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