DTGHF - Daimler Truck Holding AG (DTRUY) Martin Daum on Q2 2022 Results - Earnings Call Transcript
Daimler Truck Holding AG (DTRUY)
Q2 2022 Earnings Conference Call
August 11 2022 2:00 AM ET
Company Participants
Martin Daum - Chief Executive Officer
Jochen Goetz - Chief Financial Officer
Christian Herrmann - Head of Investor Relations and M&A
Conference Call Participants
Nicolai Kempf - Deutsche Bank
Klas Bergelind - Citi
Tom Narayan - RBC Capital
Daniela Costa - Goldman Sachs
Miguel Borrega - BNP Paribas Exane
Michael Jacks - Bank of America
Jose Asumendi - JP Morgan
Himanshu Agarwal - Jefferies
Stephen Reitman - Societe Generale
Michael Punzet - DZ Bank
Presentation
Christian Herrmann
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 Q2 Results Global Conference Call. We are very happy to have with us today Martin Daum, our CEO; and Jochen Goetz, our CFO. Martin and 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 results documents. Please note, our presentation contains 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 were 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.
Now with this, I would like to hand over to Martin.
Martin Daum
Yeah, thanks you, Christian. Good morning, ladies and gentlemen, and a warm welcome from me as well. Thank you all for joining us for the results call for the second quarter in 2022. Before Jochen Goetz will provide the details of our financial results, I first want to give you an overview of the key topics in our second quarter.
Let me start with the obvious. We all observe every day that our environment remains quite volatile and at Daimler Truck, we of course monitor the various geopolitical developments very closely. As for the war in Ukraine, we informed you about our measures and their impact on our business in our annual results call in March. For now, there's nothing to add to that. We see no additional impact.
Regarding the discussion about potential shortages of natural gas, we of course monitor developments here closed as well. As of now, we expect increasing cost but no impact on production. In important markets like Europe and the US, demand remains strong and our group order backlog remains on a high level.
Today, the limiting factor of our business still is not demand. The limiting factor is supply and our ability to produce and deliver. In Q2, we could not deliver as many vehicles as we could have delivered without bottlenecks. Yet, I'm happy to report that we increased our unit sales despite these headwinds, and please consider that Q2 2021 was the quarter without major supply constraints.
Furthermore, we increased net pricing offsetting inflationary cost increases. This obviously positively contributed in our bottom line. An additional contributor was the continued strong performance of our aftersales business.
Another key topic relates to Daimler Buses. Here we took an important step to improve our competitiveness. We announced that we would reduce our production cost in Germany by €100 million annually. To that end, we for example, intend to move our body shop for buses to the Czech Republic.
Regarding zero emission, we further accelerated our transfer transformation by unveiling our all electric Freightliner eCascadia in the US. Our eCascadia will enter serious production in 2022. And we're already got the first major order of 800 units. Moreover, as part of our battery strategy, we acquired a stake of around 10% in the German high-tech machine manufacturer Manz AG. The aim of this partnership is to develop innovative battery technology and production processes that meet the very specific requirements of trucks and buses.
That said, let us now look at our business results in the past quarter. On a group level, we achieved a strong financial result in the second quarter with an adjusted EBIT of more than €1 billion and a corresponding adjusted return on sales of the Industrial Business of 8%. We are satisfied with operational performance.
Within the 10.5% adjusted loss at Mercedes Benz, we had two extraordinary special effects included in Q2. The earnings impact of the license for the localization of the Actros in China, and a positive valuation result from increased interest rates. But even without these effects, this is exactly where Mercedes-Benz was planned to be based on our turnaround plan.
As for our other key figures, group EBIT amounted to €1.1 billion and earnings per share to €1.12. Free cash flow of the Industrial Business was a negative minus €756 million. It was adversely impacted by three main items: first, significant higher inventory; second, €250 million contribution to the Pension Fund, which we communicated as part of the spin-off; third, significant cash taxes paid in the second quarter. This leads to a decrease in net industrial liquidity from €6.1 billion in Q1 to now €5.5 billion.
All-in-all, in Q2 of 2022, we again faced a challenging business environment. But despite these challenges, we made good underlying progress even without the recorded positive special items. I'm satisfied with those results as we are exactly on track to achieve our expectations for the full year with a significant improvement compared to last year. And we are fully in line with our 2022 full year guidance of 7% to 9% of our Industrial Business.
At this point, a big ‘Thank You’ to our Daimler Truck employees, world-wide. Thank you for your dedication, your hard work and accomplishments in these exceptionally challenging times. I'm very proud to be part of this great team.
Now let's take a quick look at the key market developments in Q2. In North America, demand in the heavy-duty segment continues to be very robust. During the first half of the year, our market share remained strong at over 40% with the continued upward sales trend in the market that is now 1% up year-over-year. And please be aware that the complete ramp up of our new vocational Western Star Truck offers further potential going forward.
In the EU region, market volume for heavy trucks moved sideways in the second quarter as well as in the first half year compared to 2021. Our market share developed stable quarter-over-quarter at 19.3% for the period, January until May. As in the first quarter this year, supply remains the limiting factor in North America and Europe. Without the supply chain constraints that persists throughout the entire trucking industry, market volume would have been noticeably higher, and our sales would have been noticeably higher as well.
Both of our key markets remain strong and our market volume guidance seems to be very appropriate. One exception of the positive market developments is China. There the market volume significantly decreased by 70% year-to-date compared to the same periods in 2021. This is important because it helps to understand the results at Daimler Trucks Asia and the lowered guidance for this segment.
Looking at unit sales and orders. Overall unit sales at Daimler Truck increased by 4% compared to Q2 of 2021. Main contributor here is Trucks Asia. Also we are still relocating semiconductors from Asia to higher margin markets. Keep in mind that the Chinese equity results are included in Trucks Asia, but the unit sales of our Chinese joint venture are not included here. Slight increase in unit sales are coming from Trucks North America and Daimler Buses with a flat sales development at Mercedes-Benz. Demand is very strong, especially in Europe and North America and so far we have not seen any step in cancellation rates in any of our markets.
Order intake is being carefully managed and consequently decreased in Q2 by 14% year-over-year. Our US order book for 2023 has not opened yet. In Europe, we are being restrictive with allocating slots and are only taking orders with very robust pricing plus the option to retroactively adjust pricing, if needed. Our order backlog at the end of the second quarter remained close to record high levels.
Regarding zero emission vehicles, momentum remain strong for Daimler Trucks. In the first half of 2022 we sold 446 battery-electric trucks and buses compared to 128 units in the same period last year. ZEV orders also increased significantly to 1280 units from 308 units the first half last year. And maybe most importantly, we got a lot of great customer feedback for these all electric members of our Daimler Truck family. Our customers of course, appreciate the top-notch zero emission technologies of our Zero Emission Vehicles. But they equally appreciate that our ZEVs come with all the other leading qualities, our trucks and buses have always stood for, great safety, great connectivity and great driver comfort for example.
Going forward, we will further improve our zero emission products and we will continue to further broaden our zero emission portfolio. Our zero emission offerings therefore will become more and more attractive. But as you know, the point in time when our customers will be able to make zero emission vehicles the backbone of their fleets will also depend on the availability of a suitable infrastructure. And it will depend on cost parody, which again is largely determined by regulation and the development of all energy prices.
With that, I would like to hand over to Jochen for a deep dive into our financials.
Jochen Goetz
Thank you, Martin and also a warm welcome from my side. Let me now give you some more details on our earnings performance in the second quarter of 2022. Slightly higher unit sales of total 121,000 units in Q2 2022 paired with stronger pricing, better aftersales and a positive FX effect mainly coming from the US dollar, generated significantly higher revenue for the group. Year-over-year, an increase of 18% to €12.1 billion in the second quarter 2022. Adjusted for positive FX effects, revenue increase were still significant at 11%.
Adjusted EBIT increased by 15% to €1 billion while reported EBIT increased from around €900 million to around €1.1 billion. Besides clear operational improvements like increased unit sales, better net pricing, positive contribution from aftersales as well as favorable FX, the results were positively supported by the two special items. On the other side, significant headwinds came in from the strong inflationary cost pressure, with significant efforts in the markets with fully offset cost headwinds with pricing adjustments.
The mentioned special effects are mainly visible in the Mercedes-Benz segment and results from the recording of around €160 million of license income for the localization of Mercedes-Benz trucks in China as well as a positive contribution from the valuation of the long term liabilities caused by higher interest rates.
Free cash flow of Industrial Business decreased from €500 million in Q2 last year to minus €756 million in this year's Q2. Major impact comes from working capital which is still negative due to higher unfinished vehicles, especially in North America and Asia, as well as finished inventory especially in Europe, driven by the conscious decision to produce based on our customer orders even if semiconductors are missing, or customers are unable to pick up finished trucks because of coincided driver shortage. We also made the €250 million contribution to the pension fund as part of last year’s spin-off agreement.
Next to that, higher cash taxes of more than €200 million further contributed to the year-over-year lower industrial free cash flow amount. For the full year, we confirm our guidance expecting a mid-three-digit positive free cash flow in Q3 and a very strong fiscal free cash flow in Q4 reducing finished and unfinished goods to normal levels. Net industrial liquidity remained strong at €5.5 billion at the end of Q2 2022.
Moving now to the Industrial segment. Year-over-year Industrial revenue increased to €11.7 billion. The positive effects were improved pricing, strong aftersales performance, and positive FX effects. EBIT adjusted increase to €940 million with a corresponding return on sales adjusted of 8%.
Trucks North America achieved an EBIT adjusted of €523 million and an adjusted return on sales of 10.2%. So as stated on our Q1 result call, we are back in double digit territory. In Q2, our classic trade unit sales continued its upward trend, but still, our offline inventory levels remain high due to ongoing supply constraint.
As mentioned before, we believe supplying trucks to our customers as soon as possible, is more important than optimizing a single quarter without impact on the full year. Positive effects came in from the pricing side where in the second quarter, we saw the full realization of the first surcharge that was put in place at the end of 2021 and the minor impact of the second surcharge that we have done in June. The full effect of the second surcharge will then be effective in the upcoming third quarter.
Our aftermarket daily part sales remained very strong year-over-year. On a negative side, we had significant costs increases driven by raw material prices, supply chain constraints, and inflationary effects. All-in-all, at Daimler Trucks North America, we saw as expected, a much stronger second quarter with a better and almost balanced by some costs development.
Full year guidance of Trucks North America is unchanged between 10% and 12%. To achieve that, we expect the remainder of the year, a positive impact from higher volume and a described price realization. With the first half of the year being at 9.3% return on sales, the second half will accordingly be at the high end of the corridor.
Mercedes-Benz realized and adjusted EBIT margin of 10.5% on the back of an adjusted EBIT of €512 million. Important to understand, earlier than originally expected, we recorded a positive non-cash EBIT impact of around €160 million from license income for the localization of Mercedes-Benz Truck in China.
To give you some background on the license income, Daimler Truck entered into a technology license agreement with our joint venture Beijing Foton Daimler Automotive in the context of localization, localizing Mercedes-Benz trucks for the Chinese market produced by the BFDA in China. The license agreement includes the use of defined intellectual property for Mercedes-Benz Trucks Research & Development by the BFDA for the localization of Mercedes-Benz Truck.
DTG transferred the final technical documentation in the second quarter, fulfilling its obligations under the license agreement. Revenue recognition and the positive EBIT effect was triggered by the acceptance of the documentation by the Chinese authorities. To be clear and open, the recording of the income was expected for 2022 and was included in the guidance, but the timing was depending on the final approval by the Chinese authorities.
We received the required approvals in Q2 and therefore could record the positive impact earlier in the year than initially expected. In addition to the license income, increased interest rates have resulted in mid double digit million positive impact because of higher discounting of non-current liabilities. Even without these two items, we are exactly on track to achieve our targets.
Looking at the Q2 EBIT bridge, I want to highlight further positive contribution in the volume structure and a rising bucket from an ongoing strong momentum in new truck business based on high transport activity in almost all markets. High fleet utilization also drove a positive profit contribution from our aftersales activities.
The major positive contribution here come from better pricing which helped us to successfully ease rising material costs as well as ongoing burdens to deal ongoing supply chain constraint. This bucket also includes the impact on the Chinese license agreement. On the negative side headwinds from further increased raw material price and from inflationary costs increases, supply constraints from semiconductors and freight remain bottlenecks for sales development.
In the other bucket, a positive effect from discounting non-current provisions to the higher interest rate was partially offset by the gain we recorded last year from the sale of the Campinas land in Brazil. Full-year guidance of Mercedes-Benz is still expected within the range of 6% to 8%. However, we see this now more on the upper half of the range. For the remainder of the year, we expect a positive impact from price increases. However, this is offset by higher raw material headwinds and a weaker product mix.
As mentioned the Q1 call, Q2 should operationally, that means excluding the two special effects, be the weakest quarter of the year. We expect Q3 and to see step-by-step operation improvements, which will continue in Q4 with better volume and pricing but still significant headwinds from the raw material side.
Trucks Asia could realize an adjusted return on sales of 1.9% significantly below the performance of last year's Q2. Main issue here is the equity results from our Chinese joint venture BFDA which came in below the second quarter of last year and worse than expected earlier this year. This was driven by the market slowdown and especially the economic impact of the COVID-19 related lockdowns in China while last year included significant positive one-time effects.
The strong year-over-year sales growth in Q2 at Truck Asia mainly came from international markets. However, Japan and also India were adversely affected by chip allocation to other regions, what is a conscious decision to prioritize higher margin markets elsewhere in the world. In addition, Truck Asia second quarter Industrial performance had to face further cost headwinds from the raw material side and constrained costs.
As a result positive pricing impacts in India and international markets could not fully cover the negative price and cost development we saw especially in Japan. Moreover, in Japan, we are not able to adjust pricing on the short term due to regulatory rules, these price adjustments will only be visible in 2023. Nonetheless, with 4% to 10%, our customer service business showed some positive momentum, further improving our Service income business.
So for the upcoming Q3, we expect more or less a stable development at Trucks Asia. Volume is expected to be above the first half of the year. And we expect an improvement in our regions outside of China. The difficult situation in China will continue in the second half of the year. Q4 versus Q3 should then see more or less as a flat development. This was the reason why we had to lower our full year guidance for Daimler Trucks Asia. I’ll come back to that in a minute.
Daimler Buses adjusted margin came in at minus 1.2% and this segment remains affected by COVID-19 although sales in Europe and Latin America are increasing due to a strong market demand. And also the coach segment is showing first small signs of recovery. In Q2 we saw positive volume effects in Europe and Latin America as well as positive contribution from our aftersales business.
But Industrial performance was significantly burdened by further increase in material costs mainly driven by raw materials. To counter the material costs inflation to at least some extent, we were able to realize improvements on the pricing side. Industrial performance also included in negative mid double digit million elimination effect where we saw a positive effect in Q2 last year. The elimination effect had no impact of the full year of 2021 as we had a calendar affect in Q4 last year. This year, we equalize the effect over the year.
Now let's have a closer look at the year-over-year EBIT performance of the overall group in the second quarter of 2022. I think one main driver for the good results were volume, mix and pricing, total positive contribution of €915 million year-over-year. Pricing made up two thirds of the total positive development of this bucket. In addition, the Chinese license agreement and our aftersales business contribution here as well. FX was positive with €124 million mainly coming from the US dollar.
Within Industrial performance, Q2 was mainly burdened by a middle triple digit raw material increase, manufacturing costs - constraint costs were still a burden. As you see we are facing higher inflationary cost headwinds in our selling as well as G&A expenses. So achieving our fixed cost target is getting more ambitious. In others, you can see the mentioned negative contribution from our BFDA at equity results, as well as a year-over-year negative impact from the valuation of our shares in [Setra] and the sale of Campinas plant in 2021.
EBIT contribution of Financial Services group performance was flat with a positive effect from higher results of - higher interest resulting in North America and improved cost of risk situation. This leads to an adjusted EBIT of €1 billion. The positive adjustments are preliminary to be seen in connection with the spin-off here above all at Financial Services. EBIT performance of our Industrial Business shows differing segment contributions.
Trucks North America and especially Mercedes-Benz delivered major contributions to the second quarter Industrial Business performance. Trucks North America delivered a strong improvement as expected. In Mercedes-Benz the positive €269 million EBIT increase includes the mentioned positive special effects. However, the second quarter last year also included positive contributions, for example, from the sale of our Brazilian Campinas plant.
Trucks Asia and Daimler Buses had a negative contribution each both still heavily impacted by the high supply chain constraints, correlating higher manufacturing and significantly increased material costs. As I said before, Trucks Asia saw positive contributions last year from the China equity result where now the opposite is the case and we have to digest a negative at equity result.
As you already know, the reconciliation bucket which is part of Industrial Businesses results mainly contains our group participations like cellcentric and Setra, our autonomous activity and elimination. The recon made a negative contribution of minus €87 million to the Q2 Industrial Business process results compared to last year, therefore [total] was at minus €30 million re-evaluation effect. In total, EBIT adjusted of the Industrial Business came in the €0.9 billion with return on sales adjusted of 8%.
Looking at Financial Services, our business is still in the ramp up phase by adding more and more new markets. However, performance has remained ahead of our expectations at the start of the year. In April we went live in five more countries and are now active in 12 out of planned 16 countries. Compared to 2021, year-end portfolio increased by 24% to €21 billion due to improved penetration rates, increased new business volume and the positive FX effect in the United States.
EBIT adjusted increase to €71 million due to improved interest margin and strong portfolio performance in North America offset by a normalization of cost of risk and higher operating expenses in the new markets to ramp up the portfolio, this lead to an adjusted return on equity of 15.1%. In the appendix to this presentation as well in our factsbook you can find detailed walks and further information on the financial performance of each segment.
Due to the ongoing supply chain constraints, cash flow of the Industrial Business is still facing higher offline and new vehicle inventories which amount in Q2 to negative inventory impact of minus €560 million. And total, working capital went up by €1.1 billion in Q2. As in Q1, depreciation and amortization of €271 million, once again exceeded the net investments in PP&E and intangible assets in the second quarter of 2022, underlying our strict CapEx management based on our active portfolio management approach.
This leads to CFBIT of the Industrial Business of minus €60 million and adjusted for restructuring measures and M&A transactions to CFBIT adjusted on Industrial Business of minus €37 million. Cash taxes came in at minus €473 million. Free cash flow of Industrial Business excluding the adjustments for M&A transaction and restructuring measures came in at minus €756 million. This leads to minus €730 million free cash flow adjusted of the Industrial Business. Net industrial liquidity decreased a bit to €5.5 million you're at the end of the second quarter.
Regarding the outlook for the full year 2022, please allow for the following remarks. The following outlook of Daimler Truck is subject to the further development in the war in Ukraine, and its impact on the global economy as well as the development of the very high inflationary pressure and the associated Central Bank increases in interest rates.
The further macroeconomic, geopolitical as well as the COVID-19 pandemic development lead to an exceptional degree of uncertainty. However, we assume decreasing supply bottlenecks compared with the first half of the year and no production downtimes due to the availability of gas in 2022. Based on current information, we currently feel confident to achieve our targets for 2022.
The market guidance for the full year 2022, we gave you back in March at our Annual Result Conference and confirmed at our Q1 Disclosure in May is still valid, for the heavy-duty market in North America, a range of 255,000 units to 295,000 units; for the European heavy-duty truck market at a range of 240,000 units to 280,000 units.
Looking at the overall Daimler Group level, we can also confirm our full year guidance for the Group and Industrial Business for all KPIs. Regarding the 2022 outlook on segment level, we had to make some minor adjustments. But first of all, the full year guidance for the three segments Mercedes-Benz, Trucks North America, and Daimler Bus remains unchanged.
The first change of the guidance relates to Daimler Truck Asia, their adjusted return on sales expectation for the full year 2022 was previously at 3% to 5% and it’s now 1% to 3%. To make it clear, operationally we are fully on track. However, the market expectation for China is even worse than that what we have seen at the Q1 disclosure.
For Daimler Truck Financial Services, we previously anticipated adjusted return on equity of 5% to 7% and are now changing that to an expectation for a higher adjusted return on equity between 9% to 11% for the full year 2022. Main reasons for this change here are lower cost of risk, lesser project related expenses for the portfolio ramp up, and anticipated positive impact from FX.
Moreover, we also increasing our guidance for the new business at Financial Services from €8 billion to €9 billion to now €9 billion to €10 billion for the full year 2022 because of this positive impact from the FX side. Both changes are offsetting each other, and we are not expecting any impact on Group level.
So much from my side on the financial outlook for the full year 2022, and back to Martin.
Martin Daum
Thank you, Jochen. Let me conclude by looking at our strategic priorities for 2022 and beyond. You know our two strategic goals, we want to unlock our profit potential and to lead sustainable transportation. And we want to do so by leveraging our people, our culture, and our ESG strategies. These goals are deeply anchored in our organization, and we will continue to work on them with focus and commitment. I will not go through all the bullets on this slide. Because strategic topics do not change every quarter and therefore you already know them from our past calls.
I just want to point out one update on the right hand side of the slide with respect to accelerating zero emissions. At the Trade Show IIA Transportation that is coming up in September, we will celebrate the premiere of our Mercedes-Benz eActros LongHaul. At Daimler Trucks, we are really proud of this vehicle. After our eActros, our eActros LongHaul will take zero emission transport to the next level and bring it to long distance transport. It will have a range of around 500 kilometers and serious production is planned for 2024.
In sum, I think it is fair to say that Daimler Truck is in full swing. We have clear ambitions and we are consistently executing these ambitions. And we show that quarter-by-quarter, including this past second quarter.
With that, I would like to thank you very much. And we are now looking forward to your questions.
Christian Herrmann
Thank you very much Martin and Jochen. Ladies and gentlemen, you may ask your questions now. [Instructions]. Now before we start, the operator will explain the technical procedure.
Question-and-Answer Session
Operator
[Operator instructions] And the first question is from Nicolai Kempf, Deutsche Bank. Your line is now open.
Nicolai Kempf
Yeah, good morning. Nicolai Kempf speaking from Deutsche Bank, thanks for taking my question. My first one would be on the current lead times. Can you provide some more color here? And is it fair to assume that if production increases in the second half of the year that the order intake should be much stronger in the third and fourth quarter? And my second question would be on the market guidance. Looking at the midpoint both for Europe and South America, the market is already over 50% of this market and also am assuming abundant supplies in the second half, this does look a bit conservative.
Martin Daum
Thank you. The first question is fairly easy to answer. We are sold out especially in Europe and North America 2022. That means there is no room for any more orders for the third and fourth quarter. What you see in orders in those two regions are strictly for 2023. And as I stated in the US, we have - we are not taking any order for 2023. And in Europe we are only taking very selected, very well monitored orders. And we have in have both markets in this very, very strong order backlog and therefore, no concerns at the moment at all. For the overall market, it will still be constrained by the supplies. And it will be more determined at the end of the day, how the supply situation is with us and our competitors. We are confident that it will stay in that range we have stated.
Nicolai Kempf
Perfect, thank you.
Operator
Klas, your line is now open. You can ask your question.
Klas Bergelind
Thank you. Hi, Martin and Jochen, Klas at Citi. First on the cash flow, it's a pretty big improvement that you need to see here into the second half given the negative cash flow in the second quarter. And well you said, yes, that you're pretty confident on supply availability improving quite a bit here. If you could comment, Martin on both the semi side and their supply availability, what gives you the confidence that you will release more inventory and being able to ship more trucks into the second half? Thank you.
Jochen Goetz
Yeah, Klas, good morning. Yeah, cash flow, well, I would say traditionally, and if you look for an example in last year, you see quite similar development on the cash flow in the second half, especially Q4, on our side is normally a very strong quarter really ramped down the overall into inventories and we will ramp it down in a way that it's not ending up in receivables at the end of the year. I think what's really important and I mentioned it in the speech, we still produce every single truck and basically make the conscious decision to allow us higher inventories at that point of time. Because if we stop production today, we don't have slots to fulfill the customer demand in the second half. So we’ve that, we have high stocks, that's absolutely fair. But given the availability of drivers in the second half, the customer demand and the availability of parts, we feel confident that we can reduce the inventories early enough that at the year-end, we also get to cash in and to the semiconductor supply overall. Martin, over to you.
Martin Daum
Yeah, Klas, and this is a very difficult to answer the question. Because on the supply side, anytime you have one problem solved, another pops up. So that is at the moment, a very unpredictable bag and it's a daily battle. When I think our people, in my speech, I meant especially everyone working on supply management and in production. It's really unbelievable. And it's not just semiconductors. It's meanwhile, nearly every part of our industry, even low interest part like plastic coverings. At the moment, we are able to still manage everything, and to keep up our sales pace. And if you look on the monthly sales or look at the sales in the first quarter now compared to the second quarter, you see that uptick and it will continue throughout the remainder of the year.
Klas Bergelind
Yeah, I appreciate it. It's tricky. My second one and final one is on the on Slide 10 and 11 on the bridge on the Industrial Performance, Jochen, €620 million negative on the Industry Performance if you could help us again with how much of that was raw material relative to inefficiencies using air freight and so forth, i.e. excessive cost inflation that will eventually drop out and then on the recon line, the €87 million bridge effect was big, it was similar to the first quarter quite big, I appreciate €30 million of that was for [Setra] but if you could give us some sort of indication into the second half because that recon line is again quite big. Thank you.
Jochen Goetz
Yeah, so let me start with the recon. I think they said already in the first - in the call so the first quarter. So roughly €60 million is the ongoing cost, we have here for our group activities, especially also autonomous. If we deduct the €30 million, which was a kind of a one-time effect in the second quarter, we are basically the same run rate. So that's the number you can also expect for the remainder of the year. And on the walk on the bridge, and if you look on the overall industry performance, the vast majority of that is driven by material costs increase and within material, it's mainly raw material, so that that's the big chunk of the €620 million, all others. If we look on inefficiency, we still have because of the supply constraint on the variable overheads and somehow an issue. That's more or less minor amount meanwhile, so raw material is a big issue.
Martin Daum
Thank you very much.
Operator
Next question is from Tom Narayan, RBC. Your line is now open.
Tom Narayan
Hi, yes, Martin, Jochen. Tom Narayen, RBC. Thanks for taking the questions. So the first one is on Mercedes-Benz Trucks, the Q2 margins if we exclude the one-time benefits, looks like we're maybe down sequentially versus Q1 and I would think that the ongoing cost cutting there would be improving margins. Just maybe could you help us understand what could be happening there? Maybe it's just a seasonality thing. And then the second one is on nat gas. Could you remind us how much gas your specific production uses? I mean in your exposure specifically to Germany for production? Volvo told us a couple of weeks ago, they expected trucks could be protected by authorities, given the need for medical and food transport in a gas rationing situation, is this your understanding as well? Thanks.
Jochen Goetz
So Tom, thanks. Thanks for the question on a Mercedes-Benz. What have you said at the end of Q1 was, we had an operational performance of 6.5% in Q1 if I exclude the one-time effects, and we said we expect in the second half - in the second quarter, the weakest quarter on operational basis. And basically, that's what happened. And the reason for that is we see more of raw material coming in Q2, and the pricing, mainly kicking in, in the second half of the year. So like expected, the second quarter was the weakest one, it's mainly driven by an increase in raw material. And then in the second half of the year, with the price increase, we can balance that out. That's the reason why Q2 is on the lower end of the quarters. And gas, Martin, over to you.
Martin Daum
Yeah, gas is a very difficult question. We monitored very closely, we increased our energy savings efforts. We looked for a lot of alternative powers that we have, higher electricity, more oil, using oil for the heating and what we call pauses heat, we have a couple of production pauses, especially when it comes to paint and hardening of steel, where we need the carbon the see out of the natural gas, not just the energy, which is not able to replace. So yes, there are certain processes, we are dependent on gas. I think that's manageable. My biggest concern would be that it will further deteriorate the supply chain. And I'm more worried then that some crucial suppliers can't supply us stuff because they don't have natural gas. As I said, we monitor it very closely, at the moment we don't plan for any major shutdowns.
Tom Narayan
And regarding the maybe commentary from authorities or maybe the German government specifically, any color there, conversations you might be having?
Martin Daum
I don't want to be - no, I’ll give you the honest answer. I don't expect anything. I would say the moment we have a real gas shortage everyone will be extremely important. And I have no clue because of the very complex supply chains. Yeah, even if the truck manufacturing itself got an exemption, then I might need a glass supplier to get an exemption as well because that company provides us the glass and I see that extremely tricky when it comes to such a situation.
Tom Narayan
Okay, thank you.
Operator
Next question is From Daniela Costa, Goldman Sachs. Your line is now open. The next question is from Daniela Costa Goldman Sachs. Your line is now open. Daniela Costa, your line is now open, you can ask your question.
We move on to the next questioner, it is from Miguel Borrega, BNP Paribas. Your line is now open.
Miguel Borrega
Hi, good morning, everyone. Thanks for taking my question. I've got two. On your order intake, some of your peers have already started to open the books for next year. Can you maybe elaborate, why haven't you? And maybe when you start to open the yearly book for 2023, if you already started in August, I don't know. And then I remember you saying that the recent orders had a surcharge to account for the higher raw materials. You know, steel prices are now coming down, logistics costs are also easing. So would you expect pricing also to ease as you open the books for 2023?
And then my second question on margin performance, are you still expecting to reach the midpoint of the margin guidance between 7% and 9%? And then maybe some color on the main levers to achieve this in the second part of the year. I believe most of your invoice deliveries in Trucks North America already have the price increase, so maybe more volumes coming from Trucks North America and then Mercedes-Benz, I think it's all going to be pricing in the second part of the year. And last year, would you expect further one-offs at the adjusted level? Thank you.
Martin Daum
First about the order, the order intake, look, I can't comment on any of our competitors. It depends on the market, it depends on how you allocate for next year the slots to certain markets to certain customers. We do it our way. And I would say we are in very close contact with our dealers, with our foreign sales organization, and with our big key customers how we do that. I don't know exactly when we will open it, it will happen somewhere between now and the beginning of October. And I know for the United States, especially, the moment we open it we will see a surge like we did, by the way, last year in the third quarter as well.
And I told you already at Mercedes-Benz we are already taking in selected orders not on a broad basis. But that means for selected markets, for selected customers, we do it with clear discussion about pricing. When it comes to pricing itself, it’s - even if now, some of the costs are easing, I have to remind that the price increases you see now are things where we have to play catch-up for the fourth quarter in 2021 and the beginning of the year. You know, if the increases would have continued, we would have to debate another round in the second half of this year. So the easing helps to not even go further. But we definitely will keep our pricing, we have to keep it just to keep - go back to normal margins and have not a depression in margin. Jochen why don’t do the second half?
Jochen Goetz
Yeah, I’ll take the one on the margin. Well, hi Miguel. Well, we confirm the guidance for 7% to 9%, and feel confident within that range. So it's fair to say that we are in the midpoint of that. If you look on second half and go through the segments for a bit as discussed in the US, the second [charge] has a full impact in the second half, so pricing plays a major role. But we all want to reduce the inventory as we said and expecting the ease on the semiconductor and other parts, which does not mean that all the problems will go away because otherwise we would have even more potential. But clear upside on Daimler Trucks.
And after, in the second half, as I said in my speech, on the European side, more and more pricing kicks in as well. We see well material, given the contract structure we have, even if spot prices are more stable now. We still see increases because I said also in the past there is a time delay in our contracts when increased raw material prices hits us in the P&L, that will happen in second half.
But also in Europe, we have opportunities on the on the volume side. And we have also a lot of already finished trucks sitting at the end of June, on our parking lot which we can sell up in the second half, and especially then also in the third quarter. So we’ve very positive Asia, a lot stable on Daimler Bus. Traditionally, we have a good fourth quarter with high volume. So overall, we really feel confident that we can deliver on the 7% to 9%. And it's fair to say as I said, to think about a midpoint on that.
On the one-off, from today's perspective, nothing specific to expect. You might remember that I said, we have more than €210 million or roughly €210 million on the Russian side. So far, it's a little bit more than €170 million. There's one portion missing, depends on our influence, we still have legally on the company. But we expect that will happen at the end of the year, so we then also book from an accounting perspective the remainder of that amount. But it's baked in the in the guidance, so it's nothing new. Other than that, nothing I can think about at the moment.
Miguel Borrega
Thank you very much.
Operator
And the next question is from Michael Jacks, Bank of America. Your line is now open.
Michael Jacks
Hi, good morning. Thanks for taking my questions. My first one is on price realization. Jochen you mentioned that prices contributed about two thirds of the €950 million in the Industrial bridge, which suggests that realisation was running around 6%, if my math is correct. Can you just give us a sense for how much more you expect to come through still in the second half? And then my second question is just going back on the topic of gas shortages. And what is your exposure to spot energy prices? And do you have any sense for how significant the potential cost impact could be? Thank you.
Jochen Goetz
So on the pricing, your math is correct. So if you look on this roughly €600 million we have and with the additional surcharge, we see in the second half, I would roughly expect another 50% higher than in the first quarter. But keep in mind we also started first price increases already in the second half of last year. That means when we come to Q3 and compare quarter-to-quarter, we have a different starting point that we had in Q2 last year. Yes, Martin, spot?
Martin Daum
I guess, we have a mix out of long term contracts and spot market prices. So yes, the impact comes through. Please understand that I don't want to give details, you have always to see that gas, certainly has in Europe an impact on energy pricing as well. We buy electric energy a lot for our plants as well, this has impact. So then, in the equation before there was mentioned the easing on transportation, there are enough other bad stuff happening outside. So the price, the cost pressure will continue. And certainly our efforts to mitigate those pressures and to increase efficiency are still there. So it's the challenges for production are still out there. And -
Michael Jacks
Understood, thank you. And Jochen, if I could just maybe ask, can you please just remind us then how much pricing was in the base in half two last year?
Jochen Goetz
Well, I would say, let's have this discussion then when we come to the Q3. I don't have the effect in the top of my head between Q2 and Q3. Let's have a discussion when we disclose the numbers for Q3 but pricing and that’s set there.
Michael Jacks
Okay. Thank you.
Jochen Goetz
Okay.
Operator
And then next question from Jose Asumendi, JPMorgan. Your line is now open.
Jose Asumendi
Thank you. Good morning Martin, and Jochen. It’s Jose from JP Morgan. A couple of questions, please. Can you discuss a little bit the actions through the use of fixed cost base in Europe? Remember in the initial plan, you talked about personnel and non-personnel actions. Where are you on this plan? Are you on track or ahead of plan? And how's that feeding for the P&L? And a second, if you could maybe talk a little more about the working capital reversal of the sector to flow through the second half of the year? Thank you.
Jochen Goetz
Okay, hi, Jose, thank you for your questions. Well, on a fixed cost, I think we have to differentiate between different categories. On the one hand, if we look on our structural measures on the personnel side, we are on plan, we're executing on that. And as I said earlier, we have to contract and align measures with the workers councils to achieve that. On the non-personnel cost side, we also from a measure base, we are on plan and achieve also here our targets. However, there are two other things which come more and more in play.
I also mentioned earlier that this year for us is a very special year because we have to separate still a lot of topics compared - related to the spin-off. I refer to IT systems but also if you look on the sales environment, which was very much embedded in the Mercedes-Benz world in the past. So we see some cost pressure here. And then overall, and I think that's obvious, we also see higher inflationary impacts than we have originally expected. So I would really separate between structural measures where we are in plan and other effects which are challenged for the remainder of the year.
On the working capital side, especially in Europe, there's good and bad. I think on the one hand, the supply chains in Europe is more stable, which helped us to reduce the unfinished good. However, at the end of the second quarter, we had a lot of high stock in finished goods. And the main reason for that was that short-term we were not able to get enough transport capacity to bring the trucks to the customer. Well we acted on that and we will increase the capacity for that so that we do not expect its impact for the full year.
A little bit different situation the United States, there still the problem is to have the parts available. It's not only chips, Martin elaborated on that already. It's meanwhile a lot of parts which are missing. So there the target is to get all the parts and then the finished trucks and the good thing in the US is as soon as the trucks are ready, we can bring it to customer hands and the stock in the US is also an okay level, on the new track side. So these are the two main impacts and topics we have to tackle in the second half.
Jose Asumendi
Thank you.
Operator
Next question is from Himanshu Agarwal, Jefferies. Your line is now open.
Himanshu Agarwal
Hi, Himanshu from Jefferies. Thanks for taking my questions. So first one is on pricing. Just want to understand how much of the pricing will you have to do away if raw materials rollover and we reach the normal levels? I'm just trying to understand if margins can be structurally higher in a normal environment. And second one on inventory. Can you talk about the share of finished and unfinished trucks in the total inventory? And we are already halfway into Q3, so are you seeing any sequential improvement month-on-month since July? And lastly, in North America, you just mentioned about a lot of parts are missing, if I got that right, so can you just specifically mention like which parts are you talking about outside of semis?
Martin Daum
Okay, the first one pricing. First of all, the costs have to go away and to normalize. We have no specific costs related accelerators in it. Yeah, we just do a normal pricing. So yes, and we'll - you'll have the debates with your customers about what the pricing is. And it's not that we go in now and just raise prices and we'll have immediate discussion with customers. They have all the chance if we change the pricing of the truck, to cancel the truck. We haven't seen any cancellation yet, so the customers are accepting it.
We are in an inflationary environment. We see in a lot of areas of the world, wages and salaries go up. And for that, I would say a lot of that pricing will stay just because we are in that inflationary environment. We have on the other side, great products that have an input too. Our customers really want our products, the quality of the Actros is better than ever. The total cost of ownership of Cascadia in the United States is by far the best money can buy. Our new vocational trUck in the United States is an absolutely smashing truck with great reviews from press and customers. So in my opinion, there are enough good arguments why the pricing can be strong in the years to come and the outlook is good.
To the inventory itself, if seam is on the one side, but it has to do with after treatment system, it has to do with ordinary plastic parts. It is not that one part that kills and it's therefore not that one problem to solve. It's a myriad of problems to solve. And once you solve one problem, then another one pops up. So that will keep us busy in the second half. Jochen, for the last one for the share of the finished and unfinished.
Jochen Goetz
Yeah, so well, by nature, if you look value wise, the big chunk is obviously the finished trucks. If you take the finished and the unfinished, it's fair to say that 75%, 80% of the value is on the finished side. As I mentioned earlier, unfinished is mainly in US at the moment. Martin elaborated on all the parts, where we have our challenges to bring them in right quality and amount in a right point of time.
On the stock level, generally speaking, we have higher stocks in Europe, that's also based on the business models for a couple of reasons. One is we have short term rent, volume in the inventory, which is always there, so nothing special, but it uplifts the volume of trucks in inventory compared, one example in the US. We have then more also overseeing from Middle East, Middle and South East Asia, out of Mercedes where we have longer lead times as well. And we have a stronger portion of body builder business or that is a structural effect where we have high inventories.
And last but not least, and I mentioned that in Europe, we had not enough transport capacity at the end of Q2. And that was another reason for an increase in inventories. So that's the structure of the inventories overall. And bear with me, I will not disclose any development of the Q3 quarter. You have to wait basically for our next call where I'm happy to talk about the development.
Operator
Mr. Reitman, you can ask your question. Your line is now open. We can't hear you.
Stephen Reitman
Thank you. Stephen Reitman, Societe Generale. Two questions, please. First of all, could you comment now a few months since the separation, how the sort of increased entrepreneurial freedom is reflected in your performance and your thinking? And maybe you could also update us on how long you think the process is going to be in order to get to benchmark results? For the - across the group compared to competitors? Thank you.
Martin Daum
Stephen, the first difference you see right in the last 30 minutes. In a Daimler AG call, over 30 minutes, we would have seen half a question about trucks. Now we talked 30 minutes exclusively about trucks and with - and alone that increased scrutiny helps the entire organization to be fully aware what we get asked. So yes, it helps a lot and it continues to help. When it comes to benchmark results, we have clearly stated our past to what we call Sunny 10, 10 means 10 percentage on the sales in good markets and we are in good markets.
So yes, there is enough room to improve in our company and we are well underway for that. And it has to do with streamlining our portfolio, increasing our margins, pulling out great products like the vocational product in North America, invoking on our costs. There are still a lot of challenges and homeworks have to be done. And if everything is fine, then we will be there where we promise to be.
Stephen Reitman
Thank you.
Operator
And the next question is from Daniela Costa, Goldman Sachs. Your line is now open.
Daniela Costa
Hi, good morning. Can you hear me?
Operator
Yes, we can hear you. Please go ahead.
Daniela Costa
Oh, I'm sorry, I don't think you could hear me earlier. Now, I have two questions. And apologies if some of this was asked because I was trying to reconnect. But my first question was regarding your comments on the US order book, which you said was closed for 2023. I think we've heard from some of your competitors, that their order book is open. So I just wondered if you could give a bit more color about how you're thinking about management between market share and margin? Is it that you're just prioritizing margin for next year? And given you have strong backlog and you're not so much worried with market share? Or is there a market share loss risk in the US next year if they start taking a lot of orders and you don't take now?
And then the second question, and it might be a follow up from some of the prior questions. But you've mentioned I think, earlier that in Europe, for the few orders you're taking in 2023, you have some price neck and retroactive potential price adjustments. I wonder if those could work both ways? Understand that we're now in an inflationary environment where raw material situation, for example, can change very fast. If we have a reversal on raw materials declining further, could customers also ask for retroactive price reductions or does it only apply sort of in your favor? Thank you.
Martin Daum
Daniela, first one is fairly easy to answer No, the order behavior at the moment has nothing to do with potential market share in the US. As you have seen this year, we significantly gain market share in the US, and if we would have had no constraints, so we only would have the unfinished product on the roads, our market share would be even bigger. So I'm extremely bullish about our product portfolio in the United States and so are our customers. It has more technical reasons, why we hope in that order book, we have a very sophisticated system in the US of allocation of slots to dealers, to long term customers to conquest accounts to different segments of the market.
So at the moment, it's more about negotiating the pricing, get the deals done and we have a tendency, we want to keep what we promise. And that means we need a clear knowledge, how the production capacities and that means the supply will be for the first and second quarter. Once we have that, we open the books. And as we did it last year, it's unnatural at the moment in the US to take in already. I remember the times when I was in the US where the majority of the next year's orders came in, in October, November. It's already pulled forward now to September. We shouldn't get now impatient and expect that now from July and August. I am not worried at all. And you'll see either in September or October a huge spike. And then we've report certainly about that. I'm not worried for market share at all.
Jochen Goetz
Okay, hi Daniela. And on your second question regarding Europe, to make that clear, well, one of the lessons learned was that if there's a significant increase in raw material but also energy, generally inflation, it's good to have the flexibility to adjust pricing. I think there was one lesson to learn of the year 2022.
And well, if we're looking at 2023, it's hard to predict what really happens on the three components I just mentioned. Energy most likely will be on a high level, at least in Europe, assuming that war is still ongoing, inflationary tendencies are very strong, and most likely will stay and on raw material, you never know. At the moment we see a kind of a stabilization in some, also a slight decline.
Well, if in the course of the year, the cost will significantly go down, there will be portion of the price increase where customer for sure will ask, if you take that back. And I think it's also fair, we called it in some area a surcharge. Not everything of the pricing increase is surcharge, but a portion of that. And that's basically the law of the market. And there's a discussion which portion will then go back. So that can happen in the year 2023.
Daniela Costa
Very clear. Thank you, very much.
Operator
Next question is from are some Michael Punzet at DZ Bank. Your line is now open.
Michael Punzet
Yes, Michael Punzet from DZ Bank. Good morning, I have two questions. First one is on the tax rate. If I calculate that correctly, you have a very low tax rate of roughly 10% in the second quarter. Maybe you can explain what is the reason for that and can you give us any guidance for the full year? And secondly, on your order intake in the Bus section there we see a very strong increase. Maybe you can elaborate a bit on the reasons for that and when this will turn into sales?
Martin Daum
Okay, Michael, let me start with the tax one first of all. Good catch, it’s a low tax rate. The reason for that is when we adjusted the pension liability cause of the change in this discount factors, and - we released some portion of the deferred tax assets. And that has an ordinary positive impact in Q2. For the remainder of the year, you can expect a similar tax rate, like we saw in the first quarter. And on Bus, Jochen, won’t you?
Michael Punzet
But on the Bus side growth?
Jochen Goetz
Sorry, on the Bus side, first of all, the very strong increase comes from an extremely low basis. And it mainly shows that we are back in the coach business. And as you might remember, we had for nearly 18 months, no order at all on the coach side and subsequently closed our factory, you know, we are now not back to normal levels but we are back to an okay level. And that now with the orders coming in on the Bus side, coach buses are running again, so customers are ordering. We just launched a new generation of our Setra coach buses, so that helps orders as well. So that shows that Bus is back to life and Buses was the only segment that was negative in the second quarter. Bus is not a business that is negative in normal times, so it just shows that the order intake foreshadows the Bus comes back to normal fairly soon. And we are very positive about the outlook for that business in the future.
Michael Punzet
And when will the orders turn into sales, already in 2022, is it more relates to 2023?
Jochen Goetz
Our guidance for the year of 2022 is plus zero. As you see for half the year we are away from the plus zero. So yes, some of those orders have to turn into sales to achieve the target of plus zero where we are still confident otherwise we would have changed the guidance.
Michael Punzet
Okay, thank you.
Christian Herrmann
Ladies and gentlemen, thank you very much for your questions and for being with us today. Thank you, Martin and Jochen, for answering.
Now, as always, IR remains at your disposal to answer any further questions you might have. We hope you can enjoy the summer. We and the members of our Board are looking forward to seeing you on the upcoming investor events or the IAA Commercial Vehicles in Hannover. You can find all these events on our Daimler Truck Investor Relations website. We're looking forward to meeting you there.
Have a great day and stay healthy. Thank you and goodbye.
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Daimler Truck Holding AG (DTRUY) Martin Daum on Q2 2022 Results - Earnings Call Transcript