixed cost, which is a key lever to increase our resilience. By the end of last year, we achieved a reduction by 8% versus 2019, excluding some special effects like spin-off-related costs or excess inflation over 2%. We had higher costs, especially at Mercedes-Benz, but also Trucks North America, for example, for the Euro VI and the accelerated transformation to zero emission. Through strong pricing discipline, we have more than the offset cost pressure, as you can see in our adjusted return on sales. However, to be very clear, we are not satisfied with our progress, and our management team will work hard to stay on track here.

Despite headwinds, we will continue to make Daimler Truck more efficient. Our ambition was a reduction by 15% between 2019 and 2023. We now keep this ambition to push. And push the timeline to 2025. Let me point out, this does not affect our profitability ambitions.

They have not changed a bit. Finally, the development of our service revenue. Our initiative to grow our services will help to translate customer relationships into recurring revenues and improved return on capital employed. It will make our business less cyclical and is the other key lever to make Daimler Truck more resilient. The service revenue increased by 14% year-over-year.

In ‘22, parts sales were at record level at Trucks North America and Mercedes-Benz also delivered stronger aftersales performance. So we are making good progress. But going forward, we are revising the 2025 service percentage ambition we originally set. The ambition was based on the share of revenue, and this no longer works at the time of high inflation, significantly increased pricing for new vehicles and a strong unit growth. We will provide a new and more suitable way to measure our progress regarding service at our Capital Market Day on July 11.

And be assured, the new concept will be as ambitious as our original one, it will not change our profit ambition. The initiatives we just looked at has a clear goal: To make Daimler Truck more profitable in all market environments and particularly more resilient in downturns. We have made significant progress in this respect. In 2019 and 2022, we sold almost the same number of vehicles, around 520,000. But the adjusted return on sales of our industrial business came out very different.

In 2019, it was 5.8%. In 2022, it was 7.7%. We then simulated a recession that means a scenario, we call rainy environment, resulting in global sales of less than 400,000 trucks and buses. In 2019, our return on sales would have fallen very sharply. In 2022, it would have been a different story.

If we would have sold the same loan number of less than 400,000 vehicles in the past year, our return on sales would have remained significantly more stable. This shows that we have considerably lowered the breakeven point, and we will continue to do so. Bottom line is this: Our measures are paying off, our earnings are moving in the right direction, our service revenues are growing and our active portfolio management is firmly established. So in terms of profitability and resilience, we have already come quite some way. And you know what I like most, we can do so much better.

We adjusted the beginning of our journey and we will continue to improve in the future as we did in 2022. We are there, but we need to intensify our work on fixed cost and that is exactly what we are doing. We have a clear plan, and we will keep executing this plan. We will not loosen up a bit here. Now let’s see what all our works in the past year has come down to. Jochen Goetz will have all details on our 2022 results in a second, I just want to point out 1 very positive development here. Our unit sales grew by 14% to 520,000 units. Our group revenue grew twice as fast by 28% to €50.9 billion. And our adjusted group EBIT even grew twice as fast as our revenue by 55% and amounted to €3,959 million. This means we accomplished truly profitable growth.

We achieved the key targets we set ourselves at the beginning of 2022. And regarding profitability, we reached a new historical high for Daimler Truck. In the challenging environment of 2022, this is a really strong performance. We can, therefore, be pleased with these results, and I would like to thank our entire Daimler Truck team for the great work. I want to point out that without the bottlenecks in the supply chains mentioned before, we could have delivered even more vehicles and our business performance would have been even stronger.

Let us now take a quick look at the performance in our segments. Trucks North America once again achieved a strong return on sales driven by higher unit sales, good pricing and strong aftermarket sales. Mercedes-Benz continued to make good progress with the turnaround of its business, driven by strong sales and pricing. The performance of Trucks Asia was impacted by 2 factors: first, the sharp market decline in China and the resulting negative at equity income; second, the fact that we could only allocate a limited number of parts for the markets in Japan and India. Daimler Buses is back in positive territory, driven by a slowly recovering European coach market, strong sales in Latin America and strong aftersales.

Financial Services successfully ramped up the business by adding 8 new markets, and is now a well-positioned key enabler for our company going forward. All in all, we are making strong progress regarding our 2025 ambitions and remain laser focused to ensure every region delivers benchmark profitability. With that, I would like to hand over to Jochen Goetz.

Thank you, Martin. And also a warm welcome from my side to our full year 2022 disclosure. Let me now give you more detailed insights into the 2022 financials on group and segment level. We are very satisfied with our unit sales and order development despite a rather challenging market environment. In 2022, we could increase our unit sales by 14% year-over-year.

All our segments contributed to this increase: Trucks North America with an increase of 15%, Mercedes-Benz with 18%, Truck Asia with 9%, and Daimler Buses with a significant increase of 28%, mainly coming from Latin America. Fourth quarter sales were very strong with 155,000 units, 80% above prior year. Due to our conscious decision to allocate chips to North America and Europe, we significantly reduced the number of unfinished trucks. Incoming order development for the full year 2022 of 522,800 units underlines the strong demand. At Trucks North America, Q4 saw a significant uptick in orders due to the strong ongoing replacement demand and the increased infrastructure spending in the United States.

The significant year-over-year drop in orders at Mercedes-Benz by 35% is because we did not open the order book for the fourth quarter of 2023 at the end of last year. Today, we are still not seeing cancellations or pushouts of orders that would indicate slowing demand. Year-over-year, revenue on group level increased significantly by 28% to €50.9 billion in 2022. Adjusted group EBIT rose by 55% to €4 billion in 2022, while group EBIT increased by 4% to €3.5 billion. Free cash flow of the industrial business increased by 12% to €1.75 billion in 2022 despite still high stock levels.

As a result, the net industrial liquidity showed an increase from €6 billion at the end of last year to €7.5 billion at the end of 2022. For the full year 2022, revenue of our industrial business increased significantly to €49.2 billion. EBIT adjusted also showed a significant increase to €3.8 billion, a return on sales adjusted of 7.7%, up 160 basis points, as we delivered operational improvement. Trucks North America delivered an EBIT adjusted of €2.4 billion and a return on sales adjusted of 10.8%. DD&A was able to significantly increase unit sales despite continued supply chain constraints.

Pricing was a strong EBIT contributor as Trucks North America realized significant pricing adjustments in 2022 to compensate for rising material costs and inflation. Alongside the volume and positive mix effect, the result was a positive price/cost mix. The aftersales performance was strong with record level part sales. Ongoing supply chain constraints created high material cost headwinds inflation, product spending as well as higher manpower costs drove the increase in fixed overhead costs. The fourth quarter was negatively impacted by a onetime, high double-digit million amount related to a recall.

Mercedes-Benz trended an EBIT adjusted of €1.6 billion, with return on sales adjusted of 8.1%. Despite the ongoing constraints in the supply chain, Mercedes-Benz optimized its production and significantly increased unit sales. Mercedes-Benz realized a significant increase in contribution margin per unit driven by strong execution of its pricing strategy. The aftersales business continued to improve its performance and the used truck business continued to deliver strong contributions as well. Dramatic cost headwinds came in from inflationary pressure, further material cost increase and project costs related to transformation and post-spin-off optimization.

Supply constraints from semiconductors and freight continued to be a cost burden. We achieved strong progress in our Brazilian operations. In combination with the favorable prebuy market conditions, this led to a return on sales margin of more than 5% in 2022. However, as Martin already mentioned, we are still in the middle of restructuring our local footprint in Brazil, are on track -- and are on track to achieve our ambitions. Q4 was a very challenging quarter for Mercedes-Benz.

We faced severe headwinds compared to the third quarter for material cost increases resulting in significantly higher-than-expected onetime payments to suppliers in Q4. Significant burden also came from inflationary pressure and rate-related topics, like the onetime inflation bonus payments in Germany. Q4, nevertheless, our year-over-year improvement in gross profit and contribution margin per unit driven by the optimized pricing strategy. However, it’s obvious that Mercedes-Benz has to accelerate its efforts to bring down its fixed cost level despite the headwinds from additional regulatory requirements. Only further initiatives will bring us to our targeted cost position.

To achieve our target sustainably, it will take until 2025. As Martin already mentioned, our 2025 margin ambitions and glide path to achieve them remain unchanged. Truck Asia came with a return on sales adjusted of 2.6% on the back of an EBIT adjusted of €171 million. The segment realized a significant increase in unit sales from international markets, while our allocation strategy of parts supply limited sales in Japan and India. After sales performance was strong with continued momentum towards the end of the year.

Net pricing improved in India and international markets due to the implemented price increases. Price increases in Japan will only support the results significantly beginning in 2023. The major negative headwind in a full year ‘22 EBIT bridge came from our Chinese joint venture, BFDA, and the equity result caused by the Chinese market downturn and the nonrecurring positive onetime effect in 2021. The underlying Asian business achieved an adjusted return on sales of around 4% despite our intentional reduction of chips and are not yet effective pricing measures in Japan. With an EBIT adjusted of €40 million and an adjusted return on sales of 0.4%, Daimler Bus recovered to breakeven in 2022 after negative earnings for 2021.

Driven by prebuy effects in Brazil before the induction of Euro VI in 2023, the full year 2022 showed significantly higher unit sales coming from a low level of 2021. Whereas the European Coach segment showed only a slow recovery in 2022, we saw a kind of a normal year performance in our European city and in the urban bus segment. Net pricing improved versus last year as we countered high material costs. We also saw a strong growth in after sales. On the negative side, mainly higher material and inflationary costs, but also higher R&D costs for transformation towards zero-emission vehicles burdened the earnings performance of that segment.

The segment delivered ongoing strict and very successful cost management. With the agreement to relocate the body shop to the Czech Republic, we achieved a major step to optimize the production footprint and secure the long-term competitiveness of our 2 German plants. As already mentioned, adjusted EBIT performance in 2022 on group level increased significantly year-over-year to €4 billion. The main driver was volume, price and mix. Here, we were able to overcompensate higher material costs, especially with significantly stronger pricing that made up roughly half of the positive effect of the whole bucket.

Main driver of the positive FX effect was the U.S. dollar. Industrial performance mainly includes the highlighted increased material costs, and especially in the fourth quarter, the impact of the high inflationary pressure and the mentioned onetime payments to suppliers. General administration expenses as well as R&D costs show a higher level versus 2021 to the described fixed cost development and the planned decision to increase R&D spending to accelerate the zero-emission vehicle transformation. In the Others line, we saw a positive effect from increased discount rates.

On the negative side, we saw in 2022, a major year-over-year valuation effect from the nonrepeat of the positive onetime in 2021 from our Chinese joint venture, BFDA, that is included in our Truck Asia segment. The negative P&L effect of the lower fair value of our minority investments, like [indiscernible], were also burdened in 2022. Getting from EBIT adjusted to EBIT, we have to consider negative restructuring effects from Latin America and a smaller amount from our European restructuring program. Besides that, negative effect from discounting -- discontinuing our activities in Russia and from the spin-off are included. In sum, this led to an earnings before interest and taxes of €3.5 billion.

Looking at the full year 2022, the significant increase in our industrial business EBIT performance was mainly driven by 2 segments: Trucks North America and Mercedes-Benz. This underpins our progress towards our margin ambition for the sunny scenario of 12% in North America and 10% at Mercedes-Benz. As mentioned, performance at Trucks Asia is impacted by the negative equity effect from our Chinese joint venture as well as the intentionally reduced allocation of chip supply. Despite ongoing tough market environment, Daimler Buses delivered a turnaround and is on its track to return to previously strong levels. The reconciliation line in which we book our crew participation and our investment in autonomous decreased by €240 million.

In total, EBIT adjusted of industrial business significantly increased to €3.8 billion, with a return on sales adjusted of 7.7%.

Looking at Financial Services, new businesses was significantly up by 63% year-over-year, mainly due to the increase in North America, but also from Phase II market launches in Europe and FX effect. The same drivers led to an increase in contract volume by 43% to €24.2 billion by the end of 2022. EBIT adjusted in 2022 developed flattish at a level of €200 million, leading to an adjusted return on equity of 9.9%, 2.5 percentage points less than in 2021. The development was mainly driven by ramp-up in integration costs for the integration of the Phase II markets as anticipated when we showed our plans at the November 2021 Capital Market Day. Regarding the development of cash flow supply chain constraints, we’re still a burden in 2022, resulting in a total negative effect from an increase of working capital of €758 million, which is mainly related to inventory.

Despite massive destocking of unfinished vehicles in December, a sharp reversal of the trends seen during the year. I want to remind you that for every order in our books, there is a customer urgently waiting for it. Used truck stock remained on a relatively stable level during last year. The amount of depreciation and amortization of €1.1 billion continues to be roughly on the same level as net investments in PP&E and intangible assets, excluding M&A activities.

That underlines our strict investment discipline despite the ongoing need for significant powertrain transformation investments. The provisions and others include a noncash negative at equity contribution from China, and the income were recorded from license fees for localization, our Mercedes-Benz truck in China as well, and change in positions. This results in a cash flow before interest and taxes of the industrial business of €3 billion. Adjusted cash conversion rate stood strong at 0.9%, once again in line with our target range. Cash taxes came in at minus €1.1 billion, which leads to a free cash flow of the industrial business without adjustments for M&A transaction and restructuring measures of €1.75 billion.

Free cash flow adjusted of the industrial business stood at almost €2 billion, an increase of more than 50% versus 2021. Consequently, our industrial net liquidity has increased to €7.5 billion. Net profit development in 2022 was favorable with an increase of 16% to €2.8 billion. Earnings per share increased as well from €2.85 in 2021 to €3.24 in 2022. As already mentioned, free cash flow of the industrial business came in with €1.75 billion.

As you might remember, the 2021 figure included a €600 million onetime positive cash effect from the sale of 50% in cellcentric. So despite ongoing high transformational investment, the solid cash performance in 2022 builds the foundation for the first dividend payment of Daimler Truck. Accordingly, the Board will propose a dividend per share of €1.30, this equals a payout ratio of 40%. Our next Annual General Meeting on June 21, we’ll finally decide on the dividend proposal. Our ongoing strong track record of disciplined capital investment and high cash conversion has delivered robust free cash flow.

As we committed at the time of the spin-off, we will not maintain a lazy balance sheet. Our capital allocation principles remain the same: We will invest in our long-term future through CapEx and R&D; we aim to pay a sustainable dividend with at least 40% payout ratio; and when appropriate, return excess liquidity to shareholders. We will return to this topic in the course of the year. Before I walk you through the outlook for the full year 2023, please let me give you the following remarks. The following outlook of Daimler Truck, as at our last disclosure call, is still subject to an exceptional degree of uncertainty due to the further development in the war in Ukraine and its economic consequences, inflationary pressure and potential Central Bank increase in interest rates, as well as the further macroeconomic and geopolitical development.

We assume ongoing supply bottlenecks, but no major production downtime. We expect global market demand for trucks to stay strong for 2023. Unfortunately, at the same time, we expect that production will remain the constraining factor to the semiconductor and an increasing number of other supply chain shortages. Based on the expected global economic development, we anticipate for the full year 2023 a range of 280,000 to 320,000 units in North America for the heavy-duty truck market and the same range of 280,000 to 320,000 units for the European heavy-duty truck market. For the group, we expect full year 2023 revenue to be in the range of €55 billion to €57 billion.

EBIT adjusted as well as EBIT reported are expected to increase significantly in 2023. Investments in PP&E and R&D costs are expected to stay on prior year level. Guidance for our Industrial business includes an expectation of unit sales in a range from 510,000 to 530,000 units, and revenues in a range of €53 billion to €55 billion. We are confident that we will achieve a ROS adjustment -- a ROS adjusted with a range of 7.5% to 9%. Free cash flow reported is expected to increase slightly, which means up to 25% versus 2022.

Now let’s take a look of how this group industrial business guidance plays out on a segment level for 2023. For Trucks North America, we expect unit sales in the range of 190,000 to 210,000 units and a ROS adjusted in a range of 10% to 12%. Our North American business is expected to continue delivering a strong performance with upside potential in 2023, but will be still limited by constrained production capacities. We expect the first quarter performance to sit nicely in the target corridor. For the full year, we expect a further improvement at Mercedes-Benz, with unit sales in a range of 150,000 to 170,000 units and return on sales adjusted in a range from 7% to 9%.

Remember, 2022 included a significant positive onetime impact of more than €250 million, which equals more than 1% in return on sales. Regarding clean earnings performance, we expect a further improvement from Mercedes in 2023 versus 2022. Q1 is expected to be in the target corridor, but given the typical seasonality, rather on the low end. For Trucks Asia, we expect unit sales in the range of 150,000 to 170,000 units and return on sales adjusted in a range of 3% to 5%. Here, we expect a significantly better second half of the year with a gradual improvement quarter-by-quarter, and Q1 being in a similar magnitude as 2022.

For Daimler Buses, we expect unit sales in the range of 20,000 to 25,000 units and a return on sales adjusted of 2% to 4%. Although unit sales expectation might not result in a higher 2023 figure due to negative sales development in Brazil, a better coach market in Europe is expected to result in a positive overall mix effect for Daimler Buses. We do not expect the coach market to get back to its normal level in the short term. We rather expect a normalization to take time over several years to come. Considering the typical yearly seasonality in the bus business, we expect Q1 to be negative and then a quarterly improvement throughout the year 2023.

For Financial Services, we expect new business volume of €11 billion to €12 billion, and an adjusted return on equity between 9% and 11%. In 2023, our Financial Services business will have to digest some buildup costs for the markets in Germany and in France. Recon includes investment in future technologies, i.e., autonomous and fuel cell, and eliminations as well as fair market valuation of our minority participation. Full year should be the same level as last year. All in all, from today’s point of view, we expect for the group that typical seasonality for the first quarter of 2023 to be the weakest.

That’s it from my side on the 2022 financial and the 2023 outlook. And with that, thanks for listening and back to you, Martin.

Let me now wrap it all up. In our presentations, we have outlined how committed we are creating value for our shareholders and securing a solid financial base for our transformation. We are well underway to further improving and unlocking our profit potential. We have always been transparent that this is a longer journey and this journey is still ongoing. For example, we still need to complete the turnaround of Mercedes-Benz and renew our efforts on fixed cost there.

We also need to further improve the profitability of Trucks Asia and Daimler Buses, and we continue to ramp up our Financial Services business. So there is still a lot of work ahead of us, but at the Daimler Truck, we are always very excited about this journey, and we are fully dedicated to keep going and remaining laser-focused on executing our plan. This applies not only to our profitability ambitions but also to our second strategic ambition to lead sustainable transportation and to help fight climate change. This is, of course, primarily about zero emission. But beforehand, a brief comment on 2 other key topics of technology transformation.

First, along with battery and fuel cells, diesel engines will continue to play an important role in this decade and potentially beyond. At Daimler Truck, we are determined to remain a leader in this area, and we therefore keep constantly improving our conventional heavy-duty drivetrains. Second, there is a huge potential in automation. To leverage this potential, we follow a dual-track strategy with our partner, Waymo and our partner subsidiary, Torc Robotics in the U.S. And we are making great focus.

We are on schedule to unlock the profit potential of autonomous trucks within this decade. Now let’s look at our progress in zero emissions. In 2022, we sold 914 zero-emission trucks and buses, 200 units above prior year. We got orders for more than 2,000 zero-emission vehicles to be delivered in 2023, twice as many as in the year before. The numbers, therefore, are increasing, but they remain low on an absolute basis.

And the reason is obvious, there is no cost parity with conventional vehicles now and there is no charging infrastructure. At Daimler Truck, we helped to get things moving. We are in the intense discussions with policymakers and energy companies, and we have started some key pilot projects together with partners. We do not slow down our speed of transformation, because I’m sure the best way to convince all stakeholders is to build a green energy infrastructure as fast as possible, is to show that there will be an attractive business case. We therefore keep broadening our zero-emission product portfolio.

By the end of 2022, we had 8 zero-emission vehicles in serious production. Over the course of 2023, our portfolio will be 10 zero-emission trucks and buses, and additional vehicles will follow in the next years, especially for the long distance. We are rolling out a comprehensive zero-emission portfolio that is purpose-built for the various use cases of our customers. We will provide more information on our transformation at our Capital Market Day. We will give you a detailed overview of what the transformation to zero emission means for our company and how we will benefit from it.

Our first Capital Market Day as a standalone company will take place on July 11 in the United States. Please save the day. I think it will be worthwhile. Let me now conclude by underlining that 2022 was another important step forward for Daimler Trucks. Despite all external challenges, our first full year of independence was a successful year for our company.

Going forward, we know exactly what to do, and our high order backlog gives us a great momentum. We are, therefore, very confident that our results in 2023 will be even stronger than in 2022. With this, thank you very much for listening. We will now have a short break before we continue with our Q&A sessions.

Good morning, ladies and gentlemen. On behalf of Daimler Truck, I would like to welcome you to the analyst and investor Q&A session of our annual results conference with Martin Daum and Jochen Goetz. You have probably all joined our presentation prior to this Q&A session. Just a quick reminder, all materials in the presentation, the fact book as well as the annual report are available on the Daimler Truck Investor Relations website. Later today, you also will find our more detailed roadshow presentation on that side.

Now before we start, the operator will explain the procedure.

Welcome to the Daimler Trucks Global Conference Call. At our customers’ request, this conference will be recorded. The replay of the conference will also be available as an on-demand webcast in the Investor Relations section of the Daimler Truck website. I would like to remind you that this teleconference is covered by the safe harbor wording you’ll find in our published results documents. Please note our presentations contain forward-looking statements that reflect management’s current views with respect to future events.

Such statements are subject to many risks and uncertainties. If the assumptions underlying any of these statements prove incorrect, then actual results may be materially different from those expressed or implied by such statements. Forward-looking statements speak only to the date on which they are made. [Operator Instructions] One important thing, please mute the webcast while you’re asking your question. Now I’ll turn over to Christian Herrmann. Thank you very much.

Thank you very much for that explanation. Ladies and gentlemen, you may ask your questions now. Please introduce yourself with your name and the name of the organization that you’re representing. As always, please ask your questions in English. [Operator Instructions] So we get started with the first questioner, that is Michael Jacks from Bank of America.

Martin, Jochen and team, congratulations on a very strong first year. My first question is with regards to the cost reduction. It’s commendable, I think, that you’re sticking to these targets. In light of higher-than-expected cost inflation, where do you expect the additional cost-cutting measures to come from? And maybe just as an aside to that, I think at the time of listing, you had possibly alluded to the possibility that the cost reduction targets could have been met at Mercedes-Benz earlier than 2025, is this now definitively going to happen only in 2025? And then my second question is with regards to used trucks. How significantly did the used-truck business contribute to profit in 2022? And do you expect recent declines seen in used-truck prices to have a negative impact this year?

Thank you, Michael. I think Jochen for you.

Yes. I’ll take both questions. Thanks. So first off, the cost reduction. Well, I’ll answer first to the second part of your question. From today’s perspective, we see it as a cost target achievement on the Mercedes-Benz segment, especially in 2025. And from a cost measure perspective, we will continue, as we said, all the time. On the one hand, we will further reduce from an active portfolio management, our portfolio in a way where the biggest profit pools in the future. So that’s one element. The second element, we are -- and I mentioned that in my speech, we are updating our overall IT landscape.

That’s also the reason why we had higher costs in 2022. We called it even a conscious decision to invest in a better state-of-the-art technology towards 2025. That’s the second big lever. And then they are the third one, we still will continue to optimize our running costs as well. Second question regarding the new trucks -- used trucks.

Yes, the used trucks. Well, we are very pleased with the used-truck business in the U.S. and in North America is still high demand, still very good pricing. From an overall perspective, it’s a triple-digit million on contribution, but a low triple digit. So it plays a role, but compared to aftermarket or to new truck, a rather lower role. And from an expectation, how it will continue, as long as we see the strong demand and the limitations on supply, we expect used truck prices to be stable in 2023.

So the next question goes to Jose Asumendi from JPMorgan.

It’s Jose from JPMorgan. A couple of questions, please. Can you comment a little bit, we’re seeing your revenue guidance a little bit the moving parts between volume and price and mix, probably volume and price, how do you see that for ‘23? And then second, coming back to the cost savings, can you elaborate a little bit more what is -- how is the progress in terms of the medium-duty engine outsourcing contract with Cummins? And also, can you comment on your latest collaboration with Deutz? How is this different from Cummins and how does it contribute to fixed cost reduction in the next 12 to 18 months?

Thanks, Jose. First one for Jochen, and then Martin on the collaborations.

Yes. If you look at 2023, you see -- if you look on the volume guidance, Jose, our guidance is 510,000 to 530,000. So it’s in the range of 2022. So volume itself is not a driver for the profitability. We will further continue to optimize our mix. We allocated restricted parts to the regions where we have the highest contribution. That will be a lever still. And the second big lever is pricing. We implemented a lot of price measures in the second half -- in second quarter. Last year had a positive impact in the second half, and now we see the full year impact, but we also further optimize pricing in addition to that in 2023.

And Jose, the Cummins-Deutz question is a pretty easy one to answer. First of all, when we announced and decided to go with Cummins means we stopped all future development in our medium-duty engine and shift, rather sooner than later, over to Cummins engine when it comes on the medium-duty side. In Europe, that depends on the after -- on the regulations. So Euro 6 engines still will be continued, our own medium-duty engines. Euro 7, definitely, we are not -- we are not going to invest anything and we reduced all capacities in this area. But we use the Cummins engines. Deutz was interested in the assets. So we sold the assets associated with our medium-duty engine and the IP rights to Deutz and get an attractive price for that. So that helps, and we can still deliver some crucial parts from existing machinery to Deutz in the future, that will give us some small but interesting revenue. Secondly, with Deutz, we started to cooperate on the heavy-duty side, where they will take our heavy-duty engines and apply them to their off-highway portfolio, which is a very interesting and great customer for us in the future.

So you’ve got -- as a little follow-up, you’ve got incremental benefits from -- on the heavy-duty engines on economies of scale with Deutz? And then you have -- we’re going to see a fixed cost reduction on the medium-duty side, which we haven’t seen get into, and this will be seen in ‘23. This sounds quite substantial. Is there a way to quantify it? It sounds like a very substantial asset -- actions you’re taking on the fixed cost base?

I would say the quantification, it’s -- I would say, it’s a middle 8-digit figure, I would say.

Thank you, Jose. So the next question goes to Goldman Sachs.

You’ve got Nancy from Goldman Sachs. I’ve got 2. The first one, I’d just like to dig in a bit more into your comment on pricing. I’m wondering sort of how much of 2023 pricing is carryover from ‘22 versus new pricing? And in particular, do you think it’s going to be easy to increase pricing again? Or would you have to kind of give back more to suppliers as well given the kind of supplier pressure in 4Q?

I think Jochen, that one is for you.

Yes. So as I said, a big portion comes from price from the full year impact of the price increases in 2022. But if you look in the year 2023, we see, especially from an energy and from an inflationary perspective, additional cost pressure in the year. And like we did last year, we compensate pricing -- with pricing on this inflationary cost increase. Is it easy to increase pricing?

Well, that was never easy and will never be easy because customers want to have low prices. But I think it’s well understood that there is a change in the overall environment. And with this high inflationary environment, it’s also accepted by the customers that there is additional pricing. And obviously, we still have the situation, we talked about it earlier, the demand is higher than supply, which supports pricing obviously as well.

Okay. Great. And then just my second question is sort of the new kind of European emissions regulation proposals, I just wanted to hear your view on sort of what you think the impact on that might be, in particular, on sort of R&D and CapEx. And also, given that it sort of allows for hydrogen combustion engine, sort of views on the TCO of this versus other zero-emission vehicles.

Daniela, [ph] the European Emission Regulation have, for me, 2 legs. The one is the CO2 emission, which we fully support and which is all included in our going-forward strategy. And you’re right, it was a good movement by the EU to include hydrogen combustion as a zero-emission vehicle, which is very important, and we need a little bit more assurance that they will stick to that assessment for a long period of time. So it could be a very interesting addition to the portfolio of our 2 electric vehicles, fuel cell and battery powered. And then on the hydrogen side, with a lot of energy -- synergies when it comes to tank systems and so on.

So I think this is exciting news for us and complements our strategy going forward. And then the other legislation in Europe is a legislation about NOx, what’s called Euro 7. This is an absolutely crazy proposal, which where we want to bring in some sanity, We, as an industry, and I speak here not just for Daimler Trucks but for everyone else in the industry, we want to reduce the NOx level, but there is tendencies to have side regulations on the side when it comes to testing for longevity, for guarantee for an enormous amount of time for test procedures, which absolutely has nothing to do with reality and which will put a huge burden on all industry players going forward. But I’m pretty positive that this law will come -- will make sense when it later comes out in the market, which can take some more time.

Thank you. So next in line is Nicolai from Deutsche Bank.

Yes. Nick Kempf here from Deutsche Bank. And I appreciate your clear comments on the truck performance, also 2 questions. First one is a bit of demand. So one of your competitors stated this week on the conference call that they are basically sold out for the entire fleet for the entire year.

So can you give some color until when you have sold out? And the second question, for Jochen, it’s more about the working capital and cash flow, you had a pretty high working capital headwind this year of around €800 million. Is part of your new free cash flow guidance also on working capital swing back this year?

So Nicolai, I take the -- I’ll take the sold-out question. It always has to do how you structure the opening of your order book. As Jochen said in his speech, we have it at the end, haven’t opened the order book in Europe for the fourth quarter, which we did. In North America, we developed a very sophisticated system where our esteemed long-term customers and dealers know that we take reserve slots for them. Why, because we wanted to avoid that Stampede, where you get then in October -- September, October, November, the prior year, you get ten thousands, hundred thousands of orders.

I remember 2021 when we had suddenly, in 2 weeks, more than 40,000 orders. That is unhealthy because that is just a stampede to reserve a slot and then you think twice before you take it ultimately. We want a solid order book. But everyone organized it, it’s different. So I would say, yes, we are sold out as well because every slot we open up to the free market is taken.

Every extra we get, because we have a better supply and get short term, a couple of trucks more, are immediately taken either by push forward or by additional customer volumes. So I would second that for Daimler Trucks as well, we are at the moment, sold out for 2022 for all the slots we want to be sold. And the others, we open up will get the orders in.

And then Nicolai, on your working capital and on the cash flow question, well, it’s right that we had an increase in working capital year-over-year in 2022. That’s mainly related, as I said, in inventories. So I think there are basically 2 elements what happened in 2022. The one was an overall higher volume. And then with the pipeline effect, we have normally slightly higher inventories. But the second big effect was the permanent interruption on the supply chain. And with that, it’s difficult to plan, not only on our side, but also if you think about body builders, if they don’t know exactly when the truck is coming, they cannot build their production pipeline. So that was a problem in 2022. Now what does it mean for 2023? From a volume guidance, you have seen we are rather flattish, so that should not be an impact.

And then on the supply chain, as we said, we do not expect that the problems on the supply chain are all solved in 2023. So we still expect that there will be an impact on working capital. No additional one because this one, obviously, was already in 2022. So that’s the supply chain. On the other hand, we want to optimize our working capital management and have some structural measures in place to improve that towards the year-end 2023. That’s the way you could think about it.

So next caller is Klas from Citi.

Martin and Jochen, Klas from Citi. So my first question is on the margin in Mercedes-Benz. It looks like you’re taking a pretty big hit from supplier compensation on the energy side, but your guidance for 2023 is encouraging, 100 bps operational improvement, adjusting for the positive one-offs on slightly declining sales. What I’m trying to understand is the moving parts there. So first, what was the impact on the margin from the supplier compensation? And then secondly, looking through 2023, you keep the fixed cost reduction, where you’re pushing out the ambition to 2025. Your unit volumes are down 4%, 100 bps improvement to the margin, with Brazil getting weaker from here, sounds a little bit ambitious. So I’m just trying to understand if this is a big price carryover that you will get from last year that is carrying this.

Yes. I can take that. If you look on the fourth quarter, they were basically on Mercedes. There were basically 3 major topics to mention. A, we had higher-than-expected onetime payments. It was a triple-digit amount. We had the agreed onetime payment here in Germany for the employees, 1,500, which was not known at the end of Q3. That was the third one. And then to be very honest, we have not, at least time-wise, achieved our fixed cost MSAs. So these were the 3 big levers.

Regarding the guidance going forward, you’re absolutely right. If you deduct the onetime effects in 2022, we see positive development year-over-year. What are the main drivers? From a volume perspective, it’s flattish, but it will be a different structure. We had in 2022 a prebuy effect in Brazil.

2023 will be the year after the implementation of Euro 6, and by nature, a lower market volume, but we see strong demand in Europe and also in the Middle East, so there will be a positive mix effect. That’s one lever. The second lever is pricing. As I mentioned earlier, the price implementation in Mercedes started basically in Q2 2022, now we see the full year impact. But we also continuously working on our self-help measures, that means looking on active portfolio management, looking on further improvement on the after sales, including our own retail strategy.

And last but not least, we have even more focus on fixed cost development in 2023 to catch up what we lost in 2022. These are the elements.

Very quick second one for you, Martin. On the market shares in North America, your guide is 7% growth in unit sales against the flattish market. How much is this Western Star taking share on the vocational side relative to over-the-road long haul? I’m just trying to understand better the dynamics why, obviously, Freightliner and Western Star looks to be growing faster than the market.

Klas, you hit the nail on the head, the new Western Star series has a phenomenal market success with high rave customer praises and an especially strong order intake in the last months. So you are right. it comes out of that area. That truck is really rocking its segment, and it proves all our high hopes, but that’s through the customer and the appreciation of the product. It do early holds.

Next one in our line is Miguel from BNP.

A follow-up to the 5% margin at Mercedes in Q4. You mentioned the one-off payments to suppliers. Can I just confirm that it’s with one triple-digit figure, so if it wasn’t for that, your EBIT would be around the €400 million. And is this really a one-off or more like a normal consequence of cost inflation and -- that will probably recur in 2023, and then you’ll have to offset that with pricing? That’s my first question.

Yes, I can answer that right away. So if you look on more in detail what were the onetime payments, I think we have to differentiate. Our strategy was negotiating very long also with our raw material suppliers, because we saw a tendency that raw materials are going down. It’s a little bit shaky at the moment, it’s going up and down. But it was the strategy, so we closed a lot of contracts also in Q4.

So a portion of that is related to Q4, but some of the cost increases basically could also put into the Q3 last year. So that’s the one thing. Another one was -- and that’s -- part of that is base effect, which will also be an effect in 2023. And you’re absolutely right, that’s the reason why we added another price increase on the Mercedes side. But there were also some one-off payments in Q4, and it was roughly the half of it. They are just one-offs and there is no impact in the base material prices, and we have that no impact into the year 2023.

And then in terms of your capital allocation strategy, you ended up with €7.5 billion of net cash next year, free cash flow is guided for at least €2 billion plus dividend payments of around €1.1 billion. So net cash will actually increase further next year. Can I ask why did you have reservations about launching a buyback now? And also maybe give us a sense how much cash do you need to run the business going forward?

Yes. Miguel, that’s a good reason to come to our Capital Market Day in July. The first thing is we pay an attractive dividend this year. We want to continue to be an attractive dividend payer. Certainly, any buyback ideas needs to be vented by us with our long-term strategy when it comes to battery, fuel cells, autonomous. But I would say -- and you have it, if the year developed strongly in the future years as well as we anticipate, then there is enough money for everyone included. And we’ll give you a good long-term outlook in July. Stay tuned.

Thank you, Miguel. Then we have a question from Anthony Dick from ODDO.

Yes, so most of my questions have been answered, but maybe a few quick ones. First one, over the past couple of weeks, we saw a few announcements of a truck recall in North America over braking and steering issues. I was just wondering if these had all been booked in full year 2022? Or if there were more to expect and in what magnitude? And the second question on the recent bus restructuring that was announced, could you provide a bit more color in terms of what kind of cost savings this could generate and from when?

Yes, I think both for you, Martin.

I would say the majority part was booked in 2022 and the smaller portion of the recall will spill over in 2023, but of no material impact and not affecting our guidance we have given. On the bus side, the bus target is 7.5% and we have the feeling that we can do even better. And with the restructuring, this will bring us in this direction. And you can easily multiply the revenues with 8%. And then I would say half will come out the recovery of the markets -- and it’s very rough now from my side, half the come out of the markets and the product and the other half will come out of better cost situation. And that certainly is a very, very important step to get that better cost situation done.

And next, we have a question from Stephen Reitman from Societe Generale.

Congratulations on your results. I had a question about the zero emissions and your electric trucks. I was wondering, first of all, if you’re aware if there have been any changes in the laws of physics between California and Europe or Germany since the recent launches of the semi? And secondly, if you could maybe comment on how you see demand for battery electric trucks developing and what direction has been to your vehicles?

I think, Martin.

Yes. Stephen, I like how you phrase it. No, there is no change in our physics between California and Germany. They are all the same. And when we saw the product -- and then it’s very difficult to comment on a competitor product that you haven’t driven yet, but we are -- everything we’ve seen, we are not afraid at all.

The Cascadia that we launched already and which is in customers’ hands provide nearly similar results under same conditions. And so I would say the law of physics apply to all market participants. It rather confirmed our strategy that it irritates our strategy. Battery electric truck can serve the purpose. They are really fun to drive.

That is absolutely something we have said since the last 4 years. But fun is not the reason why someone orders a truck, it is about cost parity, it is about payload, it is about reliability. And that’s a stronghold that we are focusing on. Our electric trucks have to be a superior reliability. They have to deliver the customer the payload, it needs. And on the cost parity as I said, the price of energy is a very important factor on that. And here, we -- still society has to be work on.

Thank you, Stephen. And then we have a question from Himanshu from Jefferies.

Himanshu from Jefferies. So the first one is on the supply chain constraints. One of your North American peers said that supply constraints are largely behind them now, but you continue to face them. Could you help us understand why such a difference? And then secondly, you talked about new price increases in Mercedes-Benz.

When are they going to be applied? And how should we think about the P&L impact? Is it going to be Q2, Q3? And then lastly, a quick confirmation. Can you just tell us if there are any one-offs baked into the 2023 guidance?

Yes, Jochen, I think both for you.

Okay. On the supplies chain, well, as we said, it’s right that when we talk about semiconductor, it’s easing. However, if you look on the overall volume, what basically happened is that the pipeline for a lot of suppliers was wrapped over the last 2 years. And now to refill the pipeline, it’s necessary, and as long as we don’t have the stable pipeline, it will always come to interruptions on the supply chain. That’s what we see right now. But that’s also what we expect to continue in the course of the year, especially in the United States, and that’s the reason why we are a little bit more cautious here on the volume side because we have seen the development over the last 2 years. And we also are a bit cautious because there are so many different parts are unconstrained still. About pricing, pricing -- well, for obvious reasons, we will not announce any pricing measures concrete we are doing in this year, but you can be assured that we are looking very careful on the cost development and pricing. The additional pricing, by nature, will be more on the second half in the year because of the high order backlog we have in all regions and also in Europe, so it will be Q3 and then mainly Q4, where we see an additional price increase. But again, keep in mind, from a pricing level, you rather have to think about the second half of 2022 is the first half of 2023.

And then on the Mercedes business, as the way I understand the question, any big one-offs like we had last year from today’s perspective, we don’t see any big one-offs. It seems to be a clean underlying performance we guide.

Thank you. I think that was the last question. So ladies and gentlemen, that’s the end of our Q&A session. Thank you, Martin and Jochen, for answering the questions, taking the time, and thank you for all on the call for being with us today. As always, from an IR perspective, we are at your disposal afterwards. For the ones who want to follow the media Q&A, this will start at 11:00. To all of you, once again, have a great day. Take care, and thank you. We look forward to talking to you soon.