DTGHF - Daimler Truck Holding AG (DTRUY) Q1 2023 Earnings Call Transcript
2023-05-12 07:27:08 ET
Daimler Truck Holding AG (DTRUY)
Q1 2023 Earnings Conference Call
May 09, 2023, 02:00 AM ET
Company Participants
Christian Herrmann - Head IR and M&A
Jochen Goetz - CFO
Jorg Howe - Head, Global Communications
Conference Call Participants
Klas Bergelind - Citi
Miguel Borrega - BNP Paribas
Nancy Ni - Goldman Sachs
Jose Asumendi - JPMorgan
Michael Jacks - Bank of America
Nicolai Kempf - Deutsche Bank
William Wilkes - Bloomberg News
Ilona Wissenbach - Reuters
Marco Engemann - dpa-AFX
Alexander Jungert - Mannheimer Morgen
Presentation
Operator
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 Q1Results Global Conference Call. We are very happy to have you with us today and have Jochen Goetz, our CFO, here to present our Q1 results. 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 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 Jochen.
Jochen Goetz
Thanks, Christian. Good morning, ladies and gentlemen, and also 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 tremendous [ph] 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 group came in at €1.2 billion, leading to an adjusted return on sales of the industrial business of 8.8%. Group 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 €0.90.
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 offset 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 1 billion [ph] revenue in online retail sales of DTNA Parts since its launch in 2020 via our e-commerce platform, a platform Excelerator, 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 Canter in various markets, Fuso now started the production of the truck at Mitsubishi Fuso plant in Kawasaki in Japan. For the European markets, production will start soon. Daimler 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.
On our – 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 increase of 12%, Mercedes-Benz with 2%, where significant higher European sales were partly offset by the expected decrease in Brazil [ph] after the implementation of Euro VI.
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 to 530,000 units, but also mirrors the typical Q1seasonality. We expect further growth in the remaining quarters.
Incoming orders for Q1of 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 VI take-up.
In North America, we are seeing declined 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 Trucks Asia, especially 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 zero-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 up 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 use 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 use 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 in the first quarter of 2022 to €13.2 billion in the recent Q1. Group EBIT increased by 133% to €1.1 billion, while adjusted group EBIT rose by 78% to €1.2 billion.
Q1 was a clean quarter as we had only minor adjusted items from restructuring and M&A within, the latter mainly follow-ups connected to the spin-off. 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 at €7.5 billion at the same level as at the end of 2022.
For our Industrial segments, revenue increased significantly to €12.6 billion. EBIT 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 EBIT adjusted of €724 million 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 sales - unit sales increased significantly year-over-year, and DD&A 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 continue 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 of €440 million with ROS 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 smaller extent, tailwinds from a strong used truck business backed by strong market demand. All in all, Q1 shows that Mercedes-Benz is improving, it's clear EBIT performance, and we make significant progress. We expect further improvements in Q2.
Truck Asia came in with a return on sales adjusted of 4.6% on the back of an EBIT adjusted of €114 million [ph] Year-over-year, positive contributors to the EBIT 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 constrained costs, especially in Japan.
Our Chinese joint venture, BFDA, contributed negatively with a contribution of minus €50 million. The Q1 results of Truck Asia of 4.6% is sitting within the ROS 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 for sale [ph] in the first quarter with an EBIT adjusted of €9 million and a ROS adjusted of 1%. Year-over-year, Q1 saw a 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 bus side. On the negative side, material inflationary costs continue 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, but 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 for the year.
For the group Q1, EBIT of €1.2 billion 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 U.S. dollar translation made a positive contribution of €77 million. Industrial performance came in negative with €505 million, 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. Adjustments to group EBIT include €41 million negative cost effects mainly related to the spin-off.
Q1 EBIT performance for - of the industrial business was based on positive contributions from all our Industrial segments. Trucks North America delivered the strongest contribution with €289 million versus Q1 last year.
Mercedes-Benz contributed almost €100 million of EBIT while Truck Asia and Daimler Buses delivered each around €50 million year-over-year. As a result, EBIT adjusted of the industrial business significantly increased to €1.1 billion 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 G&A 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 macroeconomic and cost of risk situation 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 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 were lower than net investments in PP&E and intangible assets of minus €370 million. 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 for the first quarter.
Cash taxes amounted to minus €87 million, which leads to free cash flow of the industrial business without adjustments for M&A transaction and restructuring measures of €168 million. 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 further development in the war in Ukraine and its economic consequences, inflationary pressure and potential central bank increase in interest rates as well as the further macroeconomic and geopolitical development. In addition to 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 given - 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 the defining factor for the market size is still the restrained supply chain.
We also confirm our full year guidance for the group and industrial business for all KPIs. For group, we expect full year 2023 revenue to be in the range of €55 billion to €57 billion. EBIT adjusted as well as EBIT reported are expected to increase significantly in 2023.
Investments in PP&E and R&D costs are expected to stay on prior year level. Guidance for our industrial business includes an expectation of unit sales in the range of 510,000 to 530,000 units and revenues in the range of €53 billion to €55 billion.
We are confident that we will achieve a return - ROS adjusted with a range of 7.5% to 9%. Free cash flow reported is expected to increase slightly, which means up to 25% versus 2022. Overall, no change compared to our last full year results conference in March.
Regarding the outlook for 2023 on segment level, we also confirm the complete guidance given on March 10. For the second quarter, we expect a positive volume development and consequently, ongoing strong performance from all segments.
For North America and 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 underway.
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 [ph] vehicles will follow in the years to come, especially for long distance. So we at Daimler Truck 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 11, 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.
Christian Herrmann
Jochen, 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.
Question-and-Answer Session
Operator
Thank you very much. Ladies and gentlemen, we will begin the question-and-answer session. The first question is from the line of Klas Bergelind with Citi.
Klas Bergelind
Thank you. Hi, Jochen. I am Klas 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 at peers [ph] 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 curious, Jochen, to hear your reasoning here why you didn't increase the guide. Obviously, it can't be because of weaker demand given your commentary of demand still being solid during the presentation just now. I'll start here.
Jochen Goetz
Okay. Thanks. Yes, 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 of the rest of the year.
So you're 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 is upside potential. But it's too early to finally judge on that. Therefore, we kept the guidance on the level like disclosed on March 10.
Klas Bergelind
Okay. All right. Okay. No, that makes sense. And my second one is on Mercedes-Benz. It's obviously a strong start to the year, and I think you said 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, supplier 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%, 9.5% totally adjusted? Thank you.
Jochen Goetz
Yes. So yes, there are a couple of questions in one question, I would say.
Klas Bergelind
Sorry.
Jochen Goetz
No, no. All 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. 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 cost, we have seen quarter-over-quarter an increase still in material cost. 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 in our P&L. So we expect an increase in second quarter and then maybe more of a relief, assuming that the spot prices stay 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 to 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.
Klas Bergelind
And the one-off payment, did you have anything of that also in this quarter? I know you had in the fourth quarter there, Jochen.
Jochen Goetz
No, there was no major one-off payment. That was basically booked in the Q4.
Klas Bergelind
Thank you.
Operator
The next question is from the line of Miguel Borrega with BNP Paribas. Your question please.
Miguel Borrega
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 rates 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.
Jochen Goetz
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'll give you one reference point. There was a big fair 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, guys, just that you are 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 operated 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.
Miguel Borrega
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 decline in 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 being favored by the price cost spreads 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?
Jochen Goetz
So on the question, when do we open 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, that will say, there is no need to place immediately a big order when we 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 big fleets, 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 P&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 sideward’s development than a pressure.
Miguel Borrega
Thank you very much.
Operator
The next question is from the line of Nancy Ni with Goldman Sachs. Your question please.
Nancy Ni
Hi, good morning. Thanks for taking my question. And 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 color on exactly how much of the equipment you're current - that you're currently selling your financing versus third parties? And also whether you plan to maybe take on more of that risk related to 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.
Jochen Goetz
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 is 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 side and that works out pretty well so far.
Nancy Ni
Very clear. Thank you.
Operator
The next question is from the line of Jose Asumendi with JPMorgan. Your question please.
Jose Asumendi
Good morning. Hi, Jochen and Christian. And a couple of questions, please. Can you talk a little bit more about the performance in Europe? Obviously, strong progress has been 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 to come back? Thanks.
Jochen Goetz
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 VI. 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 a normalization because at one point of time, also the dealers are running out of stocks for Euro V 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? I would say, no. If you talk to customers, it's more they wait and see at the moment, how the overall pricing with Euro VI plays out.
On the cost side, well, we will continue basically our free self help measures. One is increasing the after sales share in the European market. I think that works pretty well and was a good contributor for Q1, and we expect to continue 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 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.
Jose Asumendi
Jochen, can you speak a little bit more around RIZON, the new brand you launched in the U.S.? Can you explain a little bit there the logic behind it? And what are you targeting with this brand?
Jochen Goetz
Yes, for sure. So RIZON 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 reason is also that we have a different distribution network.
Here we use Velocity, one of our big dealer groups, who jointly with us distributed 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.
Jose Asumendi
Interesting. Thank you.
Operator
The next question is from the line of Michael Jacks with Bank of America. Your question please.
Michael Jacks
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 trucks 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 mix impacts, for example, lower volumes in South America and also from more vocational trucks in North America. I'll stop there.
Jochen Goetz
So from a pricing perspective, it's absolutely right. If you basically compare, for example, the Q2, 2023 versus the Q2 in 2022, you're absolutely right. You see 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, mix. Well, in the U.S., we still have the problem that we are somehow sold out. We see very high demand from new customers on the vocational side. 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 trucks. 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 from 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 in the last 2 years. That's probably the mix picture for Daimler Trucks.
Michael Jacks
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 7.5% 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 the range for the margin outlook? Thank you.
Jochen Goetz
Yes. It basically comes back to what I said also in the speech. We saw very good supply chain in the first quarter and - but we see at the end or we have seen at the end of the Q1 that some of the problems came back, but 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 costs. You have seen or 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 road block, there is upside potential.
Michael Jacks
Clear. Thank you, Jochen.
Operator
The next question is from the line of Nicolai Kempf with Deutsche Bank. Your question please.
Nicolai Kempf
Yes, good morning, gentlemen. Nicolai Kempf from Deutsche Bank. Also two questions from my side. The first one is on working capital. Is it fair to assume that given that - working capital will swing back over the course of the year and could be neutral on a full year basis? I'll stop here?
Jochen Goetz
Yes. That's the right assumption. I think we have always the seasonality that in the 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 are 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.
Nicolai Kempf
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 those cash you have on your hand? Or is this really a topic for the CMD in July?
Jochen Goetz
Yes. So first of all, and I said it also in the past, we - for our operational business, we need a net industrial liquidity of 4% to 6% - €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'll also think about, obviously to 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.
Nicolai Kempf
Perfect, thank you. Looking forward to see you.
Christian Herrmann
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.
Jorg Howe
Good morning, everyone, and a warm welcome to this conference call on our first quarter results of 2023. My name is Jorg Howe. I would also like to welcome the CFO of Daimler Truck, Jochen Goetz. 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. [Operator Instructions]
Let me just mention, a few housekeeping notes. The full course [ph] is conducted in English. So please be so kind to ask your questions in English as well. [Operator Instructions] So 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.
Jochen Goetz
Thanks, Jorg, 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 strong revenue increase, strong sales increase, and most important, we were 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 2 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 as at the end of the year, we have a very strong balance sheet, high net industrial liquidity. So a really good start in the year. We are looking also optimistic for the rest of the year. We confirmed all the guidance we have given in our annual press conference of March 11 and March 10.
And with that, I'm very much looking forward for your questions.
Jorg Howe
Thank you very much, Jochen. Ladies and gentlemen, we will now begin the Q&A session. I will address the questionnaires by name, but please be so kind to also introduce yourself and state your media outlets at the beginning, if I haven't mentioned it. Take your time for your questions and ask them slowly and clearly. [Operator Instructions] The operator will now explain the exact procedures. Thank you very much.
Operator
Thank you [Operator Instructions]
Jorg Howe
So and we are starting with the first questions, William Wilkes, Bloomberg News, will go ahead, please. Will, we can't hear you.
Operator
Mr. Wilkes, you're now live. Yes.
William Wilkes
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 what - are you starting to see an impact from labor shortages? And is that slowing production result? Thank you.
Jochen Goetz
Yes. Hi, Will. So you are right, 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 2 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 and we expect that to stay the same way. That's true for North America, as well as for Europe.
William Wilkes
Thank you.
Jorg Howe
Okay. Next one is Ilona Wissenbach from Reuters. Go ahead, Ilona.
Ilona Wissenbach
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 for sector? 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?
Jochen Goetz
Thanks for the questions. So 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 in Q1, as I said in the analyst call as well, we are basically sold out in Europe and North America. If the order book for Q4 - sorry, 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 are tech companies. I don't want to speculate, where the attacks are coming from, but there are obviously some countries who have interest in ramping down production or getting a nice ransom, if they basically give back the data.
That's the general trend we have seen, 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 have 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.
Ilona Wissenbach
Perhaps if I may ask one question, as Continental got [ph] public with it. Was that related to this to Continental also?
Jochen Goetz
Again, we don't publish any details on specific customers. That's the business - on suppliers. That's the business of the supplier. The specific case on Continental, you have to talk with them.
Jorg Howe
So thank you, Ilona. We have plenty of time still and currently, there are no further questions. [Operator Instructions] So next one then is - it works. Next one is Marco Engemann, dpa-AFX. Marco, go ahead.
Marco Engemann
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 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?
Jochen Goetz
Yes. 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 the 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 is 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 costs go line in line, which means from a profitability perspective, we are going more sideward’s when it comes to price and cost mix.
Marco Engemann
Thanks.
Jorg Howe
Okay. Next one is Alexander Jungert from Mannheimer Morgen. Go ahead please.
Alexander Jungert
Yes, hi. And good morning to everyone. I have one short question regarding the restructuring in Mannheimer, the bus side. What is the current status? And what is the further schedule to move the production off the shelf? Thank you.
Jochen Goetz
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.
Alexander Jungert
Thank you.
Jorg Howe
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 Daimler Truck 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 the next time. Thank you very much.
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Daimler Truck Holding AG (DTRUY) Q1 2023 Earnings Call Transcript