Daimler Truck Holding AG
XETRA:DTG
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Daimler Truck Holding AG
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Good morning, ladies and gentlemen. This is Christian Herrmann speaking. On behalf of Daimler Truck, I'd like to welcome you on both telephone and the Internet to our Q1 Results Global Conference Call. We are very happy to have with us today Jochen Goetz, our CFO. Jochen will begin with an introduction directly followed by a Q&A session.
I would like to tell you today that Jochen was tested positive for COVID-19. For that reason, he does this session from home. The sound might be affected a bit by these circumstances. Apologies for any inconvenience. 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 reflects 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 expected or implied by such statements. Forward-looking statements speak only to the date on which they are made.
Now I would like to hand over to Jochen.
Yes. Thanks, Christian. Good morning, ladies and gentlemen, and a warm welcome to our results call for the first quarter of 2022. Thank you all for joining us today. Before I share with you the details of our financial results, I want to give you an overview of the key highlights of the quarter. We finished the first quarter of 2022 with an adjusted EBIT of EUR 651 million with an adjusted return on sales of 5.9% for the Industrial business. EBIT came in with EUR 461 million. Our earnings per share amounted to EUR 0.31. Despite the challenging supply chain situation, creating high unappreciating stock, free cash flow was positive leading to a slightly higher net industrial liquidity of EUR 6.1 billion.
We see a continued strong demand environment with a higher level of incoming orders. The supply chain situation remained challenging. Besides the ongoing semiconductor shortage, which again caused significant constrained costs, especially in the United States, the further increase of raw material and energy price burdened our financial performance. We are working constantly to offset these increases of raw material prices by pricing increases or surcharges on both existing and new orders. However, most of the price increases, especially in the United States, will only fully impacted the P&L from Q2 on. We expect the raw material price increase to continue to be a headwind in the next quarters, particularly in Europe and Asia, which I will provide more details on later.
EBIT Financial Services, we were live in 7 out of 16 markets per Q1. The ramp-up of the new market is well underway with further 9 markets to be added in 2022. We are continuously working on our self-help measures and are on track to achieve the targets. On fixed cost reduction, we continue to expect to achieve our targeted 50% reduction versus 2019 in 2023, 2 years earlier than initially anticipated. As highlighted in our last call, we are a member of the DAX community since March 21. As I said, we had another debt on the capital markets. We issued EUR 1.75 billion of Eurobond under the new established EMTN program. Additionally, we accessed the U.S. bond market with a $1.8 billion this year. This was the second issuance for the Daimler Truck in the U.S. market after inaugural bond offering in December 2021. Both have seen strong demand from investors.
The fundings are purely used for our financial services business. Mid of April with a deep dive on our autonomous driving activities at a test center of our subsidiaries, Torc Robotics in New Mexico. I must say that I was very impressed by the demonstration of what our Daimler Truck team together which Torc is capable of bringing on the road. This really underlines our innovation power and sustainable technologies, driving safety and enabling our customers in making their businesses future-proof.
As mentioned in our full year 2021 call, we decided to suspend our operations in Russia and rolled off our Russia related assets, which had a negative onetime impact in Q1 of EUR 170 million. The remainder of the anticipated total impact of roughly EUR 200 million will be written off at a later point of time. Given the strong demand in other regions, the volume we lost in these markets was reallocated and absorbed quickly by other market. Because we are receiving some questions on this topic at the moment, let me once again clarify the size and scope of our defense business at Daimler Truck.
Our sales share of defense vehicle was far below 1% in 2021. These are vehicles for logistic purposes without weapons or mounting for weapons on the outside. This is in line with previous years, as recently mentioned at the AGM of the former Daimler AGM. In sum, Q1 of 2022 remains a challenging business environment as we were already used to from last year.
But despite this challenge, we will finish the first quarter in line with our expectations, and we reconfirm our return on sales full year guidance. At this point, a big thank you to all our Daimler Truck employees worldwide, also for my colleagues of the entire Board. Thank you for the dedication, hard work and accomplishment in these exceptionally challenging times. I'm very proud to be part of this great team.
Now let's take a short glimpse at the key market development in Q1. We were able to maintain a strong market-leading position in North America. This underlines the appreciation of our customers. And it also reflects the efforts we are putting in produce as many trucks as possible and deliver them to our customers, even if the semiconductor shortage require us to accept additional costs. In this challenging time, we are prioritizing our long-term customer relationship.
In the EU 30 region, we have increased our market share from 17.1% in Q4 of last year to 19.3% in Q1. For both regions, North America and Europe, also in Q1, the limiting factor was remains supply. With the supply chain constraints throughout the entire trucking industry, market volume would have been noticeable higher and sales at Daimler Truck as well.
Looking at other major truck markets worldwide, we see very weak markets in Asia. Japan is showing a significant decrease of total market volume with only 38,000 units in Q1 compared to 50,000 units 1 year ago. Also, China came in this year with only 198,000 units for the heavy-duty truck market in Q1 compared to 513,000 units in Q1 of 2021, mainly driven by prebuys in 2021. The overall market development confirms to us that our market guidance for 2022 seems to be still appropriate.
Looking at unit sales and orders overall group sales in Daimler Trucks increased by 8% compared to Q1 of 2021, despite the continuing supply chain constraints. Main contributions are coming from Trucks North America and Mercedes-Benz. Flat sales development at Daimler Buses and a significant decline in Truck Asia to the constrained part supply and active reallocation of semiconductors to higher-margin markets. In contrary to last year, when very specific chips for European and U.S. heavy-duty products were missing, we now have the opportunity to reallocate chips, which are used in Asia and our other regions to Europe and North America. We are intentionally doing this accepting a negative impact on our sales and financial performance in Japan.
Just as we saw in the second half of 2021, the global supply chain imaging are depressing our sales. Demand continues to remain well above production levels. Cancellation rates remain very low. We are monitoring this issue extremely closely and so far not seen any step up in cancellation rates in any of our markets. The order intake in Q1 showed a slight decrease of 8% compared to last year's Q1, but remains on a high level.
Keep in mind that we are more or less sold out for 2022 and a very careful effect in orders for 2023 or has not even opened the order book. Given the strong demand, order intake is currently still more dependent on our willingness to accept orders and to fill production slots than on demand. Respectively, the order backlog at the end of the first quarter of this year is at a record high.
Auto fuel emission vehicle side, positive momentum is strong. In the first quarter of 2022, we sold 163 battery electric trucks and buses compared to 61, 1 year ago. Orders also increased significantly from 169 units of last year, the 619 units in the recent Q1. But still infrastructure and the framework for cost parity with conventional vehicles remain a limiting factor here.
At Daimler Trucks, we are, therefore, in constant discussion with policymakers and energy companies to get the right momentum in that respect. And we are also engaging in partnerships with other companies from the energy and trucking sectors to set up initial infrastructure projects in Europe and North America. We are ready and we are serious about it. We now also have the eActros in addition to eCascadia and series production, and we are producing our e-vehicles at the same line as our conventional vehicles. So we are not making headlines with phototypes but can quickly ramp up steady reproduction according to our customer.
Now let's move ahead to take a closer look at our earnings performance in the first quarter of 2022. Year-over-year revenue for the group increased by more than 70% to EUR 10.5 billion for the first quarter 2022. Adjusted for FX effects, revenue increased by 13%. Adjusted EBIT increased nearly 11% to EUR 0.9 billion, while reported EBIT declined from EUR 1.7 billion to EUR 0.5 billion due to the Q1 2021, including the onetime positive impact of sales-centric.
Free cash flow of the industrial business decreased from EUR 931 million in Q1 2021 to EUR 73 million in Q1 2022. The reduction is mainly attributed to the negative working capital caused by the ongoing global impact of the semiconductor bottlenecks and elevated inventory levels, increased investments in sales-centric and higher tax payments. In our business, we face seasonality so that Q1 is normally on the low side in terms of cash contribution. The fact that we are positive in terms of free cash flow despite the mentioned negative effects, gives me confidence for the full year.
Free cash flow adjusted stood at EUR 0.2 billion, the data is mainly related to the payouts for restructuring. Net industrial liquidity is strong and stood at EUR 6.1 billion at the end of Q1 2022, more or less the same level at the end of 2021. Industrial revenue increased to EUR 10.3 billion, mainly driven by a significant increase in Euro VIII sales, part currently translation effects from the U.S. dollar and first visible effects of better pricing. EBIT Adjusted increased to EUR 600 million with a corresponding return on sales just to 5.9%, which is in line with the company compiled consensus of EUR 5.8 million.
Performance at Trucks North America was adversely affected by the 4,000 lower unit sales and ongoing supply constrained cost pressures leading to adjusted EBIT margins below Q1 2021. Our first priority remains to fulfill the commitments we gave to our customers with customer loyalty being our primary goal. This means that we are not optimizing our business on the back of our customers. We are always the last man standing for them.
We are not optimizing a single quarter by slowing down production at the expense of our customers since we believe customers will remember that. Instead, we are trying to minimize delays and as soon as we get to require chips for the older trucks that are sitting in our very high off-line inventory. We get them out to our customers who are eagerly waiting for them.
In North America, we are continuing to apply price charges for trucks. In Q1, 30% of our sales were covered by the price increase done in Q1. This does not yet fully offset the material cost increases. In Q2, we will see a significantly higher realization of the price surcharges. However, raw material and inflationary costs are still further increasing. Therefore, it will be necessary for us to implement further significant price increases this year with visible effects in our P&L from Q3 on.
The performance of our aftermarket business remained strong in Q1, we achieved another new record level average day part sales. New truck business was significantly stronger last year, given the shortness on new vehicles in the first 3 months of the year, we had almost no used truck volume to sell, and therefore, less tailwind from used truck revenue. The start into the year, the Truck North America was the opposite of last year. In 2021, we started strong without major headwinds on the production and supply side and ended rather on the low side with major headwinds in Q3 and especially Q4. In 2022, we build up during the year, driven by the price surcharges becoming effective with Q1 as of what we see today being the low watermark.
With Q1 adjusted margin of 7.9%, Mercedes-Benz achieved a significant improvement versus last year, despite ongoing supply constraints and inflationary pressure. We achieved a good price realization in Q1 that was initially aided last year, a respective order intake also helped us here. Moreover, we have adjusted pricing further upwards for all the vehicles. However, we expect the full impact of the inflationary raw material price increase in Europe only in Q2, while these additional price increases will support the P&L only in the second half of the year.
In Brazil, we continued our efforts to turn the business around. We still contributed positively. In addition, we are able to sell parts on the real estate of the plan in tours before. And on the used truck side, our results benefited from the constrained new truck market. Overall mix in Q1 was stronger than in Q1 and Q4 of 2021. While we are proud of the operational progress we made, it's important to keep in mind that we had significant positive onetime effects from increased interest rates and pension obligations.
In Europe and I mentioned positive effect of the real estate sale in Brazil. The overall onetime effects amounted to approximately 1.5% in U.S. Each time, each item is not large enough to be treated as exceptional and hence included in adjusted EBIT. Important to highlight, at Mercedes-Benz, Q1 showed once again continued strict cost control and execution of restructuring on track to secure sustainable profitability towards our margin goals and our guidance for the full year.
Our business at Trucks Asia saw a return on sales of 2.2%, significantly below the performance of last year. Main reason here was the low level of Q1 sales. The worst group sales since financial crisis 10 years ago, especially our sales in Japan were affected by part supply and relocation of semiconductors to North America and Europe. As mentioned, we are doing this intentionally to support a higher-margin business in Europe and North America, something we are not able to do last year because of the nature of the chips and new technical solutions now in place. Moreover cost headwinds from raw material could not be fully compensated by positive pricing development in Indonesia and India.
In Japan, metal prospective pricing is legally not possible. So price increase already action will only meaningfully impact our results from Q4 on. Another weakening factor was the equity participation result of our Chinese joint venture BFDA, that came in negative and significantly below Q1 of 2021, due to the prebuy effect in China in the respective market reigning in 2022, which was anticipated in our guidance.
Don't forget that the participation result of our equity investments are included in our EBIT. For the remaining year, the FDA is expected to remain a burden for the performance of Trucks Asia also to the expected launch costs of the soon to be introduced Mercedes-Benz Actros to the Chinese market. On the positive side, ongoing disciplined fixed cost spending helped to partially compensate the mentioned headwind.
Daimler Buses worth and still is affected by COVID-19 with the tourism segment in Europe remains weak as expected. In the weak market supply constrained cost and significant raw material headwinds could not be compensated by price increases. A better aftermarket business, improved mix and an ongoing restructuring activities strict cost management led to a return on sales of minus 7.1% half of the losses we recorded in the same period last year.
Now let's have a closer look at the individual EBIT drivers for the first quarter 2022 compared with last year's Q1. Main driver of the Q1 results were volume mix and pricing, total positive contribution of EUR 473 million year-over-year. After sales and with a slight positive sale used truck business also contributed to the increase. FX impact was positive with EUR 46 million, mainly translation effects from the U.S. dollar.
Regarding our industrial performance, Q1 was mainly burdened by a triple digit raw material cost increase. Manufacturing constrained costs are still a burden, although a lot smaller than the headwinds from the material side. Warranty costs had a smaller negative impact. As already mentioned, the price increases that we initiated at the end of last year could only partially offset these headwinds, especially the continuing raw material cost inflation.
Selling and G&A expenses combined were more or less flat year-over-year, although our sales activities are clearly picking up again. And as highlighted before, the volumes are steadily increasing. This clearly improves our strong fixed cost control and working out. In others, you can see the negative contribution from our BFDA at equity result, which makes up the main part of the negative effect.
Financial Services supported good performance with EUR 11 million, which positive effects from higher interest margin in North America and improved cost of credit risk. This leads to adjusted group EBIT of EUR 0.7 billion, including the adjustments for restructuring and M&A, EBIT reported came in at EUR 0.5 million. Filling up the EBIT performance of our industrial business in the inter-mid segment contributions Q1 shows a mixed picture. The sales spend on Daimler Buses contributed positively to the Industrial business performance versus Q1 of last year.
As mentioned, please keep in mind that the Mercedes-Benz impact here is affected by the mentioned positive onetime effects. Trucks North America and Trucks Asia had a negative contribution each, both still heavily impacted by higher supply chain constraints, correlating higher manufacturing and significant increase in the cost. The reconciliation bucket mainly contains our co-participation like cellcentric and Portera, autonomous activity and elimination. I want to underline again that within our reporting logic, the recons part of the Industrial business result.
Our total EBIT adjusted industrial business came in with EUR 0.6 billion with return on sales adjusted of 5.9%. At Financial Services, we are making good progress in ramping up the business and adding new markets. Contract volume increased to EUR 80 billion to the significant increase -- increased new business and improved penetration rates. However, the main positive effect came from the FX side from North and South America, especially from the United -- U.S. dollar. EBIT adjusted in Q1 increased to EUR 47 million. Return on equity came in with 11.3%, a little bit above last year's quarter. Main drivers on the positive side were higher interest margin North America and improved cost of credit risk. On the negative side, we saw a normalization of the cost situation.
Please be aware that European markets have not yet been consolidated in the Q1 results. 7 out of the 9 Phase 2 countries were shifted only in early Q2, and we expect ramp-up costs for these entities to impact to the file for the rest of the year. Our full year guidance reflects this. Detailed work and further information on the financial performance of each segment are included in the appendix of this presentation as well as in our factbook.
Cash flow for our industrial business is still facing high inventory through the supply chain constraint which amounts in Q1 to a negative working capital impact of EUR 137 million compared to last year's Q1. And even Q4, further significant increase in off-line inventory, and mainly at Trucks North America and Trucks Asia. The net investment bucket includes a negative effect of EUR 50 million from financial investments, mainly driven by our fuel cell joint venture cellcentric with the main part of the minus EUR 26 million coming from net investments in PP&E and intangible assets.
Depreciation and amortization of EUR 260 million once again exceeded the net investments in PP&E and intangible assets also in Q1 for 2022, underlying our strict CapEx management based on our active portfolio management approach. The provision and others bucket contained on the one side, a triple-digit negative effect from the mentioned reversal of personal provisions due to increased interest rates in the same expense and on the other side, also a positive effect in the cash flow from the impairment of our Russian operations. This leads to the bit of the Industrial business of EUR 0.2 billion and adjusted for restructuring measures in M&A transactions to be adjusted on the industrial business of EUR 0.3 billion.
Down the way to free cash flow, cash taxes came in EUR 147 million, free cash flow of the Industrial business, excluding the adjustments. So M&A transmission -- transactions and restructuring measures came in at EUR 73 million. This leads to a EUR 0.2 billion free cash flow adjusted of the industrial business. Net industrial liquidity rose a bit to EUR 6.1 billion at the end of Q1.
Regarding the outlook for full year 2022, please allow for the following remark. Obviously, the following outlook of Daimler Trucks is subject to further development in the Russian war against Ukraine, and it impacts on the global economy. It currently also looks as if the market distortions caused by the semiconductor and COVID-19-related supply bottlenecks will continue to impact the market.
Daimler Truck assumes that we will continue to face change supply chains for the key upstream products. The further geopolitical as well as the COVID-19 pandemic development also harbor uncertainties. While the global market outlook remains opaque, we are laser-focused on our strategy and self-held measures. We continue to make great progress on fixed cost savings.
Now our pricing actions will address the inflationary headwinds. Given that, and based on the current information, we feel confident to achieve our targets for 2022. All of the following guidance is made with the following assumptions. We currently assume that the economic conditions in our most important markets continue to normalize, that neither the COVID-19 pandemic nor the Russian war against Ukraine will have an executive impact on the general market development. Despite strong demand, bottlenecks and semiconductor industry and ongoing supply constraints will continue to impact sales mainly in the first half.
The market guidance for the full year 2022, we gave back in March at our annual price conference still valid. For the heavy-duty market in North America, a range of 255,000 to 295,000 units, for a European heavy-duty truck market a range of 240,000 to 280,000 units. For its Industrial business, Daimler Truck continue to anticipate an increase in unit sales to a range between 500,000 and 520,000 in 2022. We also continue to expect a significant increase in revenue on group level in 2022. We update the revenue forecast in terms of the range to between EUR 48 billion to EUR 50 billion from the previous forecast of EUR 45.5 billion to EUR 47.5 billion. The increase in our revenue forecast is caused by a favorable pricing in Europe and North America and improved aftersales business and positive impacts from exchange rate developments. For the industrial business revenue guidance, this leads to an increase in the guidance range from EUR 44 billion to EUR 46 billion to now EUR 46 billion to EUR 48 billion. Consequently, the EBIT guidance for the group was also adjusted from slight decrease to prior year levels.
Regarding EBIT adjusted on group level, we continue to expect a significant increase regarding the return on sales adjusted for the Industrial business Daimler Truck is expecting to come out unchanged between 7% and 9%. Investments in PP&E and R&D costs are still expected to slightly increase coming from a lower level in 2021. Our guidance for free cash flow reported is also unchanged and still expect on prior year level.
So what's the outlook for 2022 on the segment level? Simple answer, it's the same that we gave you at our full year 2021 disclosure conference back in March. Because of that, I'm not going to read it all out again, but rather make use of the time to provide you with the main drivers of the outlook for the outcome in second quarter.
For Trucks North America, we expect the second half of the year to be materially stronger than the coming second quarter. As Q1 at Mercedes-Benz, the minor material cost increases versus Q4 of 2021. In addition, we had the mentioned onetime effect of around 1.5% return on sales percentage points. The segment material cost headwinds is expected to significantly increase in Q2, and we expect to see the next major negative inflationary impacts coming into effect.
With regard to price actions that were already initiated to compensate this material cost increases, the majority of that will come into effect only after Q2. At Truck Asia, I already mentioned that the equity result of our Chinese joint venture for the full year 2021 is expected to be negative. And if necessary, we are going to further reallocate semiconductors from our Asian business to higher-margin segments in North America and Europe. If this should track on for all of the upcoming quarters for 2022, this could have an impact on today's confirmed segment guidance of Trucks Asia.
At Daimler Buses, we expect a weak quarterly performance not only for the second, but also for the third quarter of the year as we have very specific semiconductor shortages here. From today's view, we expect a very strong fourth quarter. At Financial Services, we see significantly increase in operating costs in the remaining quarters of the year, especially related to adding the European countries, so much on the financial outlook for the full year 2022.
Let me conclude by looking at our strategic priorities for this year and beyond. We now our two strategic goals, we want to unlock our profit potential and to lead sustainable transportation. We respect to profit potential, several things on the top of our list.
Let me highlight the following measures to manage our environment: To take maximum advantage of the strong market environment, we will allocate available parts and semiconductors in a deliberately way. This means we will consistently prioritize products and new regions with high contribution margins. At the same time, we continue to adjust our net pricing to pass on increased raw material costs to our customers. Of course, we have an intense dialogue with our customers on that. And so far, the actions are very positive.
Apart from that, we also continue to increase our resilience. It is a priority for us to keep working ourselves at measures and continue our strict risk cost control to achieve our cost reduction target. On Services, we are fully ramping up our financial services business all around the globe, and we are further strengthening our aftersales business.
Let's now switch to our second strategic priority, leading sustainable transportation. First of all, we are pushing hard to further accelerate zero-emissions. 2 weeks ago, we hosted our Daimler Buses e-mobility days to lay out our bus customers, how we see the way forward and to get their feedback on that. Key highlights can be summarized as follows. By 2030, we will only offer CO2 neutral city buses in Europe and only CO2-neutral new lags will be on offer in the core European markets by 2039. In addition, we are clearly committed to offer an all electric in the city bus from 2025.
Just last week, we launched our Freightliner eCascadia and our electric heavy duty truck with a range of 370 kilometers. And there are more premieres coming up in the next month. We intend to launch our refuse collection specialist Mercedes-Benz eEconic, the next generation of our light truck FUSO eCanter and an electric bus chassis in Latin America. So we are accelerating that we try. And we are doing the very strange of our hydrogen trials by intensively testing our GenH2 truck on public law. That's much for zero emissions.
Let's now quickly look at autonomous trucking. Here, we have 2 great partners, Waymo and our independent subsidiary Torc Robotics. Both partnerships are making great progress. We are delivering autonomous ready Freightliner Cascadia trucks to Waymo. And Torc Robotics now further identified its collaboration with leading logistic companies. All this is backed by our strong corporate culture with its key pillars of trust and entrepreneurship.
With that, I'd like to thank you very much, and I'm looking very much forward to your question.
Thank you very much, Jochen. Ladies and gentlemen, you may ask your questions now. The operator will identify the questioners by name, but please also introduce yourself with your name and the name of the organization you're representing. A few practical points, please ask your questions in English. And always, as a matter of fairness, please limit the amount of questions to a maximum of 2. Now before we start, the operator will explain the procedure.
[Operator Instructions] The first question is from Nicolai Kempf of Deutsche Bank.
Nicolai Kempf here from Deutsche Bank. First of all, all the best for you Mr. Goetz, hope you get well soon. And my first question would be on the current lead times. Can you just give some color how much they currently are?
Yes. Thanks a lot for the good wishes. Well, as we said several times, well, given the very strong order backlog, the lead times are very long. It's always depends on which region and which product we are talking about. But generally speaking, if you want to have one of our flagship products, the Cascadia and Actros, the likelihood that it get it this year. If you have no place to order right now is basically full. And even if somebody would start back from an order, which we don't see at the moment, there are so many in the waiting room basically and saying, hey, we would take that immediately. So they are longer than normal. You have to wait.
As I said, if we look at the end of the year, 8 to 9 months for a truck like that. Are the customers happy with that? No, obviously not because they need it. On the other hand, they understand that given the overall situation with the semiconductor, that's what happens, not only on our side but on the whole industry. And with that, the customer accept that it's not a bigger problem. And as I said, we are continuously in discussions with our customers to optimize the situation but also openly sharing the circumstances we are operating in.
Okay. Makes sense. And maybe just to follow up on the supply chain production. Do you see any improvement in the supply chain in the same quarter? Or is more regarding second half of the year that you see a strong improvement of the same supply?
Yes. I would answer twofold. If you look on semiconductors, which was a major topic for the -- basically for the last year -- since summer last year, we see improvements and two kind of. The one is while we have intense discussions with our customers, with our suppliers, and they were basically not able to give firm commitments because they simply didn't know when they get their pre-material. That has changed. And meanwhile, for all of the main suppliers, we have some commitments. That means they have more confidence to get the path and that helps us to stabilize our business. There will be improvement already in Q2, but it will be significantly better in the second half.
The second thing what also happened is that we work on the technical side of the problem, meaning there were chips, which were restricted in the past. Our engineers are looking for alternatives. And now we have cases where we have more than 1 chip, we can do the job that helps us to be more flexible. And we have also one real life case where, in the past, for steel model units had to use two chips, same kind. Now we were able to reduce the number of chips to one, which immediately doubles the outcome. So on the semiconductor, still challenging, as I described. However, there is really improvement and again as I said, especially in the second half of the year.
The other one is a supply chain related to everything to get out of China. And here, we have to be very clear. We are early stage. We are watching that very carefully. But given the COVID situation, we have a lot of shutdowns in major Chinese cities and obviously, the harbors, there is a risk that something happens here. We don't see concrete problems at the moment. But as I said, it's early stage. So that's a clear watch item. And here, we have a level of uncertainty.
The next question comes from Michael Jacks of Bank of America.
Michael Jacks from Bank of America. The first one is on the price increases. It's possibly a bit premature to be asking this, but do you see the new pricing levels as a watermark? Or can they come down again if raw material costs decline an initial update?
Well, what we clearly communicated to our customers that we are not increasing prices just for the sake of profit but basically a pure necessity given the higher raw material and energy costs. And customers, well, obviously, they don't like price increases for obvious reasons but they understand and they accept it. And they see it also, you can look basically on all the indices here.
But it also means just for the sake of argument, if you would assume for a moment that raw material would fall back to the level we had, call it, 1.5 years ago, that would obviously have impact on the pricing itself, and it would go down again because there is a big portion, which is really raw material related. And I think that's the way we communicate with the customer, and that's also the way the customer community is a market for raw material price will go down that we also have to adjust our pricing accordingly.
Okay. That's fair. And then perhaps just related to that, could you give us some kind of a breakdown for the major cost inflation drivers for you in raw mats and manufacts? And what you see the incremental impact being for Q2 versus Q1?
Yes. So from an overall perspective, when we talk about the cost increases -- and I mentioned in the past, for us the most important material is steel. A little bit of aluminum in the U.S., but steel is the important one. And what we said already is that year-over-year, we expect a high double-digit million impact on raw material compared to 2021. And always keep in mind, also in 2021, we had a similar impact to compared to the year 2020. When it comes -- unless that's the major thing.
On the manufacturing side, we have two effects. On the one hand, especially in the U.S., we have still inefficiencies because of these permanent interruptions caused by the supply constraint. So -- and still some COVID measures. So there is room for improvement and especially on the first one, we expect an improvement as soon as the supply chain is more stable. And then on the other side, we have the energy cost, which increased overall that could balance out in the quarters to come. So I don't see an additional burden here if we compare it to Q1.
On the raw material side, it's different region by region. India was hit very fast, very high numbers. In U.S., it's more on continuous increase. And in Europe, and I mentioned that we haven't seen that much of an increase at the moment, but it's also fair to say that we have a constant negotiation with our suppliers. They also they want to shorten the contracts because of the uncertainty, and there, we expect a significant increase. Just to give you one number. In Europe, quarter-on-quarter, it's nearly double-digit million euro, which we expect on raw material.
The next question is from José Asumendi of JPMorgan.
It's José, JPMorgan. I hope you are -- wishing all the best there. Just a couple of questions, please. Can you talk a little bit more about the margin in Europe, the margin guidance for the year? How do you expect that to evolve? And talk a little bit about those cost savings measures that are coming through the P&L? And second, if we think about the guidance you're providing and the return on sales range you're providing, are you thinking it around maybe the lower end or the upper end of the range at this stage of the year?
Yes. Thanks, José. Let me start with the second one on the guidance. Well, at the moment, we feel that the guidance is -- from a range exactly where it should be. There is an upside scenario, and that means we would -- the problem in the semiconductor side would be solved fully in the second half, and that would give us upside potential on the volume side. Especially in Europe, we are prepared for that. So if that happens basically upside potential, that would definitely lead us to the upper range on the guide.
Then on the other side, I think the big unknown is China, I touched on that. If the impact of the war and the impact of the supply chain would further worsening, then we are on the lower side. So from today's perspective, I feel very confident with the range, and we are exactly where we should be in the middle.
And then on the margin in Europe, well, as I said, we had a real strong quarter 1 versus 7.9%. Take out 1.5%, which are nonoperational I would say, sort of starting point is 6.5%, and that continues -- or shows the continuous improvement over the last quarters also Q4 to Q1. What we will see in the second quarter that will be the most challenging quarter for us. Why? On the one hand, we see further increase in raw material.
As I just said, we are in constant negotiations with suppliers, especially in Europe. So there will be a hit in Q2 and pricing action will come towards the end of the quarter. So that will be the most challenging one. And then starting the second half, we see that the price increases and the bear balanced when it comes to price and costs.
From a cost improvement perspective, I mentioned it also in the year-end call, we have basically, especially in Europe, two developments. On the one hand, we are continuously working on our structural measures, reducing personnel cost. So that's well underway. And we said that half of the reduction when it comes to personnel cost reduction was already full in 2021, a big portion will come in 2022 and the rest in 2023. But on the other side, also keep in mind, and I also share that, that we still have some related costs out of the spin-off. We have to adjust IT systems for long-term benefits. So there will be cost -- structural cost improvements, but also focus-related costs so that will balance out basically on Europe. So the big driver in the second half will end on the price increase on Europe.
The next question is from Klas Bergelind of Citi.
So I want to come back on pricing. We know that pricing in North America, it was mid-single digit Jan 1, 1/3 only this quarter and more to come in the second quarter. But did you say there how much we should model from expense and you're talking about phasing more into the second half, it would be really good to have some sort of guide as well on price realization and expense and the phasing, please? I will stop there.
Yes. Thanks, Klas, for that question. Well, let me just start with North America, and I come to Europe also. You rightly said, we do at first, the price increase which has an effect already had in March, but now a full impact in the Q2. But we already announced also to our customers second, which then will be affected starting of July because of the increased pricing. So if you compare it year-over-year, it's more than a double-digit price increase.
If you go back to Europe, it's a little bit different and took a bit longer because we have a different customer structure than in the United States. But if you look from a year-over-year perspective, with all the initial price increases, we will end up at a similar level. It's just basically 1 quarter delayed compared to North America. But from a procedure, we do exactly the same. We go back to the customer and they look raw material energy price, CW transfer prices -- transport prices and have similar price increases than in North America. It's just 1 quarter late. And maybe one sentence because that's also a question what happens with order in 2023, if we take any. We also changed our procedures 1.5 years, what we call a flexible pricing component in the order, which means we take the order but we take the liberty to just raw material price parts of that order depending on the micro level at the point of time, which gives us flexibility, but still the customer has the security decade.
Okay. My second one is on the reconciliation line, which came in higher than I thought. And obviously, it's good trading at sort of the operating level. But I mean, thinking what kind of level we should model here going forward because you have group participation, you have the autonomous solutions, et cetera. Yes, so we get that right for the outer quarters, that would be very helpful.
Yes. So I would say in the Q1, there were 2 effects which in quotation, mate you could call it further merry. The one effect is that we have the participation in Portera and they are seen as a tech company and we see it as a tech company, but you all have seen what happens with tech companies in the United States who had a burden the year, when it comes to our participation since this caused their stock price dropped. The second one is the elimination I talked about is mainly elimination between the segments, so delivering parts from trucks from Asia to Europe but also parts for engine production in North America.
So basically, these are pre material. We delivered from 1 segment to the other, which was not sold to the customer, therefore, we had to eliminate the intersegment profit. Sorry, for the technical answer, but that was a big portion. That's a onetime portion. We do have it at the beginning when you ramp up. And then in the course of the year, then it's more stabilized and normally you have a positive impact in Q4. So if you take the 2 extraordinary effects out, you can basically deduct, call it, EUR 40 million out of the recon and then you have the normal run rate.
Got it. Now that makes sense. My very final one is on the industrial performance, the EUR 377 million in the bridge on Slide 10. You obviously showed this also when you report at the full year stage. I think the majority is the raw material negative versus in efficiencies on the production from the semi shortages. Was that the same last quarter? I'm just trying to understand the raw mat impact in the bridge, so we can annualize this, think about it for the year? And also will be low in the second quarter of course.
Yes, you're right. The majority of that is material. And we're also right its efficiency as well as raw materials and a negative effect of the raw material increase. As I said on a question earlier, on the U.S., we see more constantly changing raw material price for more linear development. While in Europe, we had quite a positive as well, less negative development on the raw material than expected, but we see some catch up in Q2. And as I said, you can see for Europe take EUR 100 million as an effect quarter-over-quarter for raw material. And then it's very much depending on what happens on the stock price -- on the raw material price, but then it's more flattish towards the end of the year.
The next question is from Miguel Borrega of BNP Paribas.
I just have two questions. The first one, apologies for coming back to the price increases in Europe. Can you maybe talk about how that compares to the U.S.? I think you talked about $4,000 of surcharges, of price surcharge in the U.S. So how much are we talking about in Europe? I believe you said also there's a second price increase in the middle of the year.
And then just a follow-up on your margin guidance. I think you mentioned that at this stage, you expect the midpoint of the margin guidance to be achieved and only disruptions to the supply chain would lead you to the low end. I mean, how much confidence you have on this guidance given the disruption as of now of stock inflation? Do you have all your cost inflation headwinds secured up until now? And are you thinking on taking additional measures maybe some more restructuring to offset cost inflation in Europe?
Yes. Thanks, Miguel, for the questions. Let me start with the later one. And to clarify, well, what's baked in our guidance is an outlook on semiconductors. And as I said earlier, it's getting better. We get more firm confirmations by our suppliers. And we are also working on technical solutions. Some are already in production, some are still to come. So there, we see a normalization. I'm not saying that all the problems are solved in the second quarter, but that's based in our underlying planning. Same so for raw material and energy as we see them today and what's the expectation as we have for the call of the year.
The point I want to make is, if now something happens, which you don't know right now. Let's assume we will figure out that due to the COVID crisis in China, important raw materials could not be delivered anymore. That's not baked in the guidance because we simply don't know at that point of time. But everything which we know we have included. So that's important. Therefore, we feel confident when it comes to the guidance. I only want to say there is uncertainty in the market, and that's nothing new since we talked last time, but there are also opportunities, and I talked on the volume side as well. That's the one piece on the guidance.
And then on the pricing, as I said earlier, the pricing in Europe is very similar to the U.S. if you take year-over-year, it depends a little bit on products and markets, but roughly, we increased prices to double digit. Just the cadence is a different one. The U.S. started earlier with the price increase. Therefore, we see a price increase already in Q2 of a major one, while in Europe, we see 1 quarter later. But given the fact that the majority of that is driven by raw material and they have very much globally raw material commodity prices. Meanwhile, it's also logical that we have a similar pricing strategy.
And the last comment I want to make, what happens if raw material got even worse, meaning even higher cost. Well, what we did so far, and I would say successfully, is getting in touch with our customers and saying, look, that's what happens. Now we see another spike and they have to talk how to improve that. To be honest, given the structure of our contracts, we are now in May. We have always a kind of a time delay in raw material prices. It's not a spike, if you will. If that really happens, that will be a bigger challenge for 2023 and not that much for 2022 because somehow we are already secured for the rest of the year.
The next question is from Tom Narayan of RBC.
Yes. Tom Narayan, RBC. On Mercedes-Benz, in Q1, I was wondering if you could comment on the positive effects from valuation measures. You mentioned on Slide 25 on the bridge there. Was that significant? That's my first question.
So if you look on the valuation measures, there are basically 3 effects worth to mention for Q1. The one, it's not a valuation effect, but had an impact. We sold a part of our plan in Q4. That was a part we haven't used for years. There was an interest for industrial company to take over that piece of land and we sold that. That's one thing, not a valuation, but kind of a nonoperational effect. The second one is, yes, unfortunately, and you've seen that our share price dropped significantly. And with that, we had to adjust our front end share programs positively from an EBIT perspective negatively, obviously, from the overall development, and that was a positive contribution, which we hope will go away in the course of the year but we will see.
And why does it hit Europe much harder than others because the majority of the white collar that's sitting here in Europe, hold powertrain operations are part of the Mercedes-Benz segment. Therefore, it was a significant higher. In fact, that was one example, in North America. That was the second one.
And the third one is if you look on long-term liabilities, we always discount them according to accounting rules, and it very much depends on what's the interest rate. And what we have seen in Europe is an adjustment on the interest rate up already with maybe potential in the course of the year as well. But in Q1, we have seen a major step upwards, and that reduced basically our liabilities given positive impact on the EBIT. These are the 3 impacts, which in total account for the 1.5% I mentioned in the speech.
Okay. And my second question is on the head count reduction that you guys have achieved. I think it was, I believe it was something like -- it was like a EUR 280 million is your total plan and you got half of it, it was around EUR 140 million by the end of 2021. If I look at the annual report, I have the head count there, I think it implied something like a reduction of 1,400 employees or something. And I know most of them are white collar. It implies that kind of average salary of around EUR 100,000. I just want to make sure the math is right. Is that -- are those the right numbers? Like a 1,400 kind of head count that you achieved and that goes to the EUR 140 million savings?
Yes, there's basically 2 questions. So first of all, well, not a surprise, it very much depends on which level you are talking but EUR 100,000 for employees annual salary, for Europe in average, it's not a bad number. That's a good number. And then on the headcount, we never disclosed any headcount numbers. And we are also saying we are not aiming for a specific number of headcount reductions. We are aiming -- and you set the number rightfully, the EUR 280 million, which are confirmed in the aim for EUR 300 million overall.
Keep in mind, if you look on headcount numbers, especially at the moment, there's still a lot of changes which are related to focus activities. We're still taking all companies, which at the starting point of the December were on the Mercedes side. So there are changes here. That's true for financial services. That's true, but also for the sales organization at Mercedes-Benz. And we also have taken over function. On example, April 1, we started with indirect purchasing department, which was still a mandate from old Daimler AG autonomous expense now we take that over. So I just want to say, be a little bit careful if you look on the numbers because there are so many effects included in that. So I think, therefore, we are focusing on the euro number. And there, you're absolutely right. We had EUR 140 million, half of it was baked in the EBIT of 2021. You see a big portion this year and then the remainder will come in 2023.
The next question is from Himanshu Agarwal of Jefferies.
Himanshu from Jefferies. Best wishes from my side as well. Just have two questions. One is on the supply chain constraints. So you just talked about the semi shortages, but are they seeing constraints in other areas as well, and especially around labor shortages in the U.S.? Yes. And then I will have second one.
Yes. Well, as I said, the major thing still is the semiconductor one. If you look on everything else, we don't have any shortages on raw material. We have the price topic, but we don't have a quantity topic, so that's not a problem. The one where Russia was one of the main suppliers, we could find alternatives like on palladium. So that's not an issue. If you look on everything else, I would say, you have the normal noise. There's always a part missing but nothing I would write wrong about. So it's really the semiconductor.
On the labor side, the labor market is challenging. But so far, we have no constraints on labor, not in the U.S., not in Europe. And as I said, we want to ramp up production in the second half given a more stable supply on the semi contactors. And we are prepared for that from a capacity perspective as well as from the headcount. So challenging, but not a problem at the moment.
Understood. And secondly, I wanted to ask about the recent announcement where Daimler Trucks North America has partnered with comments on fuel cell. Can you just give us more color on that? And how does that impact cellcentric? Yes.
Yes. Yes, thanks for that question. Basically, you have to think in 2 phases on the fuel cell. Well, when we decided to join forces with Volvo, that was clearly a decision for the long term. We want to develop a state-of-the-art fuel cell which fits to our standards and fits to our purpose built we lead with longer fuel. We start with Europe, but both companies Volvo and also we have a strong U.S. business. And therefore, we always have an eye on U.S. and they make sure that from form factors, from the technical requirements, this fuel cell fits in the future also in our track. So that's our long-term plan and long-term goal.
On the other hand, we have good experience in the United States with having two suppliers. We have that for ages basically on the engine. And sometimes dimes of essence, so therefore, we decided to join forces of Cummins have an earlier point of time, fuel cell trucks up and running, gain knowledge with that. And then we have therefore for the U.S. market 2 options. But it does not mean -- your question basically that does not mean we go with Cummins only in the U.S. and cellcentric is for Europe only. That's not our plan.
The next question is from Jonathan Day of HSBC.
It's Jonathan from HSBC. I just wanted to ask a little bit about the switching of parts from Asia to the U.S. I just wondered if you could talk a little bit about the impact of that on your Asian customer base. That's my first question.
Yes. Yes, you might remember that in the past, you were saying, well, we are missing very specific chips. And that hit us in 2021 quite hard especially on the Actros, especially on the Cascadia. And it was also a burden for the overall profitability last year. Now the world changed a little bit that the specific chips are available. Now it's more, call it, the incoming chips, which are missing. And that gave us the opportunity to move away parts or to optimize the allocation of chips positively that affected especially India, and it will affect India in the second quarter very strongly because we have 3 common chips here, and it also affects Japan. So that's the one.
Hard to judge what it would mean if we would allocate everything with the same amount or percentage points. But I could easily see and we've seen high stocks. We have a lot of unfinished sitting in Japan, could easily sell 3,000 to 5,000 more in its high-margin trucks. So 1 to 2 percentage points on return on sales, if we would do the allocation in a different way would be possible.
Okay. Great. And then my second question was really more on buses. And I was just wondering if you could talk a little bit about sort of the longer-term outlook there, whether you could see at some point a recovery? Or do you think there are sort of structural challenges now for buses and coaches or I suppose coaches post-COVID. Just curious to get your thoughts on that.
Yes. Well, that's obviously the most important question. If the coach business basically returns to the levels before. Well, we have intense discussions with that, we have intense discussions with our customers. And we believe it will come back because the purpose of driving buses will be the same. What are the big drivers? Well, it's the cruise ships. They are up and running now. Now that's too big demand. And that's important to understand, it's not only the older generation who uses coach buses, it's more and more also the younger generation. We use that to come to point to point and have a more flexible alternative basically to taking the wave and cheaper as well. So that's a huge demand.
So we see no structural change on that. Will it take some years? Yes, it will take some years. But 2 things are positive, I would say. The 1 is what we see is a much higher demand in parts. In other words, that means the trucks are now not sitting on a lot, but really are used. So that's the first sign of recovery. And the second one, and that was a concern, to be honest. Because on that segment, you don't have these mega fleets who are buying thousands of buses, it's more midsized companies. And it was quite hard and still is hard for them to survive but if we see at the moment, especially in Germany, but also in countries like France, that these midsized companies, they really survive. They managed to survive they use the coach buses to transport kids to schools and things like that. And that's very important for the long term that the customer base was not heard but majorly hurt by that crisis.
So therefore, our answer is structurally, we believe coach segment comes back. And as I mentioned several times, we really use the time to significantly decrease the level of costs in our bus businesses. And then with that, I think we are very well prepared when the time of a stronger coach might come back, and we'll see nice return on sales there.
The next question is from Anthony Dick of ODDO BHF.
I had a question on the U.S. market. So we're witnessing a sequential slowdown in freight indicators in the U.S. And at the same time, you're passing on price increases and operators themselves are facing higher operating costs. So to what extent do you think this can translate into demand for your products in the short and medium term?
Yes. Very good question. Thank you. I think it's important to understand that at the moment, the market size is not defined by demand, but by supply. And what we said at the moment, if you look on the range of the guidance we have given, that already includes basically a significant impact, negative impact by supply, without the market would be easily 50,000, 60,000, 80,000 higher than what we see. And what basically happened or could happen is that even if the demand is not that strong any longer, but if the customers were not able to get the trucks for this high demand, it's still in line. Therefore, we see our market guidance still okayish, a lot on this upside potential.
And the other one I want to mention, and that's important to understand. In 2021, the U.S. market without a restriction on the supply chain would be a spike market, a very, very strong market. So what happens? Supply chain constraints limited the market and demand was postponed to 2022. So now the postponed demand in 2022 meets still very strong demand in 2022, but still cannot fulfill because of the limitation of semi-contractor. So basically, a portion of 2021 has moved to 2023 and the not fulfilled demand of 2022 is moved to 2023.
At the same time, you see more efficient truck and you see an aging fleet. So basically, what we see at the moment, and there could be, call it, a positive side effect of the crisis, instead of what we have seen in the past spike in U.S. and then lower markets for a couple of years. We have seen more stabilization in 2021, 2022, 2023, after that, it's hard to judge where you have a couple of years with a strong good market. So we are not concerned at the moment that the demand is not strong enough.
We have time for one more question, and the question comes from Poppy Boyd-Taylor of Goldman Sachs.
The first thing I wanted to ask was just on the increase in sales that you saw in the quarter and understanding a bit better the balance of that, that was driven by the kind of using supply chain and the reallocation of resources, for example, towards North America and Europe, how much was driven by the supply chain side versus positive trends in demand?
I would say it's only driven by the supply chain side because if you're referring to Q1 last year, there basically the supply chain was not a big issue. Now we are -- we had already a strong demand in the course of the year. So the demand would be even much higher than what we could sell in Q1. The limiting factor was the supply chain that we are able to sell more trucks and obviously has another effect. You might remember that we said at the end of the year, we were producing full steam and had a problem at your end, as there's a lot of trucks are sitting in a lot, especially in the United States with just 1 or 2 chips missing. But we really decided to make a conscious decision.
We accepted a higher cost that burden our profitability in North America in Q4, and we had a higher inventory. But that gave us the opportunity to -- as soon as the chips came in at the beginning of the year to immediately finish the trucks and then hand it over to our customers. So especially in January, we had a much stronger January than last year, and that was mainly driven by a different approach at the year-end. And again, it was really a conscious decision because customers are eagerly waiting for the trucks. That's about the main driver.
Okay. Yes. Understood. The last thing I wanted to ask and apologies if this was already mentioned earlier, my line did cut out for a moment. But just if you could clarify what are your net pricing assumptions and the margin guidance for the full year. How do you like within the different segments you're expecting to become sort of price cost positive overall?
Yes. So what I said earlier for the 2 major markets, if you take year-over-year overall, we see double-digit price increase, that's for U.S. and for Europe. And from a balance perspective, well, as mentioned in Q1, we were not able to fully recover what we see on the cost side. That will change in the U.S. in the quarters to come already in Q2. While in Europe, we have a more difficult quarter ahead of us with expected significant increases in raw material quarter-over-quarter in pricing to aim in the second half. From a full year perspective, in our guidance, we assume that we can cover the cost increases based on the current spot price, including our anticipation for the rest of the year with pricing. That's what's baked in, in our guidance.
So ladies and gentlemen, thank you very much for your questions and for being with us today. Jochen, thank you very much for answering all the questions. Now as always, the IR team remains at your disposal to answer any further questions you might have. To all of you, have a great day. Thank you for participating today and talk to you soon. Goodbye and take care.