Daimler Truck Hldg Ag

Good morning, ladies and gentlemen. This is Christian Herrmann speaking. On behalf of Daimler Truck, I'd like to welcome you on both telephone and the internet to our Q1 results global conference call. We are very happy to have you with us today and have Jochen Götz, our CFO, here to present our Q1 result. Jochen will begin with an introduction directly followed by a Q&A session. The respective presentation can be found on the Daimler Truck IR website. On our request, this conference will be recorded. The replay of the conference call will also be available as an on-demand audio webcast in the investor relations section of the Daimler Truck website. I would like to remind you that this telephone conference is governed by the safe harbor wording you will find in our published result 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. And with this, I would like to hand over to Johann.

Thanks, Christian. Good morning, ladies and gentlemen, and also a warm welcome from my side to our results call for the first quarter of 2023. You have already received the key financials for the first quarter with the pre-release two weeks ago. It was a strong and clean first quarter of 2023 without any material special effects. Results were supported by strong pricing, strong demand resulting in significantly higher sales volume and a strong after-sales performance. I'm happy with the start of the year and remain very confident for the remainder of the year. To all our employees at Daimler Truck around the globe, a big thank you for your relentless dedication and successful work. We started 2023 very well and can be proud of our achievements in the first three months. Now, let me first give you a short overview about the key highlights in the first quarter of 2023. Let's take a quick look at the key financials of the first quarter. Adjusted EBIT for the Coup came in at €1.2 billion, leading to an adjusted return on sales of the industrial business of 8.8%. Coup EBIT amounted to €1.1 billion. €168 million of free cash flow were generated in industrial business, leading to a stable level of net industrial liquidity compared to the end of last year of €7.5 billion. Earnings per share of 90 euro cents. The key highlights of the first quarter can be summarized as follows. Demand for trucks in every of our industrial segments remained on a very strong level as the pent-up demand in all our key regions continues to be high. This is clearly visible in the demand and sales of our products as well as in our still high order backlog. In our key regions, we are more or less sold out for this year. While the supply chain certainly has improved compared to last year, we still have challenges and we still expect some more periodic supplier shortages affecting production. However, we are converting our increasing unit sales into strong financials. I'm very pleased with the improved pricing and the strong after-sales business as it more than offsets higher material costs. Here we made significant progress versus the past. Let me also point out the latest operational highlights. We set the foundation for further growth of our parts business and decided to build a new global logistics site in northeast Germany. In the U.S., we achieved a big milestone and reached a billion revenue in online retail sales of DTNA parts since its launch in 2020 via our e-commerce platform. a platform accelerator, a comprehensive line of replacement parts, maintenance items, and accessories for medium and heavy-duty commercial trucks and buses. After starting sales for the new Kanta in various markets, Fuso now started the production of the truck at Mitsubishi Fuso's plant in Kawasaki in Japan. For the European markets, production will start soon. Diamond Truck Financial Services also started operations in France in Q1. With this final step, we have completed the initial rollout in 16 countries in record time and have made a good start. In North America, the heavy-duty truck market continues to show strong demand with a year-over-year increase in the first two months of 2023 of 32%. Our market share came in at a strong level of 33.5% during this period. Our on-highway performance continues to be strong, and we are seeing the first positive impact from sales of our new vocational truck. Also, the EU30 heavy-duty truck market showed an increase year-over-year by 26%. Our market share stood at 17.8% in the first two months of 2023. Unit sales at Daimler Trucks increased by 15% compared to the first quarter of last year. All segments contributed to this increase. Trucks North America with unit sales increased by 12%. Mercedes-Benz with 2% where significant higher European sales were partly offset by the expected decrease in Brazil after the implementation of Euro 6. Trucks Asia with a positive development of 34%, and Daimler buses with a significant increase of 55%, mainly coming from Latin America. 125,000 units is consistent with our full-year guidance corridor of 510,000 to 530,000 units, but also mirrors the typical Q1 seasonality. We expect further growth in the remaining quarters. Incoming quarters for Q1 of 2023 decreased by 11%, mainly driven by Mercedes-Benz and Trucks North America. However, we have a very strong backlog and are in principle sold out for this year. The decrease at Mercedes-Benz is driven by Brazil to the slow Euro 6 take-up. In North America, we are seeing decline in incoming orders as we are at the moment only filling the remaining but already allocated slots for the remainder of 2023. The overall incoming order decrease was partly offset by Truxx Asia, especially due to the order increase from Japan and India. And we can again confirm that we still not see any indication of any material cancellations or push-outs. Now, let's look at our progress in CO emissions. In the first quarter of 2023, we sold 287 zero-emission trucks and buses, 76% above prior year. We got orders of more than 700 zero-emission vehicles, 100 units of prior year. We are ready and prepared to produce many more zero-emission vehicles as soon as there is higher market demand and infrastructure is ready. I can therefore only repeat what we at Daimler Truck have been saying for some time. If policymakers want to accelerate sustainable transportation, they need to accelerate the development of charging infrastructure for battery and hydrogen, and we need to see the industry move to TCO parity. That's why, for example, I was at least somewhat happy to see the EU's announcement of the alternative fuel infrastructure regulation in March. It provides a minimum framework for the development of charging and hydrogen refueling stations for all vehicle segments across Europe. More importantly, we very much appreciate the decision of the German government on a CO2-based toll system to be introduced next year. This supports the approach of Daimler Truck regarding cost parity and could become a real game changer. So things are moving, but we need more of these initiatives. We need to gain more momentum. We at Daimler Truck keep rolling our comprehensive zero-emission product portfolio for all user cases of our customer. Now let's take a closer look at the financials for the first quarter to complete the picture you received with pre-released preliminary figures. Revenue on group level increased significantly from 10.6 billion euro in the first quarter of 2022 to 13.2 billion in the recent Q1. Coop EBIT increased by 133% to 1.1 billion euro, while adjusted coop EBIT rose by 78% to 1.2 billion euro. Q1 was a clean quarter, as we had only minor adjusted items from restructuring and M&A, with in the latter mainly follow-ups connected to the spinoff. Free cash flow for the industrial business reflects the typical seasonality with inventory build-up at the beginning of the year, but it is significantly above prior year and came in at €168 million. Net industrial liquidity in the first quarter stood with €7.5 billion at the same level as at the end of 2022. For our industrial segments, revenue increased significantly to €12.6 billion. EBITDA adjusted increased to 1.1 billion in the first quarter, leading to a return on sales adjusted of 8.8%. Trucks North America achieved an EBITDA adjusted of 724 million euro and a return on sales adjusted of 11.6%, despite the underlying seasonality. A more or less flat development compared to last Q4 and a significant improvement versus the first quarter of 2022. Recent Q1 unit sales increased significantly year-over-year, and DTNA continued to compensate rising material costs and inflationary effects in production with strong pricing. The continued strong after-sales business delivered material positive contribution as well. Material and manufacturing costs continued to increase, but overall price-cost mix for the first quarter was clearly positive, allowing us to catch up what we missed last year. Overall, Q1 showed again a very strong quarterly performance at Trucks North America, sitting as indicated within our 2023 target corridor of return on sales adjusted of 10% to 12%. We expect this to continue in the upper half of the guidance corridor in Q2. Mercedes-Benz came in with an EBIT adjusted to €440 million, with a loss adjusted of 8.8%. After a very challenging Q4 in 2022, also driven by non-recurring effects, the recent Q1 saw a significant improvement quarter over quarter as well as year over year. Compared to the first quarter of 2022 on the headwind side, material costs remained at a high level. Same holds true for inflationary cost pressure. Our Brazilian business recorded a weak quarter in terms of profitability as expected and did not contribute to the overall results. Regarding tailwinds, the major positive effect came from a strong realization of pricing measures, especially in Europe, to balance higher material costs. After sales continues to generate strong results. And to a small extent, tailwinds from a strong used truck business baked by strong market demand. All in all, Q1 shows that Mercedes-Benz is improving its clear EBIT performance, and we make significant progress. We expect further improvements in Q2. Truck Asia came in with a return on sales adjusted to 4.6% on the back of an EBIT adjust of €114 million. Year over year, positive contributors to the EBITs were significant price increases, mainly from India and international markets, positive sales growth, especially in Indonesia, Japan, and India, as well as a strong after-sales contribution in both Japan and international markets. Headwinds resulted from material costs and constraint costs, especially in Japan. Our Chinese joint venture, BFDA, contributed negatively with a contribution of minus 15 million euros. The Q1 results of Truck Asia of 4.6% is sitting within the Ross Adjusted Guidance Corridor of 3 to 5% for the full year 2023. We expect this also to be the case in Q2. Daimler Buses saw a slightly positive result in the first quarter with an EBIT adjusted of 9 million and a Ross adjusted of 1%. Year-over-year, Q1 saw significantly higher unit sales from strong demand in both of our key regions, Europe and Latin America. A significant positive impact came from net pricing. Also, the after-sales business delivered a strong contribution. FX was also a material positive EBIT contributor at the bust side. On the negative side, material inflationary costs continued to burden EBIT performance. Two things to highlight. Latin America made a strong contribution to the financial performance in Q1. In Europe, the coach market and sales respectively continue to recover for the full year, what will impact our results more in the second half of the year. However, the market, especially the coach market, remains on a low level. Following typical seasonality in our bus segment, Q1 should be the weakest quarter in 2023. with the following quarters showing a gradual improvement throughout the year. For the group Q1, EBITDA of 1.2 billion euros showed almost a double performance year over year. As explained for the segments, the major positive effects came from pricing, volume, mix, and after sales. FX, to a huge part from US dollar translation, made a positive contribution of 77 million euros. Industrial performance came in negative with 505 million euro, a big portion of it is coming from material cost increases. Net-net price-cost mix in Q1 was clearly positive. Selling and G&A expenses were higher year-over-year due to inflationary pressure and spin-off-related IT projects. We will continue to work on our fixed-cost situation to counter this development. Financial services achieved a positive EBIT contribution of 5 million euro. Adjustments to group EBIT include 41 million euro negative cost effects mainly related to the spin-off. Q1 EBIT performance of the industrial business was based on positive contributions from all our industrial segments. Trucks North America delivered the strongest contribution with 289 million euro versus Q1 last year. Mercedes-Benz contributed almost 100 million euros of EBIT, while TruckAsia and Daimler Buses delivered each around 50 million euros year-over-year. As a result, EBIT adjusted of the industrial business significantly increased to 1.1 billion euros with a return on sales adjusted of 8.8%. At financial services, new business was significantly up by 53% year-over-year, mainly due to the phase 2 market integration in Europe. Contract volume versus end of 2022 improved slightly and stood at 24.5 billion by the end of Q1. EBIT adjusted increased year-over-year slightly to €52 million in Q1, resulting in a lower return on equity adjusted of 9.2%, mainly due to the ramp-up of our European operations. The main burden to return on equity came from higher selling and GNN expenses due to our additional markets in Europe. Positive effects resulted from higher portfolio volume by those additional markets. In addition, we saw an improved microeconomic and cost of risk saturation compared to first quarter of last year when Russia started the war with Ukraine. And the underlying credit quality of our portfolio remained very strong with low credit losses. Cash generation in the first quarter was mainly affected by a minus 1.1 billion working capital effect that came almost completely from a significant but typical seasonal increase in inventories, mainly in North America and at Mercedes-Benz. Depreciation and amortization of 277 million euros were lower than net investments in PP&E and intangible assets of minus 370 million euros. Provision and others mainly came in from changes to ongoing provisions. With that, we end up at a cash flow before interest and tax of the industrial business of 178 million euro for the first quarter. Cash taxes amounted to minus 87 million euro, which leads to free cash flow of the industrial business without adjustment for M&A transaction and restructuring measures of 168 million euro. Adjusted free cash flow of the industrial business stood at €355 million, an increase of more than 70% versus the first quarter of 2022. As a result, industrial net liquidity remained high at €7.5 billion. Before we go 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 subject to an exceptional degree of uncertainty due to the further development of 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. In addition, the recent turbulences in the U.S. and European banking sector brought additional new uncertainties. On the production side, we assume ongoing and further supply bottlenecks, but no major production downtime. We still expect global market demand for trucks to stay strong for 2023. The market guidance given at our last full year disclosure on March 10 remains unchanged at 280,000 to 320,000 units expected for both our major heavy-duty markets. We see strong demand, but a defining factor for the market size is still the restrained supply chain. We also confirm our full-year guidance for Coop and industrial business for all KPIs. For Coop, we expect full-year 2023 revenue to be in the range of 55 to 57 billion euro. 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 the range of 510 to 530,000 units and revenues in the range of 53 to 55 billion euro. We are confident that we will achieve and return was 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. Overall, no change compared to our last full year result conference in March. Regarding the outlook for 2023 on segment level, we also confirmed the complete guidance given on March 10th. For the second quarter, we expect a positive volume development and consequently ongoing strong performance from all segments. For North American Mercedes-Benz, we have now a more positive view and given the strong start into the year, we see both segments in the upper half of their respective guidance range. On a group level, if the supply chain situation further improves, we currently see more positives than risks for 2023. Let me conclude with the big picture. You know our two strategic ambitions to unlock our profit potential and to lead sustainable transportation. The entire Daimler truck team is dedicated to deliver on these ambitions. And we are making strong progress. 2022, our first year of independence, was already quite a success for our company. The first quarter of 2023 now is a solid start into what we expect to be an even more successful year with even stronger financial results. Regarding the transformation of our industry, we are also well on the way. In sum, we will already have 10 different zero-emission trucks and buses in our portfolio by the end of this year. And more battery and fuel cell vehicles will follow in the years to come, especially for long distances. So we at Dynatrack know exactly what to do going forward. We are very excited about our road ahead, and we're very confident about the rest of this year. Talking about excitement, I'm looking forward to seeing you at our upcoming capital market day on July 11th, which will take place in Boston. With that, I would like to thank you very much, and I'm now very much looking forward to your questions.

Johan, thank you very much. Ladies and gentlemen, you may ask your questions now. The operator will identify the questioner by name, but please also introduce yourself and the organization you are representing. A few practical points. As always, please ask your questions in English, and as a matter of fairness, please limit the amount of questions to a maximum of two. Now, before we start, the operator will explain the detailed procedure.

Thank you very much. Ladies and gentlemen, we will begin the question and answer session. The first question is from the line of Claes Bergelind with Citi.

Thank you. Hi, Jochen, Claes at Citi. So first on the market guide, you're not raising it versus others out there hiking around mid-single-digit. And the reason for the raised guide appears is because of easing supply chains. And you must see the same. We're hearing of significant easing of the supply chain in Europe, but still a tough backdrop in North America. I'm just I'm curious, Jochen, to hear your reasoning here, why you didn't increase the guide. Obviously, it can't be because of the weak demand, given your commentary of demand still being solid during the presentation just now. I'll start there.

Okay, thanks. Yeah, you're absolutely right. We expect 2023 will be another year where demand is significantly higher than supply. We have seen a quite good development in Q1. I think that was also one of the reasons why it could deliver high volumes. But we have also seen towards the end of Q1 that the number of supply problems, including cyber attacks on some of the suppliers, have further increased and will have an impact over the rest of the year. So you are absolutely right. We see from today's perspective still a lot of risks which will have impact on the output we can deliver over the year. But as I said, if the strong development in supply chain would continue for the whole rest of the year, there's upside potential. But it's too early to finally judge on that. Therefore, we kept the guidance on the level like disclosed on March 10th. Okay.

All right. Okay. Now that makes sense. My second one is on Mercedes-Benz. It's obviously a strong start of the year. And I think you say that you expect the margin here at the upper end of the range. Can we talk about how you see price-cost here for Mercedes-Benz for the next couple of quarters? What is the carryover on price, both in the P&L and what we should think of here through the backlog? And then also the moving parts on the cost side. Obviously, supply compensation, material costs should come down versus wages going up. Interested to hear that. And finally, within this, if you could confirm, Jochen, if you had any one-off wage payments in Germany this quarter, Because if you had, I get this to a clean margin of almost 10%, and 9.5% totally adjusted. Thank you.

Yeah, so there were a couple of questions in one question, I would say. No, no, good. Let me start with the pricing. So basically what we have seen in Q1 is the price increases, which we had in the course of last year, came now into full... effect in Q1. So from today's perspective we expect a stable pricing for the remainder of the year. You know we are rather waiting before we open the order book to have the opportunity to include the latest and greatest when it comes to cost increases. And therefore, we have not opened the order book for an example for 2024. So pricing rather stable. On the material costs, we have seen quarter by quarter an increase still in material costs. We expect that to continue in the second quarter. The biggest cost driver as always is still the raw material costs. And for us, it's mainly steel when we talk about the European business. We have seen that the spot prices came down quite a bit, but we have also seen a little bit of uptick now on the steel price. We watch that very carefully and always keep in mind that we have a time delay in the contracts we have with our suppliers. So even if the spot prices go down, it takes some time until it hits then our P&L. So we expect an increase in second quarter and then maybe more of a relief, assuming that the spot prices are staying on the level where they are right now in Q3 and Q4. On the inflationary side, well, we see ongoing inflationary pressures. That's true, and we expect also that this continue in the course of the year. So that will be a burden for the rest of the year. But if you look from an overall price-cost mix, we expect it to be positive also in the quarters to come.

And the... one of payment. Did you have anything of that also in this quarter? I know you had in the fourth quarter there.

No, there was no major one of payment. That was basically booked in the Q4.

Thank you.

The next question is from the line of Miguel Borrega with BNB Paribas. Your question, please.

Hi, good morning, everyone. A few questions. The first one on order intake and demand specifically from North America. So we continue to see freight crates going down, used truck prices also, and credit conditions tightening. How do you square that out with a book to bill in North America below one times in Q1? Do you see customers already cutting capex? And looking a little bit further out, how do you think your orders will perform once you open the books for 2024? I'll start there.

And it's obviously a very important question, and we look on that very carefully also. Look, the problem at the moment with the order intake is if you have a high or a low order intake, it's not that much about demand at the moment. It's more about when do you open the book. So it's also quite difficult if you compare numbers of competitors because you always have to understand when they have opened the book or what part of the book is still closed. What we expect from today's perspective is as soon as we open the order book for 2024, that we still get a good order income. And I give you one reference point. There was a big affair a couple of days back in the United States, which is always a good opportunity for us to talk to the big customers. And two of the major customers, I will not name them right now, but on the top 10, they approached us and said, guys, just that you're aware of. We have a significantly higher demand for 2024 than you could deliver in 2023. Now, so it seems to be what we are saying all the time, that the pent-up demand still continues all of 2023. And from today's perspective, also will have a positive impact on 2024. What you also see is that small customers, the owner-operator and small fleets, they are more affected by cutting capex and have more problem to refinance. But if you look on the structure of our customers, that's not our main customer base. We have more the big fleets and the medium-sized fleets. So it might be an impact, but does not affect us too much.

That's great. Thank you very much. And then secondly, when you do open the books for 2024, how are you thinking about pricing those orders? Do you already expect some declining new prices because you just talked about raw materials down in the second part of the year? And that said, would you also expect some gross margin compression or do you see the current P&L, you know, being favored by the cost spread price cost spread that is still being supported by supply demand imbalance in other words would you expect some normalization in the gross margin when you open the books for 2024 so on on the on the question when do we open the the books well like last year we would rather wait now talking north america for a couple of more months

But in parallel, we have the discussion with the big fleets, like I just named two examples. What do they expect? And you might remember that we changed the process already for 2023 in a way. There is no need to place immediately a big order when you open the order book because for the big fleets, we have basically reserved slots and they can put their order time by time because they know they have some reserved orders. And this discussion takes place at the moment. we just started as I said and as soon as we are done with the with the big feeds we have a much better picture on 2024 but at the moment it's as I said quite positive so therefore we would wait for sure a couple of more months before we fully open the order book for 2024. On the pricing side Well, it very much depends now obviously also on the cost development. If the raw material, as I said earlier, stays on that level, there is a kind of a normalization. From an E&L perspective, I would from now on always see that cost decreases on raw material and price decreases based on the raw material surcharge would go hand in hand and would be neutral. What we have to watch very carefully is still the inflationary effect outside the raw material. That's, by the way, another reason why we wait before we open the order books, because we want to have the latest and greatest on inflation to adjust then prices if necessary. So I would rather see here a sidewards development than a pressure.

Thank you very much.

The next question is from the line of Nancy Nee with Goldman Sachs. Your question, please.

Hi, good morning. Thanks for taking my question. I'd like to follow on from an earlier question sort of regarding the current credit tightening situation. I was hoping maybe you could give some more colour on exactly how much of the equipment that you're currently selling, your financing versus third parties, and also whether you plan to maybe take on more of that risk-related role maybe stuff that you're not yet financing and for some reason it's out of your scope and what that could mean. Thank you.

So if you look from a penetration rate perspective on the financial services side, there was no major change. So I would say at the moment it works pretty well. And I would even say Until a couple of weeks ago, it was rather the other way around. There were a lot of banks who had cheap money. We were competing with them. So there was more pressure, basically, that they take a higher share of the overall cake. I would say with the latest development, especially in the U.S., it has now changed a little bit. But there is still enough... Also, money outside is available, so there's no need that we take higher risk. We will continue on our portfolio looking especially on the customer quality because we don't want to compromise on the risk size, and that works out pretty well so far.

Okay, very clear. Thank you.

The next question is from the line of Jose Asomendi with JP Morgan. Your question, please.

Good morning. A couple of questions, please. Can you talk a little bit more about the performance in Europe? Obviously, you know, strong progress being done there on a quarterly basis. Are there any additional benefits we should expect from restructuring actions in the coming quarters related to workforce or fixed cost reduction actions that you're undertaking in the European business? I would love to learn a little bit more about that. And second, Brazilian market, I know it's very difficult to call it, but are you expecting at some point the market to turn again, maybe third or fourth quarter, or is that too early to expect a comeback?

Thanks. Hi, Jose. I'll start with the latter one. Well, the Brazilian market was pretty weak in Q1, as expected, after the introduction of Euro 6. From today's perspective, I would say also the second quarter will be still very much down. But after the second quarter, maybe even at the end of the second quarter, we expect that we see a kind of normalization. Because at one point of time, also the dealers are running out of stocks for Euro 5 trucks. But overall, that means for the full year, it's a pretty low Brazilian market. And with that, obviously, there is margin pressure in the market as well. That's the way we look at it at the moment. Is it something sustainable that the market is now depressed? We would say no. If you talk to customers, it's more they wait and see at the moment how the overall pricing of Euro 6 plays out. On the cost side, well, we will continue basically our three self-help measures. One is uh increasing the after sales share um in the european market i think that that works pretty well and was a good contributor for q1 and we expect to continue in the in the rest of the year on the fixed cost side we have the measures we have laid out it's not only on the on the workforce It's IT infrastructure. It's prioritization of investments. It's also the active portfolio management where we're continuously looking on where are the areas we want to invest and spend our money in. So that's an ongoing process. As I said, we expect a rather stable development and more to come than in 2024 and 2025. All right.

Jochen, can you speak a little bit more around Ryzen, the new brand you launched in the US? Can you explain a little bit the logic behind it and what are you targeting with this brand?

Yeah, for sure. So Wisen is our new light medium duty truck in the United States and we want to establish that an e-brand only. We see a huge demand, especially in the state of California, but not only there. And with the history of the Fuso brand in the United States, we want to close that chapter and start new. And one of the reasons is also that we have a different distribution network. Here we use Velocity, one of our big dealer groups. to jointly with us distribute that truck in the United States. But again, the demand for e-trucks, especially in that segment in the U.S., is already there, and we see a significant growth potential all over the United States in the years to come. That was the rationale behind it.

Interesting. Thank you very much.

The next question is from the line of Michael Jacks with Bank of America. Your question, please.

Hi, good morning Jochen, Christian. Thanks for taking my questions. The first one is a bit of a follow-up on some of the previous questions on price and mix. You had previously commented that the last truck sold in 22 was around 10% higher than the last one in 21, which implies that there is still further carryover pricing to come. in the following quarters. And also, I believe there were some lagged pricing effects from Trucks Asia where you struggled to recover costs from last year that I would imagine would need to come through into this year as well. So if you could please just comment on that. And then also at the same time, if you could just try to elaborate a bit on mixed impacts, for example, lower volumes in South America and also from more vocational trucks in North America. I'll stop there.

So from a pricing perspective, it's absolutely right if you basically compare For example, the Q2, 2023 with the Q2 in 2022, you're absolutely right. You've seen the full impact of the price increases we launched in 2022. If you compare quarter over quarter, we are now on a level where pricing is rather stable. So from Q1 this year to the expected Q2, it's rather stable. That's true for North America and Europe, but you're absolutely right. Asia had a different situation. And the reason for that was while in Europe and North America we could adjust prices, for trucks which were already in backlog. That was not legally not possible in Japan. So in Japan, we still see a gradual improvement quarter over quarter. And latest in Q4, we have then basically a similar situation like we see that in Europe and North America already in Q1. So there is still a price improvement quarter by quarter for the Asian business. To your second question, Mixed, Well, in the US, we still have the problem that we are somehow sold out. We see very high demand from new customers on the vocational side. um unfortunately we could not all of them serve at the same time because as i said we are still restricted on the supply chain but the truck itself has a good reputation and we were also able to convert some long-term competitor customers already to the new vocational truck so quite positive and as soon as the problems of supply chain are solved we'll have even more volumes on that side But other than that, mix between heavy duty and medium duty, we see rather stable. If you go for Mercedes-Benz, you're absolutely right. We will have lower volumes in South America due to weakness in Brazil, but also Argentina is quite in trouble at the moment. And until the election, we do not expect any major changes there. So given the guidance from an overall volume for Mercedes-Benz, we see a mix more towards Europe, and that means from a margin perspective, rather tailwind than a headwind. And then on Asia... With now more available of chips, we can better serve India, which is an important market for us today and even more important in the future. So there is upside potential in India, and with that, we would have a slightly lighter mix than we have seen the last two years. That's probably the mixed picture for DemoTracks.

Very clear. Thank you. And then if I could just sneak in one last question on the guidance you're already now at the upper boundary of the industrial return on sales guide, uh, well, seven and a half to 9%. I know Q1 is typically not your strongest quarter and you've also alluded to further sequential improvements. Just curious as to the factors that prevented you from raising or at least narrowing, uh, the range for the margin outlook. Thank you.

Yeah, it basically comes back to what I said also in the, in the speech. Um, we saw a very good supply chain in the first quarter and, um, But we see at the end, or we have seen at the end of the Q1 that some of the problems came back. It's not the chips anymore, but as I said, it's cyber attacks as well as a lot of other parts. So we are at that point of time not sure that the supply chain will be stable enough for higher volumes. And if there's uncertainty on supply chain, it's also associated with cost. You have seen and you might remember that we had significant costs in the last years to rearrange trucks back and forth to get all the parts ready. That's basically the block which is ahead of us. If we can avoid this roadblock, there is upside potential.

Thank you, Jochen.

The next question is from the line of Nikolai Kempf with Deutsche Bank. Your question, please.

Yes, good morning, gentlemen. Nikolai Kempf from Deutsche Bank. Also two questions from my side. The first one is on work capitols. Is it fair to assume that government capital will swing back over the course of the year and could be neutral on a full year basis?

Stop here. Yep, that's the right assumption. I think we have always the rationality that in Q1 we build up the working capital here, especially in the European operations. But that's one of the action items for us to really exactly understand what's behind each and every truck and to bring down mainly the inventory to the end of the year. I think we proved quite successfully that we're capable to do that

latest in q4 but the target for us is not to have it only q4 so that's an ongoing task for us and overall working capital should be at least neutral okay perfect and my second one is i mean post the first quarter you sit on 7.5 billion of industrial cash and there could be a decent free cash flow to come so my question is what's your plan with all this cash you have on your hands or is this why a topic for the CMD in July?

Yeah, so first of all, and I said it also in the past, for our operational business, we need a net industrial liquidity of 4 to 6 billion, and we will continue to have that save on the bank. So we have a strong cash position, but we also have to think about transformation. but we also think about obviously returning cash to our shareholders. That's an ongoing discussion and as you rightfully said, it will be also a topic in our capital market day in July.

Perfect, thank you. Looking forward to see you.

Nancy, gentlemen, thank you very much for your questions and for being with us today. Thank you very much, Jochen, for answering the questions. And as always, the IR team remains at your disposal to answer any further questions you might have. We are looking forward to staying in touch with you. Have a great day and stay healthy. Thank you and good day. Take care.

Good morning, everyone, and a warm welcome to this conference call on our first quarter results of 2023. My name is Jörg Hove. I would also like to welcome the CFO of Daimler Truck, Jochen Götz. This morning, we published our press release and the Q1 presentation on our website. I assume that most of you have followed today's analyst conference call just prior to this media Q&A. Jochen Goetz will now briefly explain the most important facts and figures for the first quarter and our business outlook. Throughout today's recorded presentation, all participants will be in a listen-only mode. The presentation will be followed by a Q&A session. Let me just mention a few housekeeping notes. This whole course is conducted in English, so please be so kind to ask your questions in English as well. If you would like to ask a question, you may press star followed by one on your touchtone telephone. Please press the star key followed by zero for operator assistance. The operator will explain the procedure for your questions again in a moment. And our conference call is supposed to end at around 10.15 a.m. Now, Jochen, the floor is yours.

Thanks, Jörg, and a warm welcome from my side as well. Well, we reported today our Q1 number, and we can be very proud on what we have achieved in Q1. Markets are still strong, and also demand for our products is still strong. With that, we were capable to deliver products Strong revenue increase, strong sales increase, and most important, we are capable to increase significantly our profitability in Q1. What's also very important, all our industrial segments contributed to this increase. So all the measures we have laid out over the last two years now really bear fruit on a very broad scale. That's quite important. As well, we were able to deliver a positive free cash flow in the first quarter Also a very strong start into the year. And at the end of the year, we have a very strong balance sheet, high net industrial liquidity. So really good start in the year. We're looking also optimistic for the rest of the year. We confirmed all the guidance we have given in our annual press conference of March 10th. And with that, I'm very much looking forward for your questions.

Thank you very much, Jochen. Ladies and gentlemen, we will now begin the Q&A session. I will address the questioners by name, but please be so kind to also introduce yourself and state your media outlet at the beginning if I haven't mentioned it. Take your time for your questions and ask them slowly and clearly. Anyone who wishes to ask a question may press star followed by one at this time. If you wish to remove yourself from the question queue, you may press star followed by two. If you are using a speaker equipment today, please lift the handset before making your selections. One moment for the first question, please. The operator will now explain the exact procedures. Thank you very much.

Thank you. And again, if you wish to ask a question, please press star and one on your telephone keypad. Please press star and two if you wish to withdraw your question. One moment for the first question, please.

So, and we are starting with the first questions. William Wilkes, Bloomberg News. Will, go ahead, please. Will, we can't hear you.

Mr. Wilkes, you're now alive, yes.

Hi, thanks. Good morning, everyone. I just had a question about labor shortages. Obviously, a lot of supply chain disruption is easing and some components, kind of the supply is improving or normalizing. I wondered, are you starting to see an impact from labour shortages and is that slowing production at all? Thank you.

So your supply chain in the first quarter was quite good. And that helped us to increase our production with that sales volume. We expect in the remainder of the year still a lot of challenges in the supply chain. So it's not stable, but it's getting better. On the labor shortage side, Labor shortage was a problem over the last two years and is still a problem, but so far we could manage it, and labor shortage is not a problem of production shortages. It's a constrained source, if you will, but we could manage it, and we expect that to stay the same way. That's true for North America as well as for Europe.

Thank you.

Okay, next one is Ilona Wissenbach from Reuters. Go ahead, Ilona.

Good morning. I have two questions. How worried are you about the decline of order income in Q1? And you mentioned in the analyst call that you're a bit uncertain about the outlook because of cyber attacks towards the end of the quarter. on some suppliers. Can you please shed some light about this new risk factor? How many or what kind of suppliers were affected? Does this obviously happen more often than in the past? And how long does it take the companies to get back to normal? Do you have already experiences about that?

Thanks for the question. order intake these days very much depends on when have you opened the order book or are your order books open at all. So if you look on Q1, As I said, we are basically sold out in Europe and North America. If the order book for Q1 next year or for 2024 in total is not open, it's a logical consequence that the orders are rather low. And that will continue until we open the order book for 2024. So it's not a real good indicator anymore. about demand, if demand is high or not that high. I shared earlier already that we are in close contact with customers about potential demand in 2024 and what we have seen now, especially from the U.S. market, that the demand seems to be even stronger in 2024 than it is in 2023. Too early to finally judge, but the first indications are positive. So we watched it carefully, but we are not too worried about the incoming orders in Q1 because we also are sitting on a very strong order backlog. And as I said, we are basically sold out for the full year 2023. On the cyber attacks, more generally speaking, We have seen in the course of 2023 an increasing number of cyber attacks. It seems to be that it's a good business case for the ones who attack companies. I don't want to speculate where the attacks are coming from, but there are obviously some countries who I have interest in. in ramping down production or getting a nice ransom if they basically give back the data. That's the general trend we have seen. There were a couple of them last year. We as a company were not affected by that but some of our suppliers for obvious reasons we do not share the suppliers itself because it always has to happen from the supplier. What I can say, it very much depends how deeply the attackers can get into the system. And if they really steal basically all the data, you have to rebuild that manually, and that could take weeks, in worst case, a couple of months. So it's really depending on how successful the attack was.

Perhaps if I may ask one question as Continental got public with it, was that related to this? to Continental also?

Again, we don't publish any details on specific customer. That's the business on suppliers. That's the business of the supplier. The specific case on Continental, you have to talk with them.

So thank you, Ilana. We have... Plenty of time still. Currently there are no further questions. If you want to ask a question, please press 01 on your telephone keypad. So next one then is, it works, next one is Marco Engelmann, DPA AFX. Marco, go ahead.

Yes, good morning. Thanks for squeezing me in. Mr. Goetz, as I understand, you said in the analyst call, there are no further price increases this year and the price increases from the past year are playing out right now. And you said if there are decreasing raw material costs, there's a certain lag to arrive at your P&L. How big is this lag and do you see any material relief in cost pressure already from that side?

Yeah, so first of all, from the pricing, you're right. I said the majority of the price increase is basically the full year impact of the increases we said last year. We watched it very carefully. I mean, in this case, the cost development and always have the opportunity to adjust prices if needed. That's a change in the behavior which we started already last year. From a cost perspective, we still have seen increased raw material prices in Q1. We expect it to continue in Q2. And then it very much depends on how the spot prices on the major raw materials, especially steel, will develop. From today's perspective, there's the potential to get some relief in the second half of the year. On the inflationary side, in general, as we all recognize every day, there's still a lot of inflationary pressure on cost side outside of raw material. We expect from today's perspective that it will continue in the course of the year. So there is additional cost pressure on that one, and therefore it might be necessary also to adjust prices. Overall, we expect that in the quarters to come, price and cost go line in line, which means from a profitability perspective, we are going more sideways when it comes to price and cost mix.

Thanks. Okay, next one is Alexander Jungert from Mannheimer Morgan. Go ahead, please.

Yes, hi, and good morning to everyone. I have one short question regarding the restructuring in Mannheim at the bus side. What is the current status and what is the further schedule to move the production of the shelves? Thank you.

Well, we continued in the course of the quarter the negotiation with the workers' council. As we have published, we finalized also the negotiation and are now in agreement. And then we'll basically execute the plan to relocate towards Czech Republic piece by piece over the next couple of years. So basically we could confirm what we said at the beginning of the year. There are no changes compared to that. Thank you.

Okay. I have no one in the line for questions anymore. Are there any questions still? then we can shut down here, cancel. But by any means, of course, the PR team of Diamond Shark AG is at your disposal at any time today or tomorrow if you want to. Thank you very much for taking part in this small conference call. And I wish you all a good day. Until next time, thank you very much.