Daimler Truck Holding AG
XETRA:DTG
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Daimler Truck Holding AG
Earnings Call Analysis
Q1-2024 Analysis
Daimler Truck Holding AG
The earnings call for Daimler Truck highlighted significant leadership changes. With Eva Scherer taking over as the new CFO on April 1, the company welcomed her to her first results call. Her presence marks a new chapter for the company's financial stewardship.
In the first quarter of 2024, Daimler Truck achieved an adjusted group EBIT of EUR 1.2 billion, with an adjusted return on sales in the industrial business of 9.3%. The company's earnings per share stood at EUR 1, and free cash flow in the industrial business matched EBIT at EUR 1.2 billion. These figures represent a robust start to the year, showcasing strong operational efficiency and profitability.
A highlight of the quarter was the strong performance in the zero-emission vehicle (ZEV) segment. Sales of ZEVs significantly surpassed Q1 2023 levels, exemplified by Thomas Built Buses achieving the milestone of selling 1,000 fully electric school buses. Additionally, a joint venture with PACCAR and Cummins unit, Accelera, selected Mississippi as the site for its battery production, planned to begin in 2027, signaling long-term commitment to sustainable transport.
The segment-wise performance varied across regions. In North America, despite a 5% decline in heavy-duty segment sales, the market remained strong with a slight dip from 48,800 units to 46,100 units. The market share held steady at a robust 43%. Mercedes-Benz and Daimler Buses contributed positively to the EBIT, despite facing some market challenges. However, Trucks Asia faced significant difficulties, with a 29% drop in sales year-over-year due to weak market conditions, particularly in Indonesia.
The management reaffirmed 2024 guidance, despite macroeconomic and geopolitical uncertainties. Heavy-duty market expectations remain between 280,000 to 320,000 units in North America and 260,000 to 300,000 units in Europe. Positive signs from North America were noted, especially with strong order intake in the vocational trucks, driven by infrastructure and industrial projects. However, a cautious outlook was maintained for Europe, particularly Germany, where market recovery signals were awaited.
Daimler Truck underscored its commitment to sustainability with advancements in hydrogen infrastructure. A notable development was the signing of a letter of intent with Masdar to explore liquid green hydrogen import from Abu Dhabi to Europe. Additionally, Financial Services expanded rental operations for truck and bus customers in Brazil, diversifying service offerings.
The earnings call also addressed potential challenges such as inflation-driven cost increases and supply chain disruptions. Despite these, preparations for flexibility in production were emphasized, ensuring resilience against market volatility. Managing material costs effectively through pricing strategies helped counterbalance negative impacts.
Looking ahead, Daimler Truck projects unit sales and margin levels in Q2 similar to Q1, with a gradual improvement anticipated in the latter half of the year. The company remains focused on unlocking profit potential while leading in sustainable transportation, maintaining strong market positions across key regions.
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Ladies and gentlemen, welcome to the Daimler Truck Holding AG First Quarter Results 2024 Conference Call. I am Sandra, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast.
At this time, it's my pleasure to hand over to Christian Herrmann, Head of Investor Relations and M&A. Please go ahead.
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, Martin Daum, our CEO; and Eva Scherer, our CFO. Martin and Eva 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'll find in our published results documents.
Please note, our presentation contains forward-looking statements that reflect management's current views with respect to future events. Such statements are subject to many risks and uncertainties. If the assumptions underlying any of these statements 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 that, I would like to hand over to you, Martin.
Yes. Thank you, Christian. Good morning, ladies and gentlemen, and a warm welcome from me as well. Thank you all for joining us today for our results call for the first quarter of 2024.
I would like to take this opportunity to, once again, thank Claus Baessler who did the last couple of calls together with me and who did a fantastic job as acting CFO. Claus, who is sitting right across me, I know you are listening. I see you are listening. Thank you so very much. Great job.
At the same time, I'm very happy now to have Eva Scherer, next to me, our new CFO, who joined Daimler Truck on April 1. Eva, welcome to Daimler Truck into your first results call. We are glad to have you with us.
Now let's jump right into our business topics of the first quarter. As always, let's start with an overview of our key figures and key topics.
In the first quarter, we achieved an adjusted group EBIT of EUR 1.2 billion, an adjusted return on sales in our industrial business of 9.3%, earnings per share exactly of EUR 1, a free cash flow in our industrial business of EUR 1.2 billion and a net liquidity of EUR 9.36 billion. Main takeaway is that we had a successful start into 2024.
This is not an achievement of the Board of Management or a single business unit, it is the achievement of the entire Truck team, where everyone is contributing every day, in every function, in every region, and this makes me very proud and grateful.
Let me now briefly highlight a few important developments in the past quarter. The market for zero-emission vehicles continues to build and to expand. Our ZEV sales are significantly above Q1 2023. And Thomas Built Buses, for example, now celebrated the milestone of 1,000 fully electric school buses sold.
Regarding the battery supply of our ZEVs, you know that we formed a joint venture with PACCAR and the Cummins unit, Accelera. This joint venture now selected the U.S. state of Mississippi as the site for its battery cell production. Reason is, that in the U.S., we found the most favorable conditions for such an investment. Battery cell production there is planned to start in 2027.
We firmly believe that next to batteries, the decarbonization of transport will also require hydrogen, and we want to help start building a hydrogen infrastructure. Together with Masdar, a highly innovative energy company based in the United Arab Emirates, we, therefore, signed a letter of intent to explore the import of liquid green hydrogen from Abu Dhabi to Europe.
As a next step in continuously expanding our service business, Daimler Truck Financial Services launched its rental business for truck and bus customers in Brazil. We like to say, future needs heritage and therefore, proudly honor our anniversaries. In the past quarter, we celebrated the 60th anniversary of our facility in Tramagal, Portugal, where we produce our light truck Fuso Canter and, of course, also our eCanter.
I now want to give you an update on key market developments in the first quarter. In North America, demand in the heavy-duty segment slightly decreased year-to-date, which is in case means, by the end of February, the Class 8 market is down by 5%. In absolute terms, market volume came down from 48,800 units to 46,100 units, which is still a very solid level. Our market share remains at a very strong level. We continue to remain the undisputed market leader, with a market share of around 43%, which trends on the same level as in previous year's Q1.
Going forward, we remain committed to go from strong to stronger in North America, for example, by taking full advantage of our own new Western Star vocational trucks, and our strong order intake for the entire Q1 in North America proves this. In Europe, we saw a similar development. By end of February, demand in the heavy-duty truck market also came down by 5%, decreasing from 57,700 units to 54,800 units.
On a positive note, we improved our market share compared to Q1 2023. It increased from 17.8% to now exactly 20%. Both of our key markets, therefore, are developing as we expected. After very strong levels, particularly in the past year, demand is now normalizing. This is nothing new for us. We have values to the cyclicality of our business and have started to adjust our production capacity in Europe accordingly.
When we move on to our unit sales and order intake, our numbers for Q1 2024, in total, are below Q1 2023. Yet, it's important to take a closer look because the development is very different across our segments. The decrease in unit sales as well as in orders is mainly due to the development of Trucks Asia. Trucks Asia sales declined by almost 1/3 compared to last year, leading to the lowest Q1 sales for the past 10 years. Many of the core markets of Trucks Asia show a significant decline, especially Indonesia, as one of the major markets in the Asian region was impacted strongly. Since we are the market leader in Indonesia, the weakness of this market hits us particularly hard.
In North America, sales are down, but only slightly. Incoming orders are 31% significantly up compared to Q1 2023, underlying the strength of our product portfolio. At Mercedes-Benz, unit sales are down by 8% and incoming orders are down by 17%. But let me again point out that this is not the first market normalization we are experiencing.
At Daimler Buses, I'm happy to report that the comeback after the COVID pandemic continues with an increase in sales and an even stronger increase in orders by 9% over a strong prior year Q1.
Now let's look at our progress in zero-emission vehicles. The matches here is as positive as in the last quarters. The momentum remains strong for Daimler Truck. In the first quarter of 2024, we sold 813 battery-electric truck and buses, almost 3x as many as in Q1 2023. ZEV orders increased significantly as well by 60% compared to the 2023 figure.
What remains positive and encouraging as well is a great feedback we get for our zero-emission vehicles. Our customers are very happy with ZEVs made by Daimler Truck. By now, our product portfolio already comprises 10 different battery-electric product lines, and behind all of them are many more different variants.
But as we will not get tired to point out, apart from the right vehicles, our customers also need the right charging infrastructure and the right total cost of ownership. These 2 factors are still holding our customers back. They are holding the ZEV market back. We, therefore, continue to work on these sectors, also together with partners and policymakers.
And Daimler Truck will remain fully committed to sustainable transportation. We remain fully committed to not slow down with respect to decarbonization, but to further accelerate and lead the way.
With that, I would like to hand over to you, Eva, for your premiere in this quarterly call and a deep dive into our financials. Eva, the mic is yours.
Thank you, Martin. Hello, everyone, and a warm welcome from me as well. My name is Eva Scherer, and I'm happy to be on board now. Let's review the financials for our first quarter. I will start with an overview of the key figures for the group.
Year-over-year, group revenue in the recent Q1 remained flat at EUR 13.2 billion. Group EBIT increased by 1% to EUR 1.13 billion, while adjusted group EBIT rose by 4% to EUR 1.2 billion. Adjusted items from M&A in the first quarter still primarily related to the spin-off. With no other significant adjustments to mention, Q1 can, once again, be described as a clean quarter.
With EUR 1.2 billion, free cash flow for the industrial business came in significantly above prior year's first quarter and sequentially on the same level as our fourth quarter. The high cash conversion rate was mainly driven by the timing of working capital, especially the earlier collection of receivables driven by customer mix as well as positive effects from less factoring activities at the end of 2023. Therefore, the extraordinary high cash performance in Q1 does not impact, but confirms the fiscal 2024 guidance for free cash flow.
Net industrial liquidity in the first quarter stood at EUR 9.4 billion, which is around EUR 1 billion higher than the level as of the end of 2023. At EUR 1.2 billion, EBIT for the group showed a slight increase versus Q1 last year.
The most significant positive driver was pricing across all industrial segments. Additional positive contributions came from product mix and foreign exchange rate impact. Negative effects came from decreased unit sales and inflation-driven cost increases. The industrial performance bucket was negative, with EUR 73 million, primarily due to higher material costs. While we have seen positive impact from raw material, negative impact from other materials, mainly additional product content, increased material cost, but has -- but this has been largely covered in pricing. Net-net, price/cost mix was positive in the first quarter.
Financial Services had a slightly negative impact on EBIT with EUR 1 million. Adjustments to group EBIT includes EUR 41 million negative cost effects, mainly related to the spin-off. Revenue for our industrial business stayed more or less flat year-over-year at EUR 12.5 billion. EBIT adjusted of the industrial business slightly increased from EUR 1.1 billion to EUR 1.2 billion, with return on sales adjusted increasing from 8.8% in Q1 2023 to now 9.3%.
EBIT contributions from the segments to industrial business EBIT presented a mixed picture in Q1. Trucks North America as well as Daimler Buses each delivered around EUR 50 million of positive contribution, whereas Mercedes-Benz with minus EUR 19 million and Trucks Asia with minus EUR 31 million, burdened the year-over-year EBIT bridge of the industrial business.
Trucks North America delivered a return on sales adjusted of 12.5% on the back of an EBIT adjusted of EUR 724 million. Both KPIs improved year-over-year as well as quarter-over-quarter. Unit sales in Q1 declined 5% compared to the first quarter of the previous year. We generated a favorable margin development due to continuous pricing enforcement. Sales mix and foreign exchange rates also had a positive impact on EBIT. The normalization of the used truck business burdened profitability. For Q2, we expect slightly higher unit sales with margins on a similar level.
Mercedes-Benz reported an EBIT adjusted of EUR 421 million, with a return on sales adjusted of 8.7% on the level of prior year's first quarter. The biggest positive contributor to year-over-year EBIT performance in Q1 remained pricing, where we could achieve a strong realization across all our markets.
Our Brazilian business also made a positive contribution in the first quarter, benefiting from a stabilizing market environment following last year's market downturn due to the Euro VI introduction. On the other hand, Euro 30 markets were down in Q1, leading to lower unit sales. Aftersales business remained supportive, while the normalization of the used truck business had a negative effect on EBIT. Inflationary cost increases and higher IT costs still remain a burden.
Looking ahead to the second quarter, we currently expect a similar unit sales level as in Q1, but with a weakening mix due to the relative increase in sales in Brazil. Based on the weak development of the German market in particular, we expect quarterly EBIT performance in Q2 at the lower end of the full year guidance range.
Trucks Asia realized an EBIT adjusted of EUR 49 million, with a return on sales adjusted of 3.3%, which was significantly down compared to Q1 and Q4 of 2023. The main reasons for the performance decrease is foremost the significantly decreased sales volume of minus 29% year-over-year due to weak Asian markets, especially in Indonesia. The equity result from our Chinese joint venture, BFDA, burdened Trucks Asia's EBIT with minus EUR 21 million, EUR 7 million less compared to Q1 last year, driven by the depressed Chinese market. This resulted in a negative impact on the Trucks Asia margin of approximately 150 basis points from the equity result from BFDA. Foreign exchange rates also had a negative impact on our Q1 results.
On the positive side, Trucks Asia realized strong pricing across all markets. Product mix was supported by the ramp-up of the eCanter. Aftersales business continued to show a positive contribution in Japan and in international markets. For Q2, we expect units and margins of Trucks Asia to be on a similar level as in Q1. Daimler Buses saw a significant improvement in EBIT adjusted from EUR 9 million in last year's Q1 to EUR 59 million. As a result, return on sales adjusted increased from 1% last year to 5% in this year's first quarter.
There are 3 primary drivers between this recovery, each contributing to a similar extent. First, slightly increased unit sales with an improved mix, predominantly fueled by further recovery in the European coach segment; second, improved net pricing; and third, a positive impact from foreign exchange rates. These positive drivers overcompensated negative effects from inflationary cost increases, especially on the wage side and from higher R&D spending. Building on this solid Q1 performance and a very strong order backlog, we expect the Daimler Buses margin for the second quarter in the upper half of the guidance corridor.
Let's have a look at our Financial Services business. Here, new business increased by 16% compared to last year's Q1, stemming from higher penetration rates and the ramp-up in Europe. Contract volume increased by 6% compared to year-end 2023, now standing at EUR 29.9 billion. This growth was primarily driven by the retail business in all regions, along with the wholesale business in North America.
EBIT adjusted remained stable year-over-year from EUR 52 million to EUR 51 million. And return on equity adjusted decreased compared to last year's Q1 by roughly 1 percentage point to 8.2%. In line with our expectations, cost of credit risk increased compared to Q1 in 2023, driven by a continued trend of market and customer segment-specific deterioration, especially in North America.
First quarter cash generation was driven by a positive effect from working capital of EUR 258 million, with main positive effect from, as I already mentioned, earlier receivables collection and less factory in Q4 of 2023. This number also includes the negative inventory effect from the typical pipeline filling at the beginning of the year. Net investments in PP&E and intangible assets of minus EUR 333 million were, as expected, higher than depreciation and amortization of EUR 276 million.
In total, cash flow before interest and taxes of the industrial business came in at EUR 1.4 billion for the first quarter. Cash taxes amounted to minus EUR 235 million, resulting in a free cash flow of the industrial business, without adjustments for M&A transactions and restructuring measures of EUR 1.2 billion. Adjusted free cash flow of the industrial business increased significantly year-over-year to EUR 1.3 billion.
As mentioned before, the strong free cash flow in this quarter is mainly driven by timing effects. Hence, our expectation for the full year cash generation remains unchanged. As a result, industrial net liquidity remains at a high level, standing at EUR 9.4 billion.
Let me hand back to Martin for the outlook.
Thank you very much, Eva. Before having a look at the assumptions for the full year 2024, please, as always, keep in mind that our outlook is subject, especially to further macroeconomic and geopolitical developments. As I already mentioned, our market assumptions for the full year 2024 are unchanged. We still anticipate a range of 280,000 to 320,000 units for the heavy-duty market in North America, a decrease of minus 3% to minus 16% versus 2023, and the range of 260,000 to 300,000 units for the heavy-duty market in Europe, translating into a decrease versus 2023 of minus 12% to minus 24%.
While headwinds have increased, in particular, in Europe, our Q1 results already showed improved resilience. Therefore, all our assumptions for the key KPIs on group and industrial business level stayed valid and unchanged.
Our segment guidance remains unchanged as well. I just want to highlight the following 2 points regarding our 2 biggest segments. For Mercedes-Benz, we are currently tracking in the lower half of the guidance range. To achieve more than this, we need to see stronger markets, especially Germany, in the rest of the year. However, currently, we do not see this. With regard to the U.S., we have achieved a preliminary agreement after negotiating with the United Auto Workers. We believe this has resulted in a fair result considering all different positions of the involved stakeholders.
Before Q&A, I just have a few concluding remarks. You know our 2 strategic ambitions are to unlock our profit potential and to lead sustainable transportation. In the past quarter, we made good progress with respect to both ambitions. We further increased our ZEV sales, for example, and we delivered solid profitability in normalizing markets. We are building on our strong result basis of 2023.
But let me assure you, we certainly do not get carried away by our recent successes. We are well aware that our market environment has become more volatile and that the number of risks has increased. We, therefore, keep moving forward with confidence, but also with prudence. With this attitude, we are convinced we can turn 2024 into another very solid year for Daimler Truck.
Now we are looking forward to your questions.
Thank you very much, Martin and Eva. 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. [Operator Instructions]
Now before we start, the operator will explain the procedure.
[Operator Instructions] Our first question comes from Nicolai Kempf from Deutsche Bank.
Nicolai Kempf, Deutsche Bank. I take them one by one. And my first one would be on Mercedes. You have said that headwinds are increasing. And it sounds a bit like that you're hoping a market recovery is going to happen in H2. What if this recovery is not happening? And how are you trying to compensate for lower volumes?
Nicolai, easy to answer. As I said in my outlook, if it's not, we are currently tracking in the lower half of the guidance range. To achieve more than this, we need to see stronger markets. So we have a guidance range, and you see it from the results from the first quarter. If we stay there, then we certainly stay in that profitability level.
We expect -- and if you look at the full market guidance, if you multiply Q1 times 4, we would be much lower for the full market than anyone, us and our competitors are prognosing for 2024. So from that side, we still expect an uptick as we always said, by the way, in the second half.
However, we don't see it yet in the industry order intake. If it not comes, then we certainly have to use -- continue to use our flexibility measures in the production, where we then reduce and adjust our production accordingly. But we are prepared for that. I would say, we are prepared to show them our resilience.
Okay. And maybe one follow-up on that. You did mention higher IT cost in Q1, and that will also be a track for the full year at Mercedes. What can we expect from these type of measures? And when are these going to kick in?
Nicolai, thank you for your question on this. I'm obviously looking into this topic. Right now what I can tell you is that we're obviously working very hard on the self-help measures and our fixed overhead costs. I will give you an update once I have built a view on that.
I can tell you that when it comes to IT, we're obviously really looking into also future-proofing our systems. So not just doing the separation from Mercedes-Benz, but also really looking at process improvement at the same time. So this is money well spent in our view. But yes, it is higher than we initially expected. And on overall sales [ health ], I would give you an update once we know a bit more how we are tracking towards the year, but be assured that we're working very hard on that.
The next question comes from Daniela Costa from Goldman Sachs.
I have 2 questions as well. I will ask one at a time. So the first one is just following up on the commentary regarding this uptick in the second half that you were talking about just before and just in general, but focused on the U.S. market. When we look at what the haulage companies are saying, we're seeing big year-on-year CapEx decreases, even bigger than the bottom end of what you and your peers are guiding for.
Can you tell for us the visibility you have now given the strong orders today versus those CapEx plans? And how -- what you're going to do with production in the U.S. as the year advances towards the end and into the beginning of '25?
Daniela, we feel much more positive for the continuation for the U.S. Orders coming -- continue to come in strong. And you are right, we see the first big fleets ordering on top. We have them on track where there's the base volume, which they can always expand, and the first ones take that.
So we see here positive signs, and we are fully prepared to go full steam throughout the entire year, if necessary. So I'm really glad that we were able to settle with UAW without any strikes, so we don't have a loss on that side. So here in the U.S., as you see from my sentiment here, I feel much more positive about the market. And I would say that the big positive for us in the U.S., in the 3 big segments, on-highway, vocational and medium duty, we have in all 3 segments, an industry-leading product and can participate wherever whichever segment is increasing.
Are you fully booked? How long does the order book go for the year?
If you order a truck, we see a -- we are not in the -- like in the last years, where if you ordered, I have to apologize and ask you to wait for 12 months. We can get you a truck if you want one by June, July. If you want 1,000, we have to talk, it depends on the pricing.
Understood. And my second question is just following up on the commentary on the weakness and the headwinds in Europe. If you expand towards sort of what's that implying for the pricing environment and for your assumptions in the second half there?
I mean people always think that pricing is kind of an extra take we do to get rich. I mean number one is we have inflation, and you've seen that in the bridge. Our wages go up, our cost of production go up. Yes, some raw materials get easier. But on the other side, suppliers still demand higher pricing on a lot of items.
So I would say there is not much room to reduce pricing. I assume the same situation we have, others have in the market as well. So I don't -- we have a strong pricing situation, and I don't see any change. And I don't want to change from our company anything from that.
The next question comes from Klas Bergelind from Citi.
So my first one is on the bottlenecks and potential supplier issues. When we met last time, Martin, after the results, I think you highlighted that there is quite a lot of trucks to be delivered this year in North America, being held back earlier from, supplier issues now being resolved.
But we're now hearing of the fire at one of your suppliers in Mexico producing a mirror for the Cascadia. To what extent will this be an issue here looking at unit sales and the margin here into the second quarter and the full year?
I would say, Klas, what I said last year, it's still valid. I would say the area where we really struggled are over. So now -- so here, I would say, at the moment, no pushback on the supply side as we had with [ Imagusa ] in the second half last year. You're right about the fire in our mirror -- for our mirror supplier. And I know this company supplies to other brands as well.
For us, at the moment, a nuisance and a lot of work for our purchasing and supplier management people. But I would say definitely neglectable -- definitely nonexisting for the full year, and I would say, even neglectable for the second quarter.
All right. That's great. My second one is for you, Eva. The ASP increase, there is mix and there is pricing in there. Can we please try and break out the carryover from pure pricing? You obviously have a positive mix from medium duty, better than heavy duty and so forth, but interested if you can give us where the pure pricing there in the quarter.
Thank you, Klas. So obviously, when we look at pricing, there is a carryover effect that we have from last year that leads to a year-over-year improvement. Overall, Martin alluded already to the fact that in certain areas of the world, we do still have price increases that we're planning for. In others, we keep the prices stable.
That obviously also depends on the market environment. So you can expect a positive pricing effect throughout the years. As of our current planning, you could expect that it gets smaller quarter-over-quarter as we go throughout the year.
Yes. That's reassuring. So a positive pure price effect for the full year, even if -- obviously, it will comp out a bit smaller.
The next question comes from Jose Maria Asumendi from JPMorgan.
It's Jose from JPMorgan. Two questions, please. The first one, how should we think about sequential margin improvement? Or maybe going sideways, when you think about North America and MB trucks, a little bit. How do you think about that sequential move Q2 versus Q1?
And then second question, Martin, you are very, very close obviously to the -- your clients at the market. What are you seeing -- what are you hearing in Europe, specifically in Germany? And do you expect the order backlog for MB trucks to stabilize at the level we're seeing in the first quarter?
I mean maybe I'll start with the margin, and then I hand over to Martin. I mean from the margin level, both on Europe and on North America, we said that they will be on a similar level in Q2 compared to Q1, as I mentioned in the speech. And then I would hand it to Martin.
Yes. And I would say Europe at the moment is a kind of a wait-and-see game. We have our total market assumptions. We base it on a long-term demand, what we can see and of an economic recovery. At one point of time, that has to translate into more truck orders.
But the question is when. And as I said in my speech, at the moment, right, as we speak, by the end of April, beginning of May, it's not there. But therefore, we have to watch. May, June order intake will be very, very crucial for any full year assumption. A lot of talks, no action at the moment. That's, I would say, the summary in the customer relationship.
The next question comes from Michael Aspinall from Jefferies.
Michael Aspinall here from Jefferies. This is kind of just a follow-up to that question and a follow-up on the U.S. customer CapEx budgets. Just listening to your customers talking, they're kind of talking about green shoots in freight markets in terms of freight rates and also expecting used truck pricing to kind of improve a little bit as we get through the year. Is that in line with your expectations?
Yes, Mike, look, when you look at U.S., the highway business is certainly down compared to last year. And it's compensated by what we call the vocational business and the medium-duty business. We have an extremely flexible production network, where we can build at every plant, at least 2, sometimes 3 to 4 different models. So we can adjust immediately to those different markets.
The on-highway market is -- it's not overheated with how it was in the past years, but it's not bad on the other side at all. You have always to consider we're still producing at full speed in the United States and don't intend to let go even one notch back. So I would say, at the moment, it's -- we like the balanced mix of the product and we are in very close contact. But if a customer needs some more, we can react, which is positive because in the past, we couldn't, yes. So at the moment, we could react. But -- so all in all, I would say, rather on the positive, as I said, on the negative side.
Okay. And second question, maybe just looking at the same thing. There's a little bit less visibility in Europe. Are those kind of green shoots in European, say, on-highway freight markets as well? Or do you think Europe is a little bit behind the U.S.?
I mean Europe is, on one thing, much more difficult to predict and answer because it's a much more fragmented market. There are countries in Europe that are doing better than others.
Look at Great Britain, for example, very difficult market. And secondly, the customers are smaller. So you have, on the one side, you don't have the big swings. On the other side, you are far more dependent on 20-, 30-unit deals or 1,000-unit deals, which makes it on the other side more -- it's more difficult to -- both to predict. And therefore, I would say it's more the general economy, which will push it.
I have the feeling what holds us back at the moment is especially that pretty depressive sentiment we have in Germany these days. And Germany is not only the largest market in Europe, it's the market that we have nearly doubled the market share we have in the rest of Europe. So it impacts us significantly.
But here, it's more the general sentiment. We have to give the local German industry a jolt of optimism into the arm, which some of the global players, especially Daimler Trucks, certainly has. It's not our fault.
The next question comes from Miguel Borrega from BNP Paribas.
Two questions for me. Same on Germany and Europe overall, Martin. Is the weak start to 2024, basically in line with your expectations? I know that you were expecting a softer first half versus second half, but is the trend that you're seeing kind of weaker than you initially expected?
And then the second-part question, what does it take for the market to pick up? Just want to understand the shape of the recovery you expect. Is it a fast rebound if you cut prices? Or even if you do, no major improvements would be seen basically?
I mean, Miguel, first of all, the first quarter is exactly how we expected it. If you ask me what is different from 3 months ago when we talked about our full year results, so it's 2 months ago, we would have expected an uptick in the order intake. That is a new -- that is, so to speak, the new type of information.
So first quarter, no problem. Second quarter, I would say, still in line, but now it starts to hurt because the order backlog is pretty small. Price -- dropping in price would make no difference. It's not a question that we lose to the competition, it's a question that, at the moment, the demand is not there. And therefore, the next 2 months are really crucial.
As I said, a lot of talk. It's not that people are not interested, it's not that nobody wants to buy a truck, but you always -- I mean I've always talked about the loss of trucking. You only buy a truck because you need a truck, but you can always wait another month, quarter, year until you buy the truck. And therefore, we have cyclic business.
Because then comes number three, at the end, you have to buy a truck because you need it. So that will be at the uptick. The big question is, when does law #3 come into play? We thought in April, May, and that is not the case. Now we think it's June, July. And really very curious how that shakes out.
Great. And then on free cash flow, I know you're reiterating your full year guidance. Is there room for further improvements on working capital? I remember you stocking up so that the production would run smoother. Now that supply chains are basically normal, is there an element now of destocking?
And then is there a case that if free cash flow is much stronger than you expected, could you revisit again the capital allocation, Martin? I mean, today, you've got EUR 9.4 billion of net cash. In reality, why would you need so much cash?
Thank you, Miguel, for the question. Let me start with the free cash flow and stock levels and inventories. So we have potential when it comes to reduction of inventories in the upcoming quarters. We did have a very positive effect now in quarter 1 from the reduction of accounts receivables.
There was also an effect when we compare it to prior year quarter 1 that in Q4 2023, we did not do factoring of receivables, to the degree that we did it in quarter 4 in 2022. So that was basically a positive impact that we had into Q1.
But then on the accounts receivable side, as we model that out, we are on a fairly low level now going into the next quarter. But on the inventory side, I do see upside. I mean we're currently monitoring it as we go. Generally, we are very well on track towards our free cash flow guidance for the full year. And of course, we will update you closely on that when we come out with Q2.
When it comes to capital allocation. I'm sure you're well aware, we're still executing the first tranche of our current share buyback program. The first tranche will be completed in summer this year. And then the second tranche will run until August 2025. And by then, we will have EUR 2 billion of share buyback completed. And at the time when we announced that at the CMD in July 2023, this amounted to 8% of our market cap at that time. So I think that was a pretty substantial program, which is now running, as I said, until August 2025.
Of course, as we come to end this program, we will also look into share buybacks going forward. And we do, generally, think that it's a good way of returning cash to shareholders. And then at the same time, we have dividend payout ratio that we committed to a 40% to 60%, also depending on market conditions. And I think we're comfortable with that, and we'll run into that framework.
So that's the -- that's all the update I can give you on that right now.
The next question comes from Shaqeal Kirunda from Morgan Stanley.
It's Shaqeal Kirunda from Morgan Stanley. I just wanted to ask about the impact of the new UAW contracts in Trucks North America. I think there was a 10% cost of wages increase this year. So Martin, are you confident you're able to pass these extra costs on to customers?
Yes. Thank you, Shaqeal. First of all, I'm glad that we didn't go on strike. Secondly, that is not the first contract the UAW closed in this contract session. It started with Ford, GM and Stellantis somewhere in summer last year. It continued with major key suppliers and with some of our competitors.
I think the 10% is the new normal for UAW contract in the United States, so it didn't come as a surprise. We, certainly -- as I said, this is certainly one part why pricing will stay because we have inflation. Secondly, we have in the U.S. a very balanced production mix with Mexico and the U.S., and we are certainly going to optimize our production network further in the future.
Got it. And then just if we take a step back, clearly, some challenges at Mercedes-Benz. The European economies are not looking great. But will your guidance for 12.5% or similar margins in Trucks North America in Q2, it seems like the strength in North America is actually offsetting any sort of weakness in Europe. And so on a group basis, still looking like a pretty strong year. Is that right?
Yes. As our forecast for the full year says, we -- look, we had last year, by far, the biggest year ever. We then told you that we expect retracting markets, which is true, but we want to end the year on the level of prior year.
So in my opinion, another great year. Only this time, with a weaker market, showing that our company is able to show resilience, which we couldn't show in the past, but I think we can show it this year.
The next question comes from Virginia Montorsi from Bank of America.
Just maybe a quick one on vocational. Can you give us a little bit more color on how do you think about this for the rest of the year? Anything that we should be aware of?
Vocational is, Virginia, is a U.S. term, meaning Trucks that are not used on highway. And here, we have really extraordinary order intake. You've seen our 31%-plus over last year's Q1. And that, after a fairly okay Q4, and it was mainly driven by the vocational piece, on some variance. Vocational has a lot of variance. Here, we are truly sold out already for the years. Others there are still some openings. So this is going strong.
It's fostered by infrastructure projects. It's fostered by industrialization projects in the U.S. It comes from the energy sector. It's very broad-based, and it's not just one single industry. So I feel very, very confident that this continues throughout the entire year.
The next question comes from Jonathan Day from HSBC.
I've got a couple. I was wondering if you could, first of all, just comment on -- a little bit more on Asia. And how you see Asia sort of playing out for the rest of the year? The weakness in Indonesia and [indiscernible] versus the guidance range there?
And then also maybe just comment on the potential for prebuy, which is something we've heard a lot of talk about. I'm just wondering how you're sort of thinking about that ahead of 2027, which I know is a long way off, but as I said, there seems to be quite a bit of noise about that?
I might take those 2 answers. And if I feel a little bit, sorry, but I have sometimes a feeling I'm the chief fortuneteller of the company, while you are looking more on reality [indiscernible]. So asking -- looking ahead in the mirror, and as you see, it's always subject to geopolitical changes, which we all don't know yet.
Now if I look at Asia, first of all, Asia is a fairly -- is a diverse set of businesses. The biggest harm to the margin is doing in China that we have at the equity loss in China. China is clearly for total market, in my opinion, nothing less than a disaster, again, below 500,000. And that's already for the third or even fourth year in a row.
Very rarely seen that. So that harms us -- harms the segment, Trucks Asia, as I had said, with 150 basis points. So -- then secondly, our largest market in Asia is Indonesia, often our second largest market. And that market plummet significantly starting Q4 last year and is nearly solely responsible for the loss of sales and order intake, especially.
Here, we are -- on that, you can always wait until you buy a truck. That is, at the moment, the case in Indonesia, but ultimately, you have to buy one. And then it goes in a similar speed up again whenever that is. What's well doing or, let's say, on a good level doing is what is our India business.
Here, I see rather upside potential throughout the year. And then we have a solid and good Fuso core market in Japan with good margins. So here, I would say, I've -- fortune telling, we have a guidance out for Asia, and this guidance is okay, and we're in the range of that guidance.
Prebuy, excuse me, the next fortunetelling. Prebuy, it's, at the end, all about -- I mean there's a lot of speculation going on. It's ultimately all about how much more expensive do the trucks get. We just got the ruling from the EPA. We are looking now for the respective engineering solutions as much as more the increase in pricing is bigger the prebuy. But I don't -- there are some [ whole ] figures around that I don't see. [ Whole ] figures means huge, huge jump in pricing, which then would result in a massive prebuy. I'm here rather on the moderate side, therefore, a moderate prebuy in 2026.
Thank you very much. This was the last question for today. Thank you very much, Martin and Eva for taking the time and answering all the questions today.
As always, IR remains at your disposal to answer any further questions you might have throughout the day and thereafter. We're looking forward to staying in touch with you. Have a good day and stay healthy. Thank you, and goodbye.